Reservation of common shares: Overview, definition, and example
What is reservation of common shares?
Reservation of common shares refers to the act of setting aside a specific number of shares of a company’s stock for future issuance or for specific purposes, such as for employee stock options, future financing, or other corporate needs. These shares are not immediately issued but are reserved for a particular use, typically outlined in the company’s governing documents (such as the articles of incorporation or shareholder agreements). The reservation ensures that the company has the flexibility to issue these shares as needed without requiring additional approval from shareholders at the time of issuance.
For example, a company might reserve a portion of its common shares to grant as stock options to key employees or to raise capital in the future without diluting existing shareholders more than necessary.
Why is reservation of common shares important?
Reservation of common shares is important because it provides flexibility and control over future stock issuance, which can be crucial for managing company growth, attracting talent, or securing financing. By reserving shares in advance, a company can avoid delays or the need to seek shareholder approval each time it wants to issue new stock. This can be particularly useful in fast-moving industries or when the company needs to act quickly to seize business opportunities, such as raising capital or executing a strategic partnership.
For businesses, reserving common shares also allows them to manage dilution of existing shareholders’ equity. It helps maintain a balance between meeting business needs and protecting the interests of current shareholders.
Understanding reservation of common shares through an example
Imagine a startup company that is planning to grant stock options to key employees as part of their compensation package. To do so, the company’s board of directors decides to reserve 500,000 common shares for stock options. These shares are not immediately issued but are set aside, ensuring that the company has the ability to grant the options in the future as the business grows and attracts talent. This reservation ensures that the company is ready to offer stock options when needed without requiring additional shareholder approval.
In another example, a company is planning to raise capital through a secondary offering but wants to ensure it has enough shares available to meet investor demand. The company reserves 1 million common shares for future issuance to accommodate potential investors and avoid delays in the fundraising process.
An example of a reservation of common shares clause
Here’s how a reservation of common shares clause might appear in a company’s articles of incorporation or a shareholder agreement:
“The Corporation hereby reserves up to [X] million common shares for issuance under its employee stock option plan, subject to the approval of the Board of Directors. These shares will be available for future issuance without the need for shareholder approval, unless required by applicable laws or regulations.”
Conclusion
Reservation of common shares is a strategic tool that provides companies with the flexibility to issue shares for specific purposes, such as employee stock options or future capital raising, without requiring constant shareholder approval. For businesses, reserving shares helps manage stock issuance, control dilution, and quickly respond to future opportunities. Understanding how to reserve common shares ensures that a company can plan for its future growth while protecting the interests of existing shareholders.
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.