What is Authorized Share Capital?
Authorized share capital is the maximum amount of shares that a company can issue to shareholders. It is defined in the company's Articles of Association and represents the upper limit of the company equity.
The authorized share capital is usually stated in the company's memorandum of association and represents the initial amount of funds that the company can raise through the sale of its shares. However, this amount can be increased through a formal process if the company requires additional capital.
Why a Company May Need to Increase its Authorized Share Capital?
A company may need to increase its authorized share capital for various reasons, such as:
1. Fundraising: One of the main reasons for increasing authorized share capital is to raise funds from investors. When a company needs more capital to expand its operations or invest in new projects, it may issue new shares to raise funds. Increasing the authorized share capital allows the company to issue more shares and raise more capital from investors.
2. Acquisition: If a company plans to acquire another company or merge with another company, it may need to increase its authorized share capital to issue new shares as part of the deal.
3. Employee stock options: Companies often offer stock options to their employees as part of their compensation package. Increasing authorized share capital allows the company to issue more shares for employee stock options.
4. Stock splits: A company may split its stock to increase the number of outstanding shares and make the stock more affordable for investors. Increasing authorized share capital allows the company to issue more shares as part of a stock split.
5. Strategic planning: A company may increase its authorized share capital as part of its long-term strategic planning. This allows the company to have more flexibility in raising capital and executing its strategic plans.
Understanding the Difference Between Authorized and Issued Share Capital
Authorized share capital and issued share capital are two important concepts related to company shares. Here what they mean:
1 Authorized share capital is the maximum amount of share capital that a company is authorized to issue to its shareholders. This amount is specified in the company's memorandum of association, which is a legal document that sets out the company's constitution and rules. The company can increase or decrease the authorized share capital through a process known as a "special resolution", which requires the approval of a majority of shareholders.
2 Issued share capital, on the other hand, is the portion of the authorized share capital that has actually been issued to shareholders. This includes all shares that have been sold or allocated to investors, whether they are currently held by those investors or not. Issued share capital can be less than, equal to, or greater than the authorized share capital, depending on the company's needs and the demand for its shares.
3 To summarize, authorized share capital is the maximum amount of share capital a company is allowed to issue, while issued share capital is the actual amount of share capital that has been issued to shareholders.
How to Increase Authorized Share Capital
Authorized share capital refers to the maximum amount of shares a company can issue to its shareholders. If a company wants to raise more capital, it may need to increase its authorized share capital. Here are the steps a company can take to increase its authorized share capital:
1 Check the company's articles of association: The articles of association outline the procedures for increasing the authorized share capital. The company should follow the procedures outlined in the articles of association.
2 Call a meeting of the board of directors: The board of directors should pass a resolution to increase the authorized share capital. The resolution should include the amount of the increase, the reasons for the increase, and any other relevant details.
3 Call a meeting of the shareholders: The company should call a meeting of the shareholders to approve the increase in authorized share capital. The shareholders will need to pass a special resolution to approve the increase. The notice of the meeting should include the proposed increase, the reasons for the increase, and any other relevant details.
4 File the necessary documents with the Registrar of Companies: The company will need to file the necessary documents with the Registrar of Companies, including the resolution passed by the board of directors, the special resolution passed by the shareholders, and the amended memorandum of association.
5 Obtain approval from regulatory authorities: Depending on the jurisdiction, the company may need to obtain approval from regulatory authorities, such as the Securities and Exchange Commission (SEC) or the relevant stock exchange.
6 Issue new shares: Once the authorized share capital has been increased and all necessary approvals have been obtained, the company can issue new shares to its shareholders.
By following these steps, a company can increase its authorized share capital and raise additional capital to fund its operations and growth.
Filing Requirements for Increasing Authorized Share Capital
When a company needs to increase its authorized share capital, it must follow certain filing requirements to ensure that the process is legally valid. Here are the steps typically involved in the process:
1 Review the company's Articles of Association: The first step is to review the company's Articles of Association to determine whether there are any specific procedures or requirements for increasing authorized share capital. If there are, the company must follow these procedures.
2 Pass a board resolution: The company's board of directors must pass a resolution approving the increase in authorized share capital. This resolution must be documented in the minutes of the board meeting.
3 Pass a shareholder resolution: The company's shareholders must pass a resolution approving the increase in authorized share capital. This resolution must be documented in the minutes of the shareholders' meeting.
4 File the necessary documents with the relevant authority: The company must file the necessary documents with the relevant authority, which is usually the registrar of companies in the jurisdiction where the company is incorporated. The documents typically include the board and shareholder resolutions, a copy of the updated Articles of Association, and any other required forms.
5 Pay any applicable fees: The company must pay any applicable fees associated with the filing.
Once the filing has been completed and the registrar of companies has approved the increase in authorized share capital, the company can issue new shares up to the new authorized amount. It is important to note that there may be additional steps and requirements depending on the jurisdiction and the specific circumstances of the company. It is therefore advisable to seek legal advice to ensure that all requirements are met.
Advantages of Increasing Authorized Share Capital
Authorized share capital refers to the maximum number of shares a company is permitted to issue to its shareholders. Increasing authorized share capital has a few advantages for a company, including:
1 Flexibility in raising funds: With an increased authorized share capital, a company can issue more shares to raise capital from the market. This can be especially useful when the company needs to raise large amounts of capital quickly, such as for financing a merger or acquisition.
2 Improved liquidity: An increased authorized share capital can improve a company's liquidity, as more shares can be issued and traded in the market. This can increase the number of potential investors and improve the company's ability to raise capital.
3 Stock splits and dividends: An increased authorized share capital can provide flexibility for stock splits and the payment of dividends. By splitting the stock, a company can increase the number of shares outstanding, making them more affordable to investors. A larger authorized share capital also provides the flexibility to pay dividends by issuing more shares instead of cash.
4 Acquisition opportunities: Increasing authorized share capital can also help a company to pursue acquisition opportunities. With a larger authorized share capital, a company can issue shares to acquire other companies or merge with them, without diluting the ownership stake of existing shareholders.
5 Overall, increasing authorized share capital can provide a company with greater flexibility in raising capital, improve liquidity, and create opportunities for growth and expansion through acquisitions or stock splits.
Disadvantages of Increasing Authorized Share Capital
While increasing authorized share capital can have advantages for a company, there are also some potential disadvantages to consider, such as:
1 Dilution of ownership: By increasing authorized share capital, a company may be diluting the ownership stake of existing shareholders, as more shares are being issued. This could lead to existing shareholders having less control over the company and potentially fewer dividends per share.
2 Shareholder approval: Increasing authorized share capital typically requires approval from shareholders. If shareholders do not approve the increase, it could result in a loss of confidence in the company's management or a negative impact on the company's stock price.
3 Perception of financial weakness: Some investors may perceive an increase in authorized share capital as a sign of financial weakness or that the company is struggling to raise funds. This could negatively impact the company's reputation and stock price.
4 Legal and administrative costs: Increasing authorized share capital can also involve legal and administrative costs, such as filing fees and regulatory requirements. These costs could be significant, especially for smaller companies.
5 Unused shares: If a company increases its authorized share capital but does not issue all the additional shares, it may be left with a large number of unused shares, which could potentially decrease the company's stock price or reduce its perceived value.
Overall, while increasing authorized share capital can provide a company with benefits such as flexibility in raising capital and pursuing growth opportunities, there are also potential disadvantages to consider, including dilution of ownership, shareholder approval, perception of financial weakness, legal and administrative costs, and the risk of unused shares.