Unissued Share Capital

Unissued share capital represents the shares that a corporation is authorized to issue according to its corporate charter but has not yet issued. Authorized share capital is the maximum amount of share capital that a company can legally issue as defined in its articles of incorporation or corporate charter. The amount that has been actually issued to shareholders is known as issued share capital. The unissued share capital is thus an excess of authorized share capital over issued share capital.

Unissued shares can provide a company with the flexibility to raise funds in the future without the need to go through the lengthy process of obtaining shareholder approval to increase the share capital. These shares could be issued in future public offerings, private placements, or employee stock options plans.

Example 1:

A company is authorized to issue 1,000,000 shares of common stock. Currently, it has issued 600,000 shares to the public. Therefore, the company has 400,000 shares of unissued share capital that it can potentially issue in the future.

Example 2:

A small technology firm has an authorized share capital of $10 million distributed into shares. The company has so far issued shares amounting to $6 million. Thus, it holds $4 million worth of unissued share capital, which it could use for funding future projects, mergers, or acquisitions.

Frequently Asked Questions (FAQs)

Unissued share capital refers to shares that have never been issued to investors, while treasury shares are shares that were initially issued but later repurchased by the company and are held in the company’s treasury.

2. Can a company sell its unissued shares?

Yes, a company can issue and sell its unissued shares to raise additional capital, usually after board approval and observing regulatory requirements.

3. Why might a company keep a portion of its shares as unissued?

Keeping shares unissued provides the company flexibility for future financing needs, strategic opportunities like mergers and acquisitions, or employee incentive programs without needing to seek further shareholder approval.

4. Do unissued shares dilute existing shareholders?

Unissued shares themselves do not dilute existing shareholders; however, if and when these shares are issued, the ownership percentage of existing shareholders may be diluted.

5. Are unissued shares represented in financial statements?

Unissued shares are not presented as part of issued capital in financial statements. They are acknowledged in the notes to the financial statements under authorized share capital.

The maximum amount of share capital that a company is authorized to issue as specified in its corporate charter.

The portion of authorized share capital that has been issued to shareholders and is fully paid.

Treasury Shares

Shares that were once a part of issued share capital but have been repurchased by the company and are held in the company’s treasury.

Paid-Up Capital

The amount of money a company has received from shareholders in exchange for shares of stock that are fully paid.

Par Value

The nominal or face value of a share as stated in the corporate charter.

Online References

Suggested Books for Further Studies

“Company Law” by Alan Dignam & John Lowry – This book provides comprehensive coverage of company law including share capital.
“Financial Accounting: An International Introduction” by David Alexander & Christopher Nobes – This book includes explanations and details accounting processes concerning share capital.
“Corporate Finance” by Jonathan Berk & Peter DeMarzo – Covers finance management principles with detailed sections on share capital and corporate structuring.

### What defines unissued share capital? - [ ] Shares that are issued and held by investors. - [x] The portion of authorized share capital that has not been issued. - [ ] Paid-up capital raised from investors. - [ ] Repurchased shares held by the company. > **Explanation:** Unissued share capital is the part of authorized share capital that has not yet been issued to shareholders. ### Can unissued shares be used for employee stock options? - [x] Yes, unissued shares can be allocated for employee stock options. - [ ] No, unissued shares cannot be used for employee compensation. - [ ] Only treasury shares can be used for this purpose. - [ ] It depends on the country’s corporate laws. > **Explanation:** Companies can use unissued shares for employee stock options, providing flexibility for future stock compensation. ### Who typically needs to approve the issuance of unissued shares? - [ ] Employees of the company. - [x] The company's board of directors. - [ ] Bondholders. - [ ] Customers. > **Explanation:** The board of directors typically must approve the issuance of unissued shares, ensuring that it aligns with corporate strategy and regulatory requirements. ### What is the immediate financial impact of unissued share capital on a company? - [ ] It represents a financial liability. - [ ] It directly increases the company’s revenue. - [x] It generally has no immediate financial impact. - [ ] It decreases company inventory. > **Explanation:** Unissued share capital does not have an immediate financial impact since it represents potential future issuance and not current financial transactions. ### Can unissued shares cause dilution of ownership when issued? - [x] Yes, they can dilute existing shareholders when issued. - [ ] No, issuing unissued shares does not affect current shareholders. - [ ] Only treasury shares can cause dilution. - [ ] It is impossible to dilute ownership through unissued shares. > **Explanation:** When a company issues previously unissued shares, the ownership percentage of existing shareholders can be diluted. ### Which term describes shares that have been issued and later repurchased by the company? - [ ] Authorized shares. - [ ] Unissued shares. - [ ] Issued shares. - [x] Treasury shares. > **Explanation:** Treasury shares are those that have been issued and later repurchased by the company. ### What is the nominal value of a share as stated in the company's corporate charter? - [ ] Issued value. - [x] Par value. - [ ] Market value. - [ ] Book value. > **Explanation:** Par value is the nominal or face value of a share as stated in the corporate charter. ### In a company’s financial statement, where are details regarding unissued shares typically found? - [ ] Cash flow statement. - [ ] Balance sheet under assets. - [ ] Income statement. - [x] Notes to the financial statements. > **Explanation:** Details about unissued shares are typically mentioned in the notes to the financial statements under authorized share capital. ### What is the maximum amount of capital a company can issue as specified in its corporate charter? - [x] Authorized share capital. - [ ] Issued share capital. - [ ] Paid-up capital. - [ ] Retained earnings. > **Explanation:** Authorized share capital is the maximum amount of share capital that a company can issue according to its corporate charter. ### What flexibility does unissued share capital offer to a company? - [ ] Immediate infusion of cash. - [ ] Elimination of existing debts. - [x] Future fundraising without awaiting shareholder approval. - [ ] Guaranteed increase in share price. > **Explanation:** Unissued share capital allows companies the flexibility to raise funds in the future without further seeking shareholder approval for issuing new shares.

Thank you for deepening your understanding of unissued share capital. Stay inquisitive and continue enhancing your financial literacy!

Unissued Share Capital

What Is Unissued Share Capital?

Examples of Unissued Share Capital