The Power to Issue Stock

48 Pages Posted: 2 May 2011 Last revised: 29 Jun 2011

Mira Ganor

University of Texas at Austin - School of Law

Date Written: March 1, 2011

Abstract

Studies of management's disregard of the will of the shareholders have focused on combinations of entrenchment mechanisms and special governance structures. However, management's power to issue stock, a fundamental element of the ability of management to control the corporation regardless of the will of the shareholders, has received scarce attention. This Article highlights the significance of the power to issue stock: When managers choose to ignore the will of the majority of the shareholders or when managers choose to circumvent the veto power of the minority shareholders, they often take advantage of their power to issue stock. A top-up option, for example, which is studied in this Article, is contingent upon the managers' ability to issue shares and dilute the voting power of dissenting minority shareholders. The poison pill is also contingent upon the managers' ability to dilute a hostile-bidder by issuing shares to the shareholders. The ability of managers to use new stock issues as a shareholder-circumventing mechanism is particularly important. It plays a key role in the management’s arsenal and it provides an incentive for managers to reserve this unique power and refrain from diminishing it by, for example, replacing equity-based compensation and equity-financing with less efficient choices. This Article explores the key power of managers to issue stock as well as the current and potential limitations on this power. One such limitation is the size of the authorized capital of the corporation, which provides a ceiling for the total number of shares that can be issued. The ratio of authorized non-outstanding shares to the issued and outstanding shares, what I shall call the "excess-ratio", is an indicator of the magnitude of the managers' power to issue stock. A study of the excess-ratio reveals that corporations go public with a high excess-ratio the number of unissued authorized shares is more than threefold the number of issued shares. Further results of the study of the excess-ratio are analyzed in this Article.

Keywords: Top-up option, corporate governance, agency costs, tender offers, mergers, acquisitions, managers, directors, boards, shareholders, shares, issuances

JEL Classification: D70, G30, G32, G34, G38, K22

Suggested Citation

Ganor, Mira, The Power to Issue Stock (March 1, 2011). Available at SSRN: https://ssrn.com/abstract=1828082 or http://dx.doi.org/10.2139/ssrn.1828082

Mira Ganor (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

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