How to Increase a Corporation's Authorized Shares
So, you took our advice (or someone else's) and decided to incorporate your business. As mentioned elsewhere in this blog, this was probably a good idea. You also authorized and issued shares to the corporation's current shareholders. Fine and good.
But somewhere along the way, something happened. Maybe you issued too many shares to the founders and didn't reserve enough for future investors, who are now knocking on your door. Or perhaps you've decided you want to set up an equity incentive pool for your employees to attract and retain the best talent for your company, but there aren't enough shares left to carry out that plan. Whatever the case, the fact is that the corporation hasn't authorized a sufficient number of shares, and now doesn't have enough stock available to support further growth.
How do you fix this problem? How does a corporation increase its authorized shares after it's already issued some to shareholders? The answer is deceptively simple: it does so by amending its articles of incorporation, and filing that amendment with the California Secretary of State.
However, we say that the solution is "deceptively" simple because, if the corporation already has shareholders, some steps must be taken before the company files the amendment. Per California Corporations Code section 902(a), if the corporation has issued shares, any amendment to its articles of incorporation must be approved by a majority of both: (1) the directors, and (2) the outstanding shares. Thus, before preparing and filing the amendment, the corporation has to prepare a board resolution approving the increase in authorized shares, along with a shareholder resolution approving the same. If the corporation fails to obtain the required approvals from its directors and shareholders, the amendment could later be invalidated.
Remember that these problems can be avoided by authorizing and issuing an appropriate number of shares upon incorporation. Note also that this post focuses on California law, and that the requirements for amending articles of incorporation may differ in other jurisdictions.