Definition
Authorized shares refer to the maximum number of shares that a corporation is legally allowed to issue, as defined in its articles of incorporation. This number can only be changed with shareholders’ approval. It serves to limit the corporation’s ability to dilute existing shares via issuing more shares.
Key Takeaways
- Authorized Shares refer to the maximum number of shares that a corporation is legally allowed to issue to shareholders, as stipulated in its articles of incorporation.
- These shares are not necessarily all issued at once but give the company room for additional capital raising in the future. They can be issued as common or preferred stock.
- Changes to the number of Authorized Shares often require shareholder approval and can provoke controversy if seen as diluting the holdings of existing shareholders.
Importance
Authorized shares refer to the maximum number of shares that a corporation is legally permitted to issue, as stated in its articles of incorporation. This term is important in finance because it sets the foundation for a company’s equity structure.
The number of authorized shares affects a corporation’s ability to raise capital through stock sales. Increasing the amount requires a formal vote by the shareholders.
The number of authorized shares also plays a crucial role in determining the value of existing shares, as issuing more shares can dilute the value of current stock. In general, it’s a critical factor in a company’s growth and financing strategy.
Explanation
Authorized shares, a significant aspect of a corporation’s structure, serve as the maximum number of shares that a company can issue. They offer an array of options, allowing the company the flexibility to raise capital, compensate employees, or institute mergers and acquisitions. The number of authorized shares is decided when the company is incorporated and is stated explicitly in the company’s articles of incorporation.
The decision is primarily based on the company’s strategic plans and future capital requirements. On a practical level, having authorized shares available provides the company with opportunities for expansion, investment, and financial facilitation. Companies may issue these shares to investors as equity financing to raise capital for various corporate expenditures, such as infrastructure development or research and development.
They can also be used in the form of stock options or bonuses to employees, facilitating talent attraction and retention. Furthermore, these shares can be used to facilitate corporate actions like stock splits or mergers. It’s important to note that while authorized shares establish an upper limit, not all of these shares are issued to the public.
The unissued shares remain with the corporation and can be issued in the future when needed.
Examples of Authorized Shares
Alphabet Inc. (Google’s parent company): As of the end of 2020, Alphabet Inc. had 15 billion authorized shares, which is the total amount of shares the company has made available to sell or issue, according to their corporate charter.
Microsoft Corporation: In 2019, Microsoft disclosed in their financial statements that its certificate of incorporation authorizes issuance of up to 24 billion shares of common stock and 1 billion shares of preferred stock.
Apple Inc: In their 2022 investor proxy statement, Apple reported having
6 billion authorized shares, out of which they issued
7 billion. Each of these examples showcase how different corporations manage their authorized shares based on their business strategy and financing needs.
FAQs about Authorized Shares
What are Authorized Shares?
Authorized Shares, often known as Authorized Stock, are the maximum number of shares that a corporation is legally authorized to issue to shareholders. This number is initially set in the company’s articles of incorporation but can be changed with shareholder approval.
What is the difference between Authorized Shares and Issued Shares?
Issued shares are those that have been authorized and distributed by the company to its stockholders. It’s possible for a company to refrain from issuing all of its authorized shares to keep some in reserve for future issuance.
Why might a company choose not to issue all of its Authorized Shares?
A company might choose not to issue all of its Authorized Shares to help maintain a controlling interest, fund future corporate expansions, protect against hostile takeovers, or facilitate stock splits.
Do Authorized Shares affect share value?
While Authorized Shares do not directly affect a stock’s price, they can potentially dilute shareholder value. If a company decides to issue more shares, the ownership interest of existing shareholders gets divided among a larger number of shares.
Where can I find the number of a Company’s Authorized Shares?
A company’s Authorized Shares can commonly be found in its articles of incorporation, which are usually filed with the secretary of state’s office in the state where the company is incorporated.
Related Entrepreneurship Terms
- Face Value
- Stock Dividend
- Issued Shares
- Equity Capital
- Shareholder Rights
Sources for More Information
Sure, here are four sources for information about the finance term ‘Authorized Shares’:
