I am writing this post because of a Quora question that I answered. Please see What does it mean when you have X shares in a company?
Before addressing the significance of the number of shares, I will address the significance of shareholding, generally.
Shareholder Rights Generally
Shareholders’ rights vary, somewhat, from state to state. They may include, for example, the right to inspect and copy the corporation’s books and records (see) and the right to inspect and copy the corporation’s shareholder list (see ).
Perhaps the most important shareholder right is the right to vote for the corporation’s directors and on other corporate matters.
Then, the question is: How much voting power does a given shareholder have?
In this respect, the number of shares that a given shareholder holds is, by itself, meaningless.
Voting Power and X Shares
Generally, decision-making power requires that a shareholder, or a group of shareholders, control a majority of the corporation’s voting shares. (See, however,.)
So, how does one determine the percentage of shares that one holds? I discussed that issue in:
I am writing this post about calculating one’s share ownership percentage because of an email exchange I had on behalf of a client.
We had formed a Delaware corporation with 10 million authorized shares. Of the authorized shares, 8 million had been issued to the founder.
The founder and an independent contractor had agreed on equity compensation for the contractor. The agreed-upon share ownership percentage was 2%.
The contractor thought that he should receive 200,000 shares (2% of 10 million). The rest of this post explains how and why the contractor was incorrect.
Authorized vs. Issued Shares
When one discusses a corporation’s shares of stock, two numbers are important: the number of authorized shares and the number of issued shares.
- The corporation’s Certificate of Incorporation specifies the number of authorized shares. This is the maximum number of shares that the corporation can issue to stockholders at a given time. This number is somewhat arbitrary. Perhaps most significantly, with required approvals the number of authorized shares can change at any time (for example, if a major investor is found). One need simply amend the Certificate of Incorporation. So, while the corporation currently is authorized to issue 10 million shares, that number could increase to 100 million next week, and to 1 billion next month.
- The number of issued (sometimes referred to as “issued and outstanding”) shares is the number of shares that the corporation, pursuant to board of directors approval, has granted to the various stockholders. This is the number that determines, at a given time, the percentage of a corporation’s shares that are held by a given stockholder.
Calculating Share Ownership Percentage
At present, the corporation has issued 8 million shares. To determine the number of shares that should be issued so the contractor will hold 2% of all issued shares, we need to solve the following equation:
X / (8,000,000 + X) = .02
X = 163,265
So, “163,265” is the number of shares to be issued so the contractor’s share ownership percentage will be 2%.
To summarize and to simplify a bit:
- You determine the percentage of shares that you hold by dividing the number of shares that you hold (as stated in the question, “X shares”) by the total number of issued shares.
- The greater (or smaller) that percentage is, the greater (or smaller) your voting power.
Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.