Legal Definitions - authorized shares

Authorized shares refers to the maximum number of shares a company is legally permitted to issue to investors, as specified in its foundational corporate documents, such as its articles of incorporation or corporate charter.

This number represents an upper limit. A company may choose to issue only a portion of its authorized shares, keeping the remainder available for future fundraising, employee stock options, or other corporate purposes. To issue more shares than the authorized amount, the company must typically amend its corporate documents, a process that often requires approval from its existing shareholders.

Examples:

• Scenario: A New Startup's Initial Setup

  Example: "InnovateTech Inc." is a new software startup. When its founders establish the company, they file articles of incorporation stating that the company is authorized to issue up to 50 million shares of common stock.

  Explanation: This means that 50 million is the absolute maximum number of shares InnovateTech Inc. can legally create and sell to investors without first amending its articles of incorporation. Initially, they might only issue 10 million shares to the founders and early investors, leaving 40 million authorized but unissued shares available for future funding rounds or employee equity plans.

• Scenario: A Growing Company Seeking Additional Capital

  Example: "Global Logistics Corp." currently has 100 million authorized shares, and 80 million of those shares have already been issued and are trading on the stock market. The company decides it needs to raise significant capital for a new expansion project and plans to issue an additional 30 million shares to new investors.

  Explanation: Global Logistics Corp. cannot simply issue the additional 30 million shares because doing so would bring its total issued shares to 110 million (80 million + 30 million), which exceeds its authorized limit of 100 million. Before proceeding with the new issuance, the company must hold a shareholder meeting to vote on and approve an amendment to its corporate charter to increase the number of authorized shares, perhaps to 150 million, thereby creating enough headroom for the new issuance.

• Scenario: Preparing for a Stock Split

  Example: "BrightFuture Energy," a publicly traded company, has 200 million authorized shares, with 100 million shares currently issued and outstanding. The company's board of directors decides to implement a 2-for-1 stock split to make its shares more accessible to a broader range of investors.

  Explanation: A 2-for-1 stock split means that for every one share an investor owns, they will now own two. If BrightFuture Energy splits its 100 million outstanding shares, it will then have 200 million outstanding shares. This amount would exactly match its current authorized share limit. To ensure it has flexibility for future employee stock options, acquisitions, or further fundraising without immediately needing another shareholder vote, the company might decide to simultaneously increase its authorized shares to 400 million when it announces the stock split, providing ample room for future growth.