When a company is formed, one of the key decisions that needs to be made is the determination of authorized shares. Authorized shares refer to the maximum number of shares that a company is legally allowed to issue to its shareholders. In this blog post, we will explore what authorized shares are, how they are determined, the process to increase them, and what happens when they are increased.
What are Authorized Shares?
Authorized shares, also known as authorized capital or authorized stock, represent the total number of shares that a company is authorized to issue to its shareholders. These shares are outlined in the company’s articles of incorporation or articles of association. The authorized share structure is established when the company is initially formed and is typically set at a level that allows for future growth and flexibility.
It is important to note that authorized shares do not necessarily represent the number of shares that have been issued or are currently outstanding. They simply represent the maximum number of shares that the company can issue.
How are Authorized Shares Determined?
The determination of authorized shares is typically based on various factors, including the company’s business plan, growth projections, and the capital requirements for the foreseeable future. The founders and initial shareholders of the company decide on the number of authorized shares during the company’s incorporation process.
The number of authorized shares can vary significantly depending on the type and size of the company. For example, a small startup might have a few thousand authorized shares, while a large multinational corporation could have millions or even billions of authorized shares.
The Process to Increase Authorized Shares
As a company evolves and grows, there may come a time when it needs to increase its authorized shares. This could be due to various reasons, such as raising additional capital, issuing stock options or grants to employees, or facilitating mergers and acquisitions.
The process to increase authorized shares typically involves the following steps:
- Board Approval: The company’s board of directors must approve the decision to increase authorized shares. This is usually done through a board resolution.
- Shareholder Approval: In most jurisdictions, increasing authorized shares requires the approval of the company’s shareholders. This is usually done through a vote at a shareholder meeting or by written consent.
- Amendment to Articles of Incorporation: Once the board and shareholders have approved the increase, the company must file an amendment to its articles of incorporation with the appropriate government authority. This amendment will reflect the new number of authorized shares.
- Government Filing: The company is required to file the amended articles of incorporation with the relevant government authority, along with any required fees.
What Happens When Authorized Shares are Increased?
When a company increases its authorized shares, it does not automatically result in the issuance of new shares or dilution of existing shareholders’ ownership. The increase simply provides the company with the flexibility to issue additional shares in the future, should the need arise.
Once the authorized shares are increased, the company can issue new shares through various methods, such as private placements, public offerings, or stock-based compensation plans. The issuance of new shares may require additional approvals, such as those from the board of directors, shareholders, or regulatory authorities.
It is important to note that increasing authorized shares does not directly impact the company’s financials or valuation. The impact on shareholders’ ownership and the company’s capital structure depends on whether and how the newly authorized shares are issued.
Conclusion
Authorized shares represent the maximum number of shares that a company is legally allowed to issue. Determining the number of authorized shares is a strategic decision made during the company’s incorporation process. If the need arises, a company can increase its authorized shares through a process involving board and shareholder approvals, as well as filing amendments to the articles of incorporation. Increasing authorized shares provides the company with the flexibility to issue additional shares in the future, but it does not automatically result in the dilution of existing shareholders’ ownership. The issuance of new shares requires separate approvals and can impact the company’s capital structure and ownership.
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