Shares Authorized refer to the total number of shares that a corporation is legally permitted to issue, as specified in its Articles of Incorporation. This number sets the ceiling for the number of shares that can ever be legally distributed to shareholders and is usually featured prominently in the capital section of a company’s balance sheet.
Importance in Corporate Structure
Shares Authorized in the Articles of Incorporation provide a framework for a company’s potential growth and the ability to raise capital. Usually, the number of authorized shares significantly exceeds the number of shares currently issued and outstanding, allowing the company flexibility for future financial operations, including raising additional funds, employee stock grants, or potential acquisition deals.
Articles of Incorporation
The Articles of Incorporation, also known as the corporate charter or certificate of incorporation, are a form of document filed with a government body to legally document the creation of a corporation. Included in these articles is the provision for Shares Authorized, which dictates the maximum number of shares a corporation may issue.
Balance Sheet Inclusion
On a firm’s balance sheet, the capital accounts section will often include a breakdown of authorized shares, providing stakeholders with a picture of the company’s equity framework. When a company allocates new shares, it must ensure it does not exceed the number authorized by the Articles of Incorporation.
Issued and Outstanding Shares
While the Shares Authorized represent the maximum possible shares, Issued and Outstanding Shares account for the actual number of shares currently distributed to shareholders and in active circulation. This disparity allows companies to issue more shares without amending their Articles of Incorporation immediately.
Special Considerations
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Amendment Procedures: Altering the number of Shares Authorized typically requires a formal amendment to the Articles of Incorporation, necessitating approval from the board of directors and potentially the shareholders.
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Dilution: Issuing additional shares can dilute the value of existing shares, as it increases the total supply.
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Capital Raising: Authorized shares provide room for raising capital through equity without needing immediate legal changes, offering quick and efficient resource mobilization.
Historical Context
The concept of Shares Authorized dates back to early corporate governance frameworks. It was introduced to provide a clear structure and legal boundaries within which a corporation could operate efficiently while planning for future financial needs.
Applicability in Modern Corporate Law
In modern corporate law, defining Shares Authorized remains crucial as it allows companies the flexibility needed for expansion, partnerships, and long-term planning. It also instills confidence in investors by delineating the company’s ability to manage its equity.
Related Terms
- Par Value: The nominal value of a share stated in the corporate charter.
- Treasury Shares: Previously issued shares that were bought back by the issuing corporation and held in the company’s treasury.
- Convertible Securities: Financial instruments like bonds or preferred shares that can be converted into a different type of security, typically ordinary shares.
FAQs
Q1. Do authorized shares need to be issued immediately? A: No, authorized shares do not need to be issued immediately. Companies often keep a significant number of authorized but unissued shares for future financing needs or strategic plans.
Q2. Can the number of authorized shares be increased? A: Yes, increasing the number of authorized shares typically requires an amendment to the Articles of Incorporation, which usually needs approval from the board and shareholders.
Q3. What happens if a company issues more shares than authorized? A: Issuing more shares than authorized is illegal and can result in severe consequences, including legal action and regulatory penalties.
References
- Bragg, Steven M. “Intermediate Accounting.”
- Graham, Benjamin. “The Intelligent Investor.”
Summary
Shares Authorized represent the total number of shares a corporation can legally issue, as outlined in its Articles of Incorporation. This figure is a pivotal part of a company’s capital structure, providing the capacity for growth and resource mobilization while ensuring legal and financial compliance. Understanding Shares Authorized is essential for investors, managers, and stakeholders as it influences corporate governance, stock issuance, and shareholder value.
