Authorized shares

Definition

Authorized shares refer to the maximum number of shares a corporation is allowed to issue to shareholders as specified in its corporate charter. This limit helps protect existing shareholders by preventing excessive dilution of their ownership interest and provides the company with the flexibility to raise capital through stock issuance when needed.

5 Must Know Facts For Your Next Test

1. The number of authorized shares can be changed if the corporation amends its articles of incorporation, which typically requires shareholder approval.
2. Authorized shares do not necessarily mean that all of them have been issued; a company may choose to keep some authorized shares unissued for future financing needs.
3. Having a higher number of authorized shares gives a company flexibility in issuing additional shares for purposes like raising capital, employee compensation, or acquisitions.
4. Only the board of directors can decide how many of the authorized shares will be issued and when they will be offered to investors.
5. The concept of authorized shares helps ensure that a company maintains control over its equity structure and prevents unwanted dilution of ownership for current shareholders.

Review Questions

• How does the concept of authorized shares impact the financial strategies of a corporation?
  • Authorized shares play a crucial role in a corporation's financial strategies by providing a ceiling on the total number of shares that can be issued. This limitation allows management to plan effectively for future financing needs, ensuring they can issue new shares without overly diluting existing shareholder value. By controlling the number of authorized shares, companies can strategically time their stock offerings based on market conditions and capital requirements.
• Discuss the implications of changing the number of authorized shares for existing shareholders.
  • Changing the number of authorized shares can significantly affect existing shareholders. If a corporation increases its authorized shares without issuing new stock, it may signal potential dilution risks if those additional shares are later issued. This could decrease existing shareholders' ownership percentage and potentially reduce earnings per share. Therefore, such changes typically require careful consideration and often require shareholder approval to mitigate negative perceptions and ensure transparency.
• Evaluate how authorized shares relate to the overall corporate governance and control mechanisms within a company.
  • Authorized shares are closely linked to corporate governance and control mechanisms as they determine how much equity a company can allocate without compromising existing shareholder rights. This structure allows boards to make informed decisions about capital structure while safeguarding shareholder interests. By establishing a limit on share issuance, corporations can prevent potential takeover threats and maintain stability in ownership distribution, which is vital for effective governance.

Related terms

issued shares: Issued shares are the portion of authorized shares that have actually been sold to and held by shareholders.

outstanding shares: Outstanding shares are the shares that have been issued and are currently held by shareholders, excluding any treasury shares.

treasury shares: Treasury shares are the portion of issued shares that have been repurchased by the corporation and are not considered when calculating outstanding shares.