What factors to consider when deciding on Authorized Share Capital?

Introduction

Authorized share capital is the maximum number of shares that a company can issue to its shareholders. It is crucial for a company’s capital structure, as it determines the company’s ability to raise funds from the market. A company may decide to raise its authorized share capital for various reasons, such as to raise capital for expansion, to acquire new assets, or to finance new projects. However, before making such a decision, there are several factors that a company should consider. In this article, we will discuss the factors that a company should consider before deciding to increase its authorized share capital.

What is Authorized Share Capital?  

Authorized share capital refers to the maximum value of shares that a company is legally allowed to issue to its shareholders. This capital amount is stated in the company’s constitutional documents, such as the Memorandum of Association. Increasing authorized share capital involves altering these documents to permit the issuance of additional shares beyond the current limit.

What are the Reasons for Increasing Authorized Share Capital?

A company may decide to raise its authorized share capital for various reasons, such as to raise capital for expansion, to acquire new assets, or to finance new projects. Increasing authorized share capital allows a company to issue new shares to raise capital from the market. It also provides the company with the flexibility to issue new shares in the future without having to go through the process of amending its articles of incorporation.

What are the Factors to Consider Before Deciding to Increase its Authorized Share Capital?

Before deciding to increase its authorized share capital, a company should consider the following factors:

1. Capital Requirements for Growth

One of the primary reasons for increasing authorized share capital is to provide the company with sufficient financial resources to support its growth plans. As businesses expand their operations, they may require additional funds to invest in new projects, acquisitions, research and development, or market expansion. Increasing authorized share capital allows the company to access these funds by issuing new shares.

2. Financial Stability  

A company’s financial stability is another important factor to consider when deciding to raise its authorized share capital. A company that is financially stable may not require a higher authorized share capital, as it may have sufficient funds to finance its operations.

3. Shareholder Approval  

The capital usually requires the approval of existing shareholders through a resolution passed in a general meeting. Effective communication and transparency with shareholders regarding the reasons, benefits, and potential impacts of share capital are essential. It helps maintain trust, minimize resistance, and obtain necessary approvals smoothly.

4. Dilution of Ownership

Before deciding to increase the authorized share capital, it is essential to evaluate the potential dilution of ownership and control. When new shares are issued, existing shareholders’ ownership percentages may decrease proportionately. This dilution could impact decision-making processes and control over the company’s operations. Therefore, businesses should carefully assess the balance between the need for capital and the impact on existing shareholders.

5. Market and Industry Trends

Before deciding to increase authorized share capital, businesses should analyze market and industry trends. Understanding the current market conditions, growth prospects, and competitive landscape can help assess the need for additional capital. It is essential to evaluate the potential return on investment and weigh it against the costs and risks associated with increasing capital.

6. Legal and Administrative Considerations

It involves legal and administrative processes. Companies must comply with the relevant laws, regulations, and corporate governance requirements when altering their constitutional documents. It is crucial to seek legal advice and ensure proper documentation and filings to avoid any legal complications or non-compliance issues.

Summary 

Increasing authorized share capital is an important decision that a company should make after considering all the relevant factors. The company should ensure that it has the support of its shareholders and that it complies with all the legal requirements. The company should also consider the impact of the dilution of ownership on its existing shareholders. By considering these factors, a company can make an informed decision about raising its authorized share capital.

Suggested Read: Step-by-Step Process for Increase in Authorized Share Capital