What it means
When a company is formed, its charter or articles of incorporation state how many shares it may create. This figure can be changed, but doing so usually needs shareholder approval and a formal filing.
The authorised amount therefore sets the outer limit on how much ownership can be handed out. Not all authorised shares are issued, and in practice many companies never use more than a fraction of them.
Companies deliberately authorise more than they need, so that the board has room to raise money, award staff share options, make acquisitions or split the shares later without going back to shareholders each time. The portion that has not been issued is called unissued stock.
It helps to distinguish several related terms, because they are often confused in company reports. Issued stock is the number actually sold or granted, and outstanding stock is the issued amount minus any shares the company has bought back and holds as treasury stock.
Only outstanding shares carry votes and receive dividends. Authorised stock matters to existing shareholders because a large unissued balance gives the board the ability to dilute them.
If a company with 6,000,000 shares outstanding issues another 3,000,000, each existing owner's share of the business falls by a third. For this reason, investors often watch requests to raise the authorised limit.
In some jurisdictions the shares carry a par value, a nominal figure written into the charter, and the authorised capital is the number of shares multiplied by this value. The accounting for par value differs between countries, and some regions have moved away from the concept entirely.
Companies sometimes hold back a block of authorised shares for specific purposes, such as stock options for employees or the conversion of bonds and warrants. These reserved shares cannot be used for anything else, which means the genuinely free headroom may be smaller than the simple subtraction suggests.
Reading the notes to the accounts shows how much is committed.
In practice
Real-world examples
Example 1
A start-up authorises 10,000,000 shares and issues 4,000,000 to its founders. The remaining 6,000,000 are kept available for future investors and an employee share plan.
Example 2
A listed manufacturer wants to acquire a competitor by paying partly in shares. Its authorised limit is nearly used up, so the board asks shareholders to approve an increase before the deal can proceed.
Example 3
A family company, owned by three cousins, has authorised 1,000,000 shares and issued 800,000. A cousin asks to buy in, and the directors confirm that they can issue up to 200,000 more without changing the charter. A lawyer drafts the board resolution so the issue is properly recorded in the company's registers.
Think of it
Authorized stock is the maximum shares a company is allowed to issue-the legal ceiling.
Formula
Calculation
Unissued shares = Authorised shares - Issued shares
Outstanding shares = Issued shares - Treasury shares
Suppose a company is authorised to issue 10,000,000 shares with a par value of $0.01. It has issued 6,500,000 shares and holds 500,000 as treasury stock.
Unissued shares = 10,000,000 - 6,500,000 = 3,500,000. Outstanding shares = 6,500,000 - 500,000 = 6,000,000. Authorised capital at par = 10,000,000 x 0.01 = $100,000.Case study
Seen in the real world
Coralbay Energy is an illustrative, fictional renewable power developer authorised to issue 50,000,000 shares. It had issued 42,000,000 and held 2,000,000 as treasury shares, so 40,000,000 were outstanding.
A promising solar project required $24,000,000, and the board planned to raise it by selling new shares at $6 each, which would need 4,000,000 shares. Since only 8,000,000 shares were unissued, the company could do it, but the board knew that further raises would hit the limit.
It therefore asked shareholders to approve an increase to 80,000,000 authorised shares, explaining the purpose and the limits on use. The illustrative lesson is that unused authorised shares give the board flexibility but also a power that shareholders watch carefully. The directors also explained that 3,000,000 of the new authorised shares would be reserved for employee options, so shareholders could see the maximum possible dilution in advance.
Watch out
Common mistakes
- Assuming authorised shares are the same as shares in circulation, when many authorised shares may never have been issued.
- Using authorised shares to calculate earnings per share or market value, when only outstanding shares should be used.
- Ignoring a proposed increase in the authorised limit, when it can open the door to heavy dilution for existing holders.
Questions
People also ask
Can a company issue more shares than it is authorised?
No, it must first change its charter or articles, usually with shareholder approval, and then issue the shares.
What is the difference between authorised and issued shares?
Authorised shares are the maximum permitted, while issued shares are those actually sold or granted to investors.
Where can I find a company's authorised shares?
In its articles of incorporation and in the equity section or notes of its balance sheet, where companies normally state the number authorised, issued and outstanding.
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