Why would I vote for an increase in the number of authorized shares?

Question

Whole Foods is requesting its shareholders to vote:

To approve an amendment to the Company’s Articles of Incorporation to increase the number of authorized shares of the Company’s common stock from 600 million to 1.2 billion

As a common shareholder, why would I want to approve an increase in the number of authorized shares? It seems to me that this just dilutes the earnings per authorized share, and consequently the value of the shares that I hold (both in terms of control/ownership and dividends). I understand that there may be some upsides to this proposal with respect to managing the company, but it seems to me that these are severely offset by dilution.

As stated in the proposal:

If the amendment is approved, except as may be required by law or NASDAQ rules, no further shareholder approval would be required prior to the issuance of the additional shares authorized by the amendment. While adoption of the amendment would not have any immediate dilutive effect on the proportionate voting power or other rights of the Company’s existing shareholders, any future issuances of additional shares could significantly dilute the equity interests of current shareholders and could have a negative effect on the market price of the Common Stock. Current shareholders have no preemptive or similar rights, which means that current shareholders do not have a prior right to purchase any new issue of common stock in order to maintain their proportionate ownership.

Answer 1

Why would I want to approve an increase in the number of authorized shares?

Because you trust management to use those shares wisely.

What it comes down to is, management is asking for money. While it may not be cash they're asking for, it has the same effect.

Before you approve this, you have to evaluate the request (similarly to how a bank would evaluate a loan request), and ask if you approve of their reasons for needing the money, and if you think that it will be used to increase the value of the company (making your shares more valuable in the process).

Answer 2

I'll skip the "authorizing...." and go right to uses of new shares: Companies need stock as another liquid asset for a variety of purposes, and if not enough stock is available, then may be forced to the open market to acquire, either by exchanging cash or taking on debt to get the cash.

1. to fund the stock portion of compensation (i.,e. bonus and company contribution to retirement plans)
2. to use a currency when acquiring another company (i.e. stock swap)
3. for stock option purposes (options granted to acquire stock at a certain price, to be acquired later)

Answer 3

As a common shareholder, why would I want to approve an increase in the number of authorized shares?"

Because it could increase the value of your existing shares.

Companies sell new shares to raise capital, and they use capital to (among other things) expand.

If Whole Foods issues new shares and uses the capital to opens new stores, then profit could increase enough to offset the dilution effect, and your stock price will go up.

You should ask yourself: What areas is is your company of choice planning on expanding into? Will they do well there? Are there better ways for the company to raise capital (debt, cash in hand, cut expenses elsewhere, etc)?

If you think that the management has a good plan for expanding, then authorizing new shares makes good sense for you personally.

Answer 4

I think you probably would not want dilution risk, but a legit reason you might is that a stock split might be a good idea if the share price is too many digits to enter into a trading box quickly. Splits do not decrease dividend income, and don't really affect your investment.

Real reasons public companies (which already had their IPO) want more shares to issue is probably to give them to their insiders. That's not really too good for shareholders. The other reasons others gave, like wanting to be able to have funds to buy companies, are not really too good either. Consider, if the company runs low on cash, it should be able to get loans from banks. So, the idea that they need to be able to print more shares, increasing the shares outstanding and eventually the float (which is just a delayed increasing number as insiders sell) thus deflating the dividend yields and stock price of the float is wrong unless you think all bankers are idiots.

In the case that a public company has planned poorly, I think that a more legitimate method of having more shares (to compensate employees, for instance) is to buy them back on the open market.