When a company goes public and gets incorporated, they change legal status. Part of it means having lots of meetings and signing more paperwork than most of us see in a lifetime. One of those pieces of paperwork is a charter, which outlines a bunch of rules—including the total number of shares a company can issue. This number of shares is called authorized stock, 'cause it's the total number of shares the company is authorized by its charter to issue.
Example
Let's say Company XXX wants to buy Company Y. Company XXX has an authorized limit of 100 million shares. It currently has 85 million shares and 5 million options, yet unvested, outstanding. Technically it has 90 million shares outstanding. It wants to print shares to buy Company Y. But company Y wants 20% of the primary shares of Company XXX or 17 million shares. Company XXX cannot print the shares to buy Y. Why? Because it needs to get approval to change the charter—doable only by a majority vote of the outstanding shares at the time.
Related or Semi-related Video
Finance: What is Authorized Stock?2 Views
finance a la shmoop what is authorized stock... well when a company goes
public and gets all incorporated well it changes legal status and part of it [People in a meeting]
means having lots of meetings and signing more paperwork than most of us
see in a lifetime well one of those pieces of paper is a charter or legal [Legal document appears]
document which outlines a whole bunch of rules including the number of shares a
company can issue well this number of shares is called authorized stock [Document stamped authorized stock]
because it's the maximum total number of shares the company is authorized by its
charter to issue ....well let's say company XXX wants to buy company Y it's like a
genetic coding industry... company XXX has an authorized
limit of a hundred million shares and currently has 85 million shares and five
million options yet unvested outstanding technically it has 90 million shares
outstanding..... it wants to
print shares to buy company Y but company Y wants 20 percent of the [Company XXX printing stock]
primary shares of the company XXX or 17 million shares no primary does not
include options all right well company XXX cannot print enough share to buy Y [Shares printing]
why? because it needs to get approval to change the charter and that is only
doable by a majority vote of the outstanding shares at the time right and
it's mostly common shareholders who will own those all right well the company has
to have authorized shares to be able to make that transaction you know happen so
that's authorized stock and now you know it isn't just stock that's been approved
by you Mark Twain [Mark Twain sitting at a desk with stock]
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