Creating more "shares"

[Cross Hair]

What is the name of your state (only U.S. law)? Ohio

Eleven years ago I entered into a stock award plan with my employer so I could earn some vested ownership in the company, a privately owned business. We started out with 400 shares and in the first three years I was awarded 40 shares (10%). The plan kind of went south do to a third party that was involved, we rescinded his shares (68 at that time) so the entire program was stopped at that point.

I have just come to discover that the majority owner at that time created another 40 shares of stock. When I questioned him about that he claimed the "accountant" determined it was necessary. When I voiced my concerns that by doing that he devalued my ownership in the business he denied that was the case, he said "your owner ship is the same, I just have more shares".

To my thinking when we rescinded the other parties shares my ownership and my number of shares should have increased proportionately. Nothing in the contracts addresses this issue.

1) Is it legal to create more shares and not increase my shares as well?
2) How can increasing the number of shares NOT decrease my ownership thusly devaluing my shares?
3) Am I confused thinking shares/ownership are related?

Thank you

 

[FlyingRon]

Well your percentage did go down. Whether it was devalued depends on whether the issuance resulted in any increased value of the company.

The Articles of Incorporation typically indicate how many shares are authorized to be issued. Note that the company isn't required to issue all the authorized shares at the outset. So it's possible that not all the authorized shares had been issued. The bylaws may or may not provide guidance on how shares that are authorized will be issued.

 

[LdiJ]

What is the name of your state (only U.S. law)? Ohio

Eleven years ago I entered into a stock award plan with my employer so I could earn some vested ownership in the company, a privately owned business. We started out with 400 shares and in the first three years I was awarded 40 shares (10%). The plan kind of went south do to a third party that was involved, we rescinded his shares (68 at that time) so the entire program was stopped at that point.

I have just come to discover that the majority owner at that time created another 40 shares of stock. When I questioned him about that he claimed the "accountant" determined it was necessary. When I voiced my concerns that by doing that he devalued my ownership in the business he denied that was the case, he said "your owner ship is the same, I just have more shares".

To my thinking when we rescinded the other parties shares my ownership and my number of shares should have increased proportionately. Nothing in the contracts addresses this issue.

1) Is it legal to create more shares and not increase my shares as well?
2) How can increasing the number of shares NOT decrease my ownership thusly devaluing my shares?
3) Am I confused thinking shares/ownership are related?

Thank you

When a corporation is set up, it commonly registers with (this is an example only, the numbers vary) with 1000 shares, but only issue 100 of those shares. Using an example like yours, that might mean that you have 10 of the shares and the primary shareholder has 90, and the company has 900 shares in reserve that they may eventually sell in order to raise capital for any number of things.

If the primary shareholder had to invest more money into the company, then absolutely it's accountant would recommend that he issue more shares to himself.

Does that reduce your percentage of shares in the company?, yes it does. However it would not normally reduce the value of your shares, because more money was invested into the company, therefore increasing the worth of the company. The only way you would be entitled to increase your shares to maintain your percentage, was if you also invested more money in the company.

That is a basic, simplistic explanation of how it works.

 

[Cross Hair]

Thanks for the reply's.

Bottom line is every time more shares are issued my owner ship percentage decreases and unless the company value increases my share value decreases as well, correct?

Can I find the articles of incorporation with out having to go thru the majority owner? If so how? I would like to know how many shares were created.

One last question. When the company rescinded the third owners 68 shares why did all those shares go back to the majority share holder If I am (was) a 10% owner shouldn't 6.8 shares have gone to me?

 

[LdiJ]

Thanks for the reply's.

Bottom line is every time more shares are issued my owner ship percentage decreases and unless the company value increases my share value decreases as well, correct?

Can I find the articles of incorporation with out having to go thru the majority owner? If so how? I would like to know how many shares were created.

One last question. When the company rescinded the third owners 68 shares why did all those shares go back to the majority share holder If I am (was) a 10% owner shouldn't 6.8 shares have gone to me?

No, they would have gone to whomever purchased the shares. If the company purchased the shares, then the company would own them. If the majority shareholder purchased the shares, then the majority shareholder would own them. Unless you bought 6.8 percent of the shares, you would not own them.

You are looking at your shares as a percentage of the company rather than a quantity of shares. It just doesn't work that way. I strongly suspect that the majority shareholder had to invest more money in the company or had to personally guarantee some sort of financing. Obviously you did not participate in that therefore it would not even be fair for you to receive more shares to keep the percentage at 10%.