When a corporation is formed, one of the first actions it typically takes is to issue shares. This process involves several key steps and considerations that ensure the issuance is valid and compliant with legal requirements.
1. Definition of Shares
Shares represent ownership in a company. When a company issues shares, it is essentially selling pieces of itself to investors, which can include founders, employees, institutional investors, or the general public. The shares can be classified into different types, such as common stock and preferred stock, each with its own rights and privileges.
2. Types of Shares
- Authorized Shares: These are the total number of shares that a corporation is legally allowed to issue as specified in its articles of incorporation.
- Issued Shares: This subset includes all shares that have been sold or distributed to shareholders. Issued shares can include those sold publicly and those given to insiders as part of compensation packages.
- Outstanding Shares: These are the issued shares that are currently held by shareholders, excluding any treasury shares (shares that were bought back by the company).
3. Board Approval Requirement
Before any shares can be issued, approval from the company’s board of directors (BofD) is mandatory. This approval can be obtained through written consent or during a formal board meeting. The board must document this decision properly to avoid future legal complications regarding the validity of the share issuance.
4. Payment for Shares
For a share issuance to be valid, it must be “duly paid,” meaning that the company must receive something of value in exchange for the shares. This could be monetary payment (cash), property (such as equipment or intellectual property), or services already rendered (not promises for future services). It’s crucial that this transaction complies with relevant tax laws to prevent unintended tax consequences for both the company and the shareholder.
5. Documentation Required
The documentation required for issuing shares varies based on the type of security being issued:
- For common stock: Board approval and a stock purchase agreement are necessary.
- For stock options: Documentation includes board approval, an independent valuation report, a copy of the stock option plan, and an option grant notice.
- For preferred stock: Similar documentation as common stock but may also require additional agreements depending on financing arrangements.
6. Importance of Proper Issuance
Properly documenting and executing share issuances is critical for maintaining good corporate governance and ensuring transparency for potential investors or acquirers. Inadequate records can lead to complications during due diligence processes when seeking further investment or acquisition opportunities.
7. Future Considerations
Companies may retain some authorized but unissued shares for future needs such as employee compensation plans or secondary offerings. Understanding how these future issuances might affect current ownership structures is essential for strategic planning.
In summary, issuing shares involves careful consideration of legal requirements, proper documentation, and strategic planning regarding ownership structure and capital needs.
