Authorized Shares

Definition

Authorized shares refer to the maximum number of shares a corporation is allowed to issue to shareholders as specified in its articles of incorporation. This number can have significant implications for corporate structure, capital raising, and stockholder rights. It's important to note that just because a company has authorized shares does not mean they have all been issued; some may remain unissued, which can be used for future financing or employee stock options.

5 Must Know Facts For Your Next Test

1. The number of authorized shares can be increased or decreased through an amendment to the articles of incorporation, often requiring shareholder approval.
2. Having a high number of authorized shares allows a company flexibility to raise additional capital without needing to amend its articles each time.
3. Authorized shares do not have any direct impact on a company's market capitalization, which is determined by the number of outstanding shares multiplied by the share price.
4. A company might choose to keep a portion of its authorized shares unissued for potential future uses, such as mergers or acquisitions.
5. In case of stock splits or stock dividends, the number of authorized shares typically remains unchanged unless a specific resolution is passed to adjust it.

Review Questions

• How do authorized shares differ from issued and outstanding shares in a corporation?
  • Authorized shares represent the total maximum number a company can issue as defined in its articles of incorporation. Issued shares are those that have actually been sold and distributed to shareholders, which can be fewer than authorized shares. Outstanding shares are the issued shares that remain in circulation among investors and exclude any treasury shares. Understanding these distinctions helps clarify the different categories that affect corporate equity management.
• Discuss the implications of having a high number of authorized shares for a corporation's strategic financial planning.
  • Having a high number of authorized shares gives a corporation greater flexibility in financial planning. It allows the company to issue new shares as needed for fundraising without constantly having to amend its articles of incorporation. This capability can be particularly beneficial during periods when quick access to capital is necessary, such as for acquisitions, expansion plans, or responding to market opportunities. However, it also raises considerations about potential dilution of existing shareholders’ equity if too many new shares are issued.
• Evaluate the potential impact on shareholder value if a corporation frequently increases its authorized share count without issuing more shares.
  • If a corporation frequently increases its authorized share count without issuing additional shares, it could create uncertainty among investors regarding management's intentions. Such actions may signal that the company plans to raise capital soon, which could lead to concerns about dilution of existing shareholder value if new shares are eventually issued. Additionally, if shareholders perceive that management is accumulating excessive authorized but unissued shares as a strategy for potential future equity sales, it might affect investor confidence and ultimately influence the market price of the stock negatively.

Related terms

Issued Shares:

Issued shares are the number of shares that have actually been distributed to shareholders, which can be less than or equal to the number of authorized shares.

Outstanding Shares: Outstanding shares are the total number of shares currently held by shareholders, including those held by institutional investors and company insiders, but excluding treasury shares.

Treasury Shares: Treasury shares are shares that were once part of the outstanding shares but were later repurchased by the company and are not considered when calculating earnings per share or dividends.