What authorized stock means
– Authorized stock (also called authorized shares or authorized capital stock) is the maximum number of shares a corporation may legally issue. That limit is set in the company’s founding document (articles of incorporation, charter, or certificate of incorporation) and is often disclosed in regulatory filings and the balance sheet’s capital accounts.
– Important distinction: authorized shares = legal cap; outstanding shares = the number of shares the company has actually issued and that are held by investors. Outstanding shares can never exceed the authorized total.
Key definitions (first use)
– Authorized shares: The legal maximum number of shares a company can issue.
– Outstanding shares: Shares that have been issued and remain held by investors (includes shares in the public float and restricted shares).
– Float: Shares available for public trading (outstanding shares excluding restricted shares).
– Restricted shares: Shares subject to transfer or sale limits (often used for employee compensation).
– Treasury stock: Previously issued shares that the company has reacquired and holds (these are not considered outstanding).
Why companies often leave some shares unissued
– Flexibility to raise capital later without amending the charter.
– Reserve shares for employee compensation plans, stock options, or acquisitions.
– Preserve voting or ownership control; a company may avoid issuing all shares to reduce the risk of dilution or hostile takeovers.
– Corporate charters often put limits on issuance and may require shareholder approval to increase authorized shares.
How authorized shares relate to dilution
– Dilution occurs when a company issues additional shares, reducing each existing shareholder’s percentage ownership and voting power and typically lowering earnings per share (EPS).
– The larger the gap between authorized shares and current outstanding shares, the greater the theoretical capacity for future dilution.
Checklist: what to look for when analyzing authorized shares
– Where to find the number: articles of incorporation / certificate of incorporation, charter, the company’s 10‑K or proxy statement.
– Authorized vs outstanding: calculate unissued (authorized − outstanding).
– Reserved shares: identify shares set aside for employee plans or convertible securities.
– Shareholder approval requirements: see charter and state law to know if an increase needs a shareholder vote.
– Dilution risk: compare unissued shares to outstanding shares to estimate how large future issuance could be.
– Conversion provisions: check whether preferred shares or other securities can convert into common stock and whether conversion would require additional authorized shares.
Small numeric example (two parts)
Part A — unissued shares calculation
– Company A authorizes 1,000,000 shares.
– At IPO it issues 500,000 shares to the public.
– It reserves 50,000 for employee stock options.
– Later it sells an additional 150,000 in a secondary offering.
Unissued shares = 1,000,000 − 500,000 − 50,000 − 150,000 = 300,000 shares remaining in the treasury (or available to issue).
Part B — simple dilution effect on ownership
– Before new issuance: outstanding = 500,000 shares. You own 1,000 shares.
– Your ownership = 1,000 / 500,000 = 0.20%.
– If the company issues 100,000 more shares, outstanding = 600,000.
– New ownership = 1,000 / 600,000 ≈ 0.1667%.
– Ownership fell from 0.20% to ~0.1667% — a relative decline of about 16.7%.
Practical steps for an investor or analyst
1. Find the charter / certificate of incorporation (company website investor relations or SEC filings).
2. Note the authorized share totals for common and preferred stock.
3. Get the current outstanding share count (latest 10
-Q/10-K or the company’s most recent investor-relations summary). Confirm whether the outstanding count is basic or already adjusted for recently-closed offerings. If you see both “basic” and “diluted” share counts, basic = outstanding shares; diluted = outstanding + potentially dilutive securities (see next steps).
4. Check issued and treasury shares on the balance-sheet footnotes. Issued shares = outstanding + treasury shares (treasury stock = shares the company has repurchased and holds). Knowing issued vs. outstanding helps you compute how many authorized-but-unissued shares remain.
5. Compute authorized remaining (simple arithmetic). Formula:
– Authorized remaining = Authorized total − Issued shares.
Example: Authorized 1,000,000; Issued 700,000 → Authorized remaining = 300,000.
6. Estimate potential dilution from options, warrants, and convertibles. Two practical methods:
– Basic dilution (conservative): Add all in-the-money convertibles, warrants, and options to outstanding.
– Treasury stock method (standard for options/warrants): Assume holders exercise options and the company uses the exercise proceeds to repurchase shares at the current market price. Net new shares = Options outstanding − (Options × Exercise Price / Market Price).
Worked numeric example (treasury stock method)
– Current outstanding = 500,000 shares.
– Options outstanding = 50,000 options, exercise price = $10.
– Current market price = $20.
Proceeds from exercise = 50,000 × $10 = $500,000.
Repurchase at market price buys 500,000 / 20 = 25,000 shares.
Net new shares issued = 50,000 − 25,000 = 25,000.
New diluted outstanding = 500,000 + 25,000 = 525,000.
Your ownership change if you hold 1,000 shares:
– Before = 1,000 / 500,000 = 0.20%.
– After = 1,000 / 525,000 ≈ 0.1905%.
Relative decline ≈ (0.20% − 0.1905%) / 0.20% ≈ 4.75%.
7. Watch corporate-authority and governance constraints. Key checks:
– Does the board have authority to issue shares without shareholder approval? (Check charter, bylaws, and state law. Some issuances—especially raising the authorized share count—require a shareholder vote.)
– Are there provisions for blank‑check preferred stock (allows board to issue preferred shares with variable terms)? This can materially change capital structure quickly.
– Look for poison-pill provisions, pre-emptive rights (shareholder right to buy new issues to maintain percentage), and authorized share limits that need amending.
8. Monitor filings and notices for changes. Primary sources to watch:
– 10-Q and 10-K (capital stock footnotes, share counts).
– DEF 14A proxy statements (shareholder votes to amend charter or authorize shares).
– 8-K (notice of material issuances).
– Exhibit copies of the certificate of incorporation or amendment (shows authorized totals).
Quick analyst checklist before flagging dilution risk
– Confirm authorized shares vs. issued and outstanding.
– Inventory dilutive instruments (options, warrants, convertibles, restricted stock).
– Compute fully diluted share count (use treasury stock method for options).
– Check recent issuer activity (open-market repurchases, new offerings).
– Read proxy materials for authorization changes or blank‑check preferred authority.
– If using valuation multiples, show both basic and fully diluted per‑share metrics.
Red flags that merit closer scrutiny
– Large, unexplained increases in authorized shares filed via an amendment.
– Authorization of broad blank‑check preferred stock.
– Frequent small issu
– Frequent small issuances that cumulatively create meaningful dilution over time.
– Use of shelf registrations, “at‑the‑market
– registrations, and “at‑the‑market” (ATM) equity programs that permit a steady stream of issuances without a single large filing.
How to compute fully diluted share count — stepwise
1. Start with basic outstanding shares (the count shown on the balance sheet or in the 10‑Q/10‑K).
2. Add in-the-money stock options and warrants using the treasury stock method:
– Proceeds = exercise price × number of options.
– Shares repurchased = Proceeds / average market price.
– Incremental shares = Options outstanding − Shares repurchased.
3. Add restricted stock units (RSUs) and performance shares on a 1:1 basis when they vest or when vesting contingencies are probable.
4. For convertible debt, apply the if‑converted method (treat the debt as converted if doing so is dilutive):
– Incremental shares = number of shares the debt would convert into.
– Adjust numerator (net income) by adding back the after‑tax interest expense that would be saved if conversion occurred (Interest × (1 − tax rate)).
5. For convertible preferred stock:
– Add preferred shares to the denominator.
– Add back preferred dividends to the numerator.
6. Sum all increments to get the fully diluted share count used for diluted per‑share metrics.
Numeric worked example
Assumptions:
– Basic shares outstanding = 100,000,000
– Net income = $50