Authorized Stock: Understanding Share Issuance Limits

Authorized stock or authorized shares refer to the maximum number of shares a corporation is legally permitted to issue according to its corporate bylawsCompany BylawsCompany bylaws are the rules that govern how a company is run and one of the first items to be established by the board of directors at the time a company is started. Such bylaws are created usually after the Articles of Incorporation are submitted. The product of the number of authorized shares and the face value per share is referred to as the authorized share capital.

Authorized shares are different from outstanding sharesOutstanding SharesOutstanding shares represent the number of a company’s shares that are traded on the secondary market and, therefore, available to investors. Outstanding shares include all restricted shares held by the company’s officers and insiders (senior employees), as well as the equity portion owned by institutional investors. Issued shares are a subset of authorized shares that are issued to the shareholders of the company. Generally, some part of the authorized stock remains unissued. The authorized share capital of the company can be changed by obtaining the approval of its shareholders.

Authorized stock acts as a limiting device to control the ability of the management to issue new shares. In the absence of authorized stock, the management will receive the unrestricted right to issue new shares, which may change the balance of control between shareholders. Such an issue of shares may also shift the balance of profit distribution if the new shares are issued at a price other than the market value.

Summary

• Authorized stock is the maximum number of shares a company can issue according to the constitutional documents of the company.
• Authorized stock plays an important role in acting as a limiting device against the ability of the management to issue additional shares that may alter the balance of control of the shareholders.
• Most companies keep a part of the authorized stock unissued to be distributed to employees on the exercise of stock options and other investors in the event that the company needs additional equity capital.

Importance of Unissued Authorized Stock

Companies need to keep some part of the authorized stock unissued for different reasons:

1. Issue of share options and warrants

From time to time, many companies compensate their employees with the option to participate in the company’s Employee Stock Option Plan (ESOP)Employee Stock Ownership Plan (ESOP)An Employee Stock Ownership Plan (ESOP) refers to an employee benefit plan that gives the employees an ownership stake in the company. The employer allocates a percentage of the company’s shares to each eligible employee at no upfront cost. The distribution of shares may be based on the employee’s pay scale, terms of. In order to issue these shares, which become a part of outstanding shares on exercise of the option by the employees, the company needs to have a sufficient portion of the authorized stock unissued.

2. Need to raise capital at short notice

Issuing new shares is usually the last resort for most companies when they need capital. However, in exceptional circumstances, a company might issue additional shares at short notice. Having unissued authorized stock is useful, as the management is not required to go through the process of shareholder approval to increase authorized stock before issuing new shares.

Specific Costs of Increasing Authorized Stock

In most jurisdictions, there are no added costs of increasing the authorized stock apart from the typical cost of holding shareholder meetingsAnnual General Meeting (AGM)An Annual General Meeting (AGM) is a meeting conducted annually where the members of an organization gather to discuss and vote on key issues. Public and certain transaction costs.

However, in some countries like India, companies are required to pay additional stamp duty to increase the authorized stock. The stamp duty in India ranges from 0.15% to 0.20% of the increase in authorized stock subject to a maximum amount of stamp duty, which varies according to the provincial stamp duty law.

Practical Examples

Apple Inc.

As of Apple Inc.’s latest annual report for the year ended September 30, 2019, the company’s authorized share capital consisted of 12.6 billion common shares of $0.00001 each, of which 4.4 billion common shares of $0.00001 each were issued and outstanding as of the date of the annual report.

The balance of 8.2 billion shares represents unissued shares, which are a part of the authorized stock. The shares of the company can be issued by the management, if necessary.

Amazon.com

As of Amazon.com Inc.‘s latest annual report for the year ended December 31, 2019, the company’s authorized share capital consisted of 5.5 billion shares of $0.01 each. The authorized share capital of the company was further divided into 500 million preferred shares of $0.01 each and five billion common shares of $0.01 each.

Of the five billion common shares, 498 million common shares of $0.01 each were issued and outstanding as of the date of the annual report. The balance of 4.5 billion shares represents unissued shares, which are a part of the authorized stock. The shares of the company can be issued by the management, if necessary.

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