It refers to stock that is authorized versus the maximum number of shares that are legally permitted to be issued by a corporation. 3 min read
2. Authorized Shares and Certificates of Incorporation
3. Authorized Shares
4. Issued Shares
5. Reasons for Limiting Authorized Shares
6. Increasing the Number of Authorized Shares
7. Stock Dilution
Updated November 2, 2020:
Authorized shares vs issued shares refer to stock that is authorized versus the maximum number of shares that are legally permitted to be issued by a corporation. The shares issued on the open market to the public for trading comprise all or a portion of the authorized shares of the corporation.
About Authorized Shares
For clarity, when discussing authorized stock, it is also referred to as authorized capital stock or authorized shares. When investors or company owners are researching the ownership of a company's shares, they may encounter terms such as:
- Authorized shares.
- Issued shares.
- Allocated shares.
- Unissued shares.
There are also restricted shares. These are a type of authorized shares and are reserved for employee incentives and compensation. You may also come across the word "float" when discussions are about the number of actual shares available to trade.
When looking at a company's balance sheet in regard to outstanding shares, the figure is the sum of the restricted shares and float shares. In the event the outstanding shares are less than what was authorized, the difference is considered unissued stock and is retained in the company's treasury.
Authorized Shares and Certificates of Incorporation
A decision made when a company is being incorporated is determining what number the authorized shares are set to. This number is listed in the certificate of incorporation also known as the articles of incorporation. There is often a misconception that the number of authorized shares listed in the certificate or articles is equal to the total number of shares. Outstanding and issued shares are different from authorized shares.
As mentioned, authorized shares refer to the number of shares listed in the company's articles of incorporation that are allowed to be issued. The common range when determining this figure is between 10 and 15 million.
With issued and outstanding shares, the number cannot exceed the authorized shares. Typically, between 5 and 10 million shares are issued.
Reasons for Limiting Authorized Shares
The reason a company typically has more authorized shares than issued shares is to give the enterprise the option of offering and selling more shares to generate additional funds, if or when needed, in the future. For example, a company with 1 million authorized shares initially sells 500,000 of those shares in a public offering (IPO) . A total of 50,000 shares are reserved for stock options for retention of employees or to attract new employees, and a secondary public offering makes 150,000 shares available to raise money.
The unissued stock is retained in the treasury account of the company will look like this: 1 million minus 500,000 minus 150,000 equals 300,000. There are two additional reasons why a company may choose to not issue all of its authorized shares. First, retaining a set number of authorized shares allows the company to maintain a controlling interest. Second, being in control prevents the possibility of a hostile takeover.
Increasing the Number of Authorized Shares
The number of authorized shares can be increased with a vote by the shareholders when the majority are in favor of the change. There is no timeframe limiting when a change can be made. A shareholders meeting and vote can take place at any time. A company may choose to keep its authorized shares substantially higher than its outstanding shares, which allows the company flexibility in selling shares at any time.
Increasing the number of outstanding shares can be achieved in several ways:
- Issuing shares by private placement.
- An initial public offering.
- A secondary offering.
- A stock payment.
- Someone exercising an option or warrant.
The number of outstanding shares can also decline due to a company buying back shares. When this occurs, this is referred to as treasury stock. An example would be the charter for a major company that states the total authorized stock will include 5 billion shares of common stock and preferred stock will be at 500 million shares.
The company's charter permits the increase of authorized stock when the conversion of preferred stock is not possible due to not enough unissued common stock.
A situation occurs when the difference between the number of authorized shares and outstanding shares increases.
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