Authorized Stock refers to the maximum number of shares that a corporation is legally permitted to issue as specified in its articles of incorporation or corporate charter. This number is established when the company is first formed and can be increased or decreased by a vote of the shareholders, typically requiring an amendment to the articles of incorporation.
Key Aspects of Authorized Stock:
- Issued vs. Unissued Shares:
- Issued Shares: These are the shares that have been distributed to shareholders, either through an initial public offering (IPO), private placements, or as part of employee compensation plans.
- Unissued Shares: These are the shares that are part of the authorized stock but have not yet been issued to shareholders. The company may reserve these shares for future issuance, such as for raising additional capital or for stock options.
- Par Value:
- Definition: The par value of Authorized Stock is the nominal value assigned to each share in the corporate charter. It’s often a very small amount (like $0.01 per share) and doesn’t necessarily reflect the market value of the stock.
- Purpose: Par value serves as a legal minimum price for issuing shares, though many modern corporations issue no-par value stock.
- **Purpose of Authorized Stock:
- Flexibility: By authorizing more shares than are initially issued, a corporation gives itself the flexibility to issue more stock in the future without needing immediate shareholder approval.
- Raising Capital: Companies can issue additional shares from the authorized stock to raise capital for expansion, acquisitions, or other business needs.
- Employee Compensation: Companies often reserve unissued shares for stock option plans or other employee compensation programs.
- **Amending Authorized Stock:
- Shareholder Approval: Increasing or decreasing the number of authorized shares typically requires a vote by the shareholders. This process involves amending the corporate charter.
- Regulatory Filings: Changes to the authorized stock must be filed with the appropriate state regulatory agency where the corporation is incorporated.
- Dilution Concerns:
- Definition: When a company issues more shares from its authorized stock, it can dilute the ownership percentage of existing shareholders.
- Impact: Dilution can affect the value of existing shares, voting power, and earnings per share (EPS).
Summary:
Authorized Stock is the total number of shares that a corporation is allowed to issue according to its articles of incorporation. This number includes both issued and unissued shares and provides the company with flexibility for future capital raising, employee compensation, and other corporate needs. Changes to the authorized stock require shareholder approval and appropriate regulatory filings.
