MK @ Legal Biz Leaf Total Number of Authorized Shares to be Issued
定款（Articles of Incorporation）
第 ５ 条 当会社の発行可能株式総数は、〇〇〇〇株とする。
Article 5 The total number of shares authorized to be issued by the Company shall be 〇〇〇〇 shares.
The total number of authorized shares is the maximum number of shares that can be issued by a company, which must be stated in the Articles of Incorporation.
I am frequently asked by my clients at the time of their incorporation, what is the right amount is, to be set as the total number of authorized shares.
To be honest, this value is not so important for a one-person or family-owned company that does not intend to receive investments from third parties. So, for those people, I generally advise them to set around 5 to 10 times the total number of shares issued at the time of incorporation.
On the other hand, this value is important for a company that intends to expand its business by receiving investments from third parties. The reasons are as follows.
Reasons for the existence of the Total Number of Authorized Shares
Benefits for the shareholders
The reason why there is such regulation for share issuance in the first place is because it would be extremely detrimental to existing shareholders if companies’ shares can be issued without a limit.
Let’s look at the following case as an example.
Total Number of
Authorized Shares 100 shares
Number of
Issued shares:
common stock Voting Right Distribution Ratio
Shareholder A 10 shares 50% 50%
Shareholder B 10 shares 50% 50%
Total 20 shares 100% 100%
In the above situation, if the company allocates 80 shares to third party C without the shareholders’ permission, the shareholder’s equity and distribution ratio will change as follows.
Total Number of
Authorized Shares 100 shares
Number of
Issued shares:
common stock Voting Right Distribution Ratio
Shareholder A 10 shares 10% 10%
Shareholder B 10 shares 10% 10%
Shareholder C 80 shares 80% 80%
Total 100 shares 100% 100%
In order to prevent such disadvantages, the existing shareholders can determine the maximum number of shares that can be issued by the company in advance.
This number can be increased when it reaches the limit, but in such a case, the Articles of Incorporation shall be amended by a special resolution, which requires more votes from shareholders than an ordinary resolution.
Since nearly 99% of Japanese Kabushiki-Kaisha are privately held companies, a general shareholders’ meeting is often required when issuing shares (i.e., the company cannot share issue without existing shareholders permission, anyway) .
However, some shareholders may want to have a brief image of how much their ownership ratio may eventually decrease after they invest in it. For example, if a company has 10 shares issued and a margin of 900 thousand shares, it is somewhat predictable that the company is planning to increase its capital in the future meaning the shareholding ratio would fall.
Additionally, there are also shareholders who hold class shares with restricted voting rights and cannot participate in the resolution to issue shares. For such shareholders, it is important to disclose information by stating the total number of authorized shares in the articles of incorporation and registering it in the certificate of registered matters.
Benefits on the companies
Considering the above, one might think it would be better to hold a general shareholders’ meeting every time new shares are to be issued without specifying any total number of authorized shares. However, such a situation could also be to the detriment of shareholders, for example in cases where holding a general shareholders’ meeting costs a large amount in personnel expenses.
Thus, especially for public companies or large corporations with many shareholders, holding many shareholders’ meetings would lead to a reduction in the companies’ assets and therefore the shareholders dividends.
Also, there might be a situation when the survival of a company may be at stake, it may be necessary to raise funds and allocate shares to the investors in a short amount of time.
Thus, guaranteeing too many shareholder rights may have a negative impact on a company, which in turn is to the detriment of the shareholders.
Therefore, by having the shareholders determine the total number of authorized shares, companies are available to issue shares relatively freely by the board of directors (if certain conditions are met) until it reaches to the maximum amount.
On contrary, if some overseas corporation that has established a Japanese subsidiary and does not want the local board of directors to have any authority to issue shares, it can be a solution to set the total number of authorized shares as equal to the total number of shares issued.
Total number of shares authorized to be issued: 100 shares
Total number of shares issued: 100 shares
* This company has no room to issue even one share unless it gets permission form the shareholders.
Four times rule for public companies
The maximum value that can be set as the number of shares authorized is depends on whether a company is a public or private company. In the case of a private company, the maximum amount can be set without limitation (whether it does so or not). On the other hand, in the case of a public company, the total number of authorized shares cannot exceed four times the total number of shares issued currently.
Total number of shares issued: 250,000 shares
The total number of authorized shares: limited to 1,000,000 shares (250,000 x 4).
＊If 250,000 shares are newly issued, then the total number of authorized shares can be set up to 2,000,000 shares.
(250,000 + 250,000) x 4 = 2,000,000 shares
Conclusion
The total number of shares authorized is determined primarily for the benefit of shareholders and the smooth operation of a company in anticipation of a new share issue.
For a private company, you may set the total number of shares authorized to any number. However, each time you increase this maximum amount, the extra registration tax of 30,000 JPY will be charged for updating corporate registry. So it is advisable to set this value with a certain range at the time of incorporation.
MK@ 03/26/2022
