Authorised Share Capital

Authorised share capital is the maximum amount of share capital, measured in number of shares or total nominal value, that a company is permitted to issue under its constitutional documents. It is a ceiling, not a record of money raised. A company can issue shares up to the authorised limit without changing its constitution; to go further it must first increase the limit, usually by a shareholder vote.

The term is also written as authorised capital, nominal capital or, in the United States, authorized shares or authorized stock. It should be distinguished from issued share capital, which is the amount actually allotted to shareholders, and from paid-up capital, which is the amount shareholders have paid on those shares. Authorised capital is always equal to or larger than issued capital.

A simple example shows the difference. A company's constitution authorises 1,000,000 shares with a par value of 1 each, giving authorised capital of 1,000,000. The company has allotted 400,000 shares, so its issued capital is 400,000 and 600,000 shares remain unissued. If shareholders have paid only half of the nominal amount on each share, paid-up capital is 200,000 and the rest can be called by the company later.

Only issued capital appears as share capital on the balance sheet. Where shares are issued for more than their par value, the surplus is recorded in a share premium account. Authorised capital is disclosed in the notes or on the face of the balance sheet as information; it is not an asset or a source of funds. Shares that a company has bought back and holds as treasury shares remain issued but are not outstanding.

The ceiling protects existing shareholders. Each new share reduces the proportion of the company that current holders own, so a cap on issuance means that directors cannot dilute them beyond a known point without returning for approval. It works together with other safeguards, such as shareholder authority for directors to allot shares and pre-emption rights, which give existing holders the first chance to buy new shares.

Companies usually set the authorised figure well above their immediate needs. The headroom lets them issue shares for employee share plans, the conversion of convertible securities, acquisitions paid for in shares, or a later fundraising, without calling a meeting each time. Investors in start-ups often negotiate over the size of that headroom.

Rules differ considerably between countries:

• United Kingdom. The Companies Act 2006 removed the requirement for a company to have an authorised share capital, with effect from October 2009. Companies formed earlier may still have a limit carried over into their articles unless they have removed it, and any company may choose to include one.
• United States. The certificate or articles of incorporation must state the number of shares the corporation is authorised to issue, by class. In Delaware and some other states the annual franchise tax can depend on that number, which discourages very large authorisations.
• India and several other Commonwealth countries. Authorised capital is stated in the memorandum of association, and registration fees are charged by reference to it, so increasing the limit carries a cost.
• Continental Europe. Many systems instead use the concept of authorised but unissued capital that shareholders allow the board to issue within a time limit and up to a set share of existing capital.

Australia, New Zealand, Singapore and Hong Kong have abolished both authorised capital and par value.

Where the concept applies, an increase generally requires a resolution of shareholders, an amendment to the constitution and a filing with the companies registry, sometimes with a fee. The limit can also be changed as part of a wider reorganisation, such as a share split, a consolidation, the creation of a new class of ordinary or preference shares, or a capital reduction. A company that issues shares beyond its authorised limit risks those shares being invalid, so lawyers check the available headroom before any issue, including a bonus issue or a rights issue.

Law reformers in several countries concluded that authorised capital gave little real protection. The figure was often set arbitrarily high, it said nothing about the resources actually available to creditors, and it added paperwork whenever a company needed to raise funds. Protection against dilution was seen as better delivered through allotment authorities and pre-emption rights, and protection for creditors through rules on legal capital and distributions. Where the ceiling survives, it remains a practical constraint that a shareholder can use to control future issuance, and it continues to matter for fees and taxes in the jurisdictions that base charges on it.