Authorized Shares or Authorized Stock
Definition: Authorized shares, also known as authorized stock, represent the maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation or corporate charter. The corporation is not required to issue all of its authorized shares.
Examples
TechStartup Inc.: TechStartup Inc. is authorized to issue up to 10 million shares according to its corporate charter. However, it initially issues only 2 million shares to raise capital, keeping the remaining 8 million available for future financing needs or for employee stock options.
RetailCorp Ltd.: RetailCorp Ltd.’s charter allows it to issue up to 15 million shares. To date, it has issued 5 million shares to public investors and retains the ability to issue the additional 10 million shares if needed for strategic acquisitions or other purposes.
Frequently Asked Questions
Q1: Can a corporation issue more shares than the authorized amount?
A1: No, a corporation cannot issue more shares than the number authorized in its corporate charter. To issue more shares, the corporation would need to amend its charter to increase the number of authorized shares, typically requiring approval from shareholders.
Q2: Why doesn’t a corporation issue all of its authorized shares at once?
A2: Corporations often reserve a portion of their authorized shares for future needs, such as raising additional capital, stock options for employees, or potential acquisitions. Issuing all authorized shares at once might limit the corporation’s flexibility to respond to future opportunities and challenges.
Q3: How are authorized shares different from issued shares?
A3: Authorized shares are the maximum number of shares that a corporation can issue as stated in its corporate charter, whereas issued shares represent the actual number of shares that have been distributed to investors. Issued shares are often less than the total number of authorized shares.
Q4: What happens if a company wants to issue more stock than it has authorized?
A4: If a company wants to issue more stock than it has authorized, it must first seek shareholder approval to amend the corporate charter to increase the number of authorized shares. This process involves a formal vote and compliance with corporate governance regulations.
Related Terms
- Issued Shares: The shares that have been distributed by the corporation to investors from the pool of authorized shares.
- Outstanding Shares: The shares that are currently held by shareholders, including both public investors and company insiders.
- Treasury Shares: Issued shares that have been repurchased by the corporation and are held in the company’s treasury.
- Par Value: The nominal face value of a share as stated in the corporate charter, which has little to no impact on the market value of the shares.
- Stock Option: A financial instrument that gives employees the right to purchase shares at a future date at a predetermined price.
Online References and Resources
- Investopedia - Authorized Stock
- Wikipedia - Authorized Shares
- U.S. Securities and Exchange Commission (SEC)
- Corporate Finance Institute (CFI) - Authorized Share Capital
Suggested Books for Further Studies
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Corporate Finance: The Core” by Jonathan Berk and Peter DeMarzo
- “Company Law” by Janet Dine and Marios Koutsias
- “The Law of Corporations and Other Business Organizations” by Angela Schneeman
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