Company owners or investors, when drafting or digging through the details of the ownership of company shares, will come across the concept of authorized shares, issued shares and sometimes allocated (and unissued) shares.  I have written this article to clear up any confusion on these three states.

The Concept of Authorized Shares

When registering a new business, the articles of incorporation in some jurisdictions will require that the registrant file the number of shares that can be issued. It is very common to authorize an unlimited number of shares in any given share classes:

The authorized capital of the corporation consists of an unlimited number of:

(a) Class A Common Voting Shares (the “Class A Common Voting Shares”);

(b) Class B Non Voting Shares (the “Class B Non-Voting Shares” and collectively with Class A Common Voting Shares, are the “Share Classes”)

By doing so the corporation can issue shares as many times as it wishes without amending the articles of incorporation.

Authorizing a LIMITED Number of Issuable Shares

A careful investor will sometimes require that a limit is placed upon the issuance of new shares in any and all share classes.  Such a restriction ensures that the number of shares available for issue are a matter of public record, and therefore any changes to the number of shares available for issue would require a formal amendment of the articles.  

The Concept of Allocated but Unissued Shares

To provide investors and/or co-founders comfort as to the balance of share ownership, the equity of a corporation may be split in some way in advance, with shares allocated but not issued.  The issue of the shares might accompany a scheduled “buy-in”, or option conversion.  In the intermediate period, the company can still track the number of shares allocated to each shareholder, and also possibly to “treasury” – i.e. available for issuance to investors and/or to other employees.  Pre-calculating the division of shares, and tracking the allocations in the company’s share register (whether or not such allocated shares are issued), will provide comfort to the shareholders or soon-to-be-shareholders on their proportionate ownership.

The Concept of Issued Shares

Issued shares are the easiest to explain, these are the shares of the company that have been transferred into the hands of one or more specific shareholders, and to which certain voting or dividend rights (among others) will attach.

Sample Share Capitalization Table

This sample share capitalization table helps to illustrate these various “states of being” of a specific type of share:

SAMPLE SHARE CAPITALIZATION TABLE

Takeaways

  • Limiting the number of authorized shares is a tactic that a careful investor might use to prevent an unauthorized share issue
  • A share capitalization table similar to the one provided above will help to provide each business owner with comfort as to such owner’s pro rata share holding.
  • It’s important to be aware of your share ownership versus all other owners (on a fully diluted basis)

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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