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.

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

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

Fundamentals of Authorized Shares: Corporate Finance Basics Quiz

### Who decides the maximum number of authorized shares in a corporation? - [x] The corporation's founders or initial board of directors - [ ] The company's first shareholders - [ ] The government regulatory body - [ ] External investors > **Explanation:** The maximum number of authorized shares is typically decided by the company's founders or initial board of directors when drafting the articles of incorporation. ### Can a corporation amend its charter to increase the number of authorized shares? - [x] Yes, with shareholder approval - [ ] No, it is fixed once established - [ ] Yes, without any restrictions - [ ] Yes, but only once in its lifetime > **Explanation:** A corporation can amend its charter to increase the number of authorized shares, usually requiring shareholder approval and compliance with corporate governance processes. ### How do authorized shares differ from outstanding shares? - [ ] They are the same - [ ] Authorized shares exceed treasury shares - [x] Authorized shares are the maximum allowable, while outstanding shares are those currently held by shareholders - [ ] Outstanding shares can never exceed authorized shares > **Explanation:** Authorized shares refer to the maximum allowed by the charter, while outstanding shares are those currently owned by investors. ### What can a company do if it needs more shares than currently authorized? - [ ] Issue more shares regardless of authorization - [x] Seek to amend its charter to increase authorized shares - [ ] Cancel outstanding shares to free up space - [ ] Increase the par value of shares > **Explanation:** If more shares are needed, the company must seek shareholder approval to amend the charter to increase the number of authorized shares. ### What are the potential reasons for a company not to issue all its authorized shares? - [x] To reserve shares for future use and maintain flexibility - [ ] Reduced administrative workload - [ ] Avoid higher taxes - [ ] All of the above > **Explanation:** Companies often reserve authorized shares for future needs like additional capital raisings, employee stock options, or acquisitions. ### Which term designates shares that have been distributed to investors from the pool of authorized shares? - [ ] Authorized shares - [x] Issued shares - [ ] Treasury shares - [ ] Par shares > **Explanation:** Issued shares represent the number of shares that have been distributed to investors from the authorized pool. ### Is it necessary for corporations to issue all their authorized shares? - [ ] Yes, it's legally required - [x] No, they can issue any number up to the maximum authorized - [ ] Only if they are publicly traded - [ ] Yes, within two years of incorporation > **Explanation:** Corporations can choose to issue any number of shares up to the maximum authorized in their charter. ### Who must approve an increase in authorized shares? - [ ] The CEO of the company - [ ] The government - [x] The shareholders - [ ] The board of directors alone > **Explanation:** Increasing the authorized shares usually requires approval from the shareholders through a formal vote. ### Authorized share count typically appears in which document? - [ ] Company's annual budget - [ ] Share certificates - [x] Corporate charter or articles of incorporation - [ ] Internal audit report > **Explanation:** The maximum number of authorized shares is detailed in the corporate charter or articles of incorporation. ### What does the flexibility of not issuing all authorized shares provide to a company? - [ ] Stabilized stock market prices - [ ] Increased immediate profitability - [x] Strategic maneuvering and readiness for future needs - [ ] Elimination of debt > **Explanation:** Maintaining a reserve of authorized shares allows a company to respond to future capital needs, acquisitions, and issuing stock options without having to seek shareholder approval each time.

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Authorized Shares or Authorized Stock