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 non-voting stock?4 Views
finance a la shmoop- what is non-voting stock? hmm well it's stock that doesn't
vote. bet you're shocked to hear that. most people need a PhD in finance to [stock wears an "I didn't vote" sticker.
understand that notion. but really that's it in most cases common stock carries
with it the right to vote. and in fact it's the common shareholders who elect
the board of directors. but every now and then a potentially hostile investor
comes along and buys or wants to buy a big chunk of stock in a company. well the
amount might be a block large enough to elect that potentially hostile investor
slate or the group of people that investor wants to place on the board to
represent her evil intentions .when that happens companies will often create a
class of common stock similar in every way to its normal common only with its [stock checklist of privileges listed]
voting rights stripped away .that way the investor can own an economic interest in
the company but not monkey with the board.
Up Next
What is the difference between common and preferred shares? Common stock is at the bottom. It comes at the very end, when a company is sold, in the...
If you go to an arcade and want to play coin-operated games, you will often exchange $1 bills for (4) quarters at a time. This is the equivalent of...
What is Authorized Stock? Authorized stock is the amount of common stock that a company can issue. A company’s shareholders have to approve any c...
What is common stock? Ownership. Common shareholders own a pro rata slice of the pie. They elect the board of directors by vote. Some companies hav...