New shares: Overview, definition, and example
What are new shares?
New shares refer to additional shares of stock issued by a company, typically to raise capital or finance expansion, acquisitions, or other business needs. These shares are newly created and sold to investors, which increases the total number of outstanding shares. New shares can be issued in various ways, such as through public offerings (e.g., initial public offerings or secondary offerings), private placements, or rights offerings to existing shareholders. The issuance of new shares dilutes the ownership percentage of current shareholders unless they are given the opportunity to purchase the new shares.
Issuing new shares is a common method for companies to secure funds without taking on debt, although it can lead to changes in control or voting power depending on the number of shares issued and the type of investors involved.
Why are new shares important?
New shares are important because they provide companies with a way to raise funds for various purposes, including business growth, capital investments, or paying off debt. By issuing new shares, companies can attract new investors or allow existing shareholders to increase their stake in the company. This process helps businesses maintain liquidity, invest in opportunities, and expand their operations without taking on additional borrowing costs.
However, issuing new shares also has implications for current shareholders, as it can dilute their voting power, ownership percentage, and earnings per share. Thus, companies need to consider the impact on their shareholder base when deciding to issue new shares.
Understanding new shares through an example
Imagine a fast-growing technology company that needs funds to develop new products. The company decides to issue 1 million new shares through a secondary offering, which are made available to the public. The proceeds from the sale of these new shares will be used to fund the product development. Before the offering, there were 10 million shares outstanding, meaning that the issuance of new shares will increase the total number of shares to 11 million. Existing shareholders will now own a smaller percentage of the company unless they participate in the offering to maintain their ownership stake.
In another example, a private startup decides to issue new shares to a venture capital firm in exchange for capital to accelerate its growth. The new shares are sold at a negotiated price, and the venture capital firm now owns a percentage of the company based on the number of shares it purchased. This provides the startup with the funds it needs to expand, but it also dilutes the ownership stake of the original founders and employees.
An example of a new shares clause
Here’s how a clause related to the issuance of new shares might appear in a corporate charter or agreement:
“The Corporation shall have the authority to issue new shares of stock as determined by the Board of Directors. The issuance of new shares shall be subject to the approval of the Board and, where applicable, the shareholders. The new shares may be issued at such price and under such terms as the Board deems appropriate, and existing shareholders will be given the opportunity to purchase additional shares in proportion to their current ownership through a rights offering.”
Conclusion
New shares are an essential mechanism for companies to raise capital by offering additional stock to investors. While issuing new shares provides companies with necessary funding for growth or operations, it can also dilute the ownership of current shareholders. Clear communication, proper planning, and consideration of shareholder interests are essential when issuing new shares, as this decision can impact the company's financial structure and shareholder relations.
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.