Authorized Stock

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  • Post last modified:November 27, 2023
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Authorized stock, also known as authorized shares or authorized capital, refers to the maximum number of shares that a corporation is legally allowed to issue to its shareholders. This figure is established through the company’s articles of incorporation or its corporate charter, which is filed with the appropriate government regulatory body.

Key points about authorized stock include:

1. **Legal Limit:**
– The authorized stock represents the maximum number of shares that a corporation is permitted to issue. It sets a legal limit on the total number of shares that can be outstanding.

2. **Flexibility:**
– The number of authorized shares is determined by the company at the time of its incorporation. This figure can be adjusted or amended later through a formal process, such as a shareholder vote or board resolution.

3. **Issued vs. Authorized Shares:**
– Issued shares are the shares that the company has actually issued to shareholders. Authorized shares, on the other hand, include both issued shares and any additional shares that could be issued in the future.

4. **Unissued Shares:**
– The difference between authorized shares and issued shares is often referred to as unissued shares. Unissued shares are those that have not been issued to shareholders and are available for potential future issuance.

5. **Shareholder Approval:**
– Increasing the number of authorized shares often requires approval from the company’s shareholders. This approval is typically obtained through a vote at a shareholders’ meeting.

6. **Protecting Against Takeovers:**
– A company may maintain a higher level of authorized shares than issued shares to provide flexibility in case of future needs, such as stock splits, mergers, acquisitions, or employee stock option plans. It can also serve as a defensive measure against hostile takeovers.

7. **State Regulations:**
– The regulations governing authorized stock can vary by jurisdiction. Each state may have its own requirements and restrictions regarding the maximum number of authorized shares.

8. **Par Value vs. No Par Value:**
– Authorized shares may have a par value or be designated as “no par value.” Par value is a nominal or face value assigned to a share of stock, and it may represent the minimum price at which the shares can be issued.

9. **Stock Buybacks:**
– Companies may buy back their own shares, reducing the number of outstanding shares. The repurchased shares are often retired, meaning they become part of the company’s treasury stock and are no longer considered authorized or outstanding.

10. **Listing Requirements:**
– Stock exchanges may have listing requirements related to authorized shares. A company seeking to list its shares on an exchange may need to comply with specific guidelines regarding its capital structure.

In summary, authorized stock represents the maximum number of shares that a corporation is allowed to issue. It provides flexibility for the company to meet future capital needs and respond to various corporate situations. However, the actual issuance of shares and any increase in the number of authorized shares typically requires approval from the company’s shareholders.