Issuance of additional shares: Overview, definition, and example
What is issuance of additional shares?
The issuance of additional shares refers to the process by which a company creates and sells new shares of stock to raise capital. This can occur through a variety of methods, such as public offerings, private placements, or rights issues. When a company issues additional shares, it increases the total number of shares outstanding, which may affect the value and ownership percentage of existing shareholders. The issuance is typically governed by the company's articles of incorporation, shareholder agreements, and relevant securities regulations.
Why is issuance of additional shares important?
The issuance of additional shares is important because it allows a company to raise capital for business expansion, debt repayment, research and development, acquisitions, or other strategic objectives. It provides companies with the ability to finance growth without taking on additional debt. However, the issuance of new shares dilutes the ownership percentage of existing shareholders, which can impact voting rights, control, and earnings distribution. As such, the decision to issue additional shares is a significant corporate action that requires careful consideration and approval from the board of directors and, in some cases, the shareholders.
Understanding issuance of additional shares through an example
Imagine a technology startup that wants to raise funds to develop a new product. The company decides to issue 1 million additional shares at $10 per share in a public offering. The funds raised from the issuance, $10 million, will be used to finance the product development. After the shares are issued, the total number of outstanding shares increases, and the ownership percentage of existing shareholders is diluted. For example, if an investor owned 10% of the company before the issuance, their ownership would be reduced if they do not purchase additional shares in the offering.
In another example, a company may issue additional shares through a rights offering, allowing current shareholders the right to purchase new shares at a discounted price before they are offered to the public. This gives existing shareholders the opportunity to maintain their ownership percentage, but it may require them to invest additional capital.
An example of an issuance of additional shares clause
Here’s how a clause related to the issuance of additional shares might look in a shareholder agreement:
“The Company may issue additional shares at its discretion, subject to the approval of the Board of Directors and compliance with applicable securities regulations. The issuance of additional shares shall result in a proportional adjustment of the existing shareholders' ownership percentages unless the existing shareholders are offered the right to purchase additional shares under a rights offering.”
Conclusion
The issuance of additional shares is a key mechanism for raising capital and funding business growth. While it provides companies with access to necessary funds, it also has implications for ownership, control, and shareholder value. Understanding how and when to issue additional shares is crucial for maintaining shareholder relations, managing dilution, and achieving the company’s financial goals. Whether done through public offerings, private placements, or rights offerings, the issuance of additional shares plays a vital role in the financial strategy of a company.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.