As I understand it, many corporations have provisions in their articles of incorporation that allow them to issue new shares (or options) by board vote and give those shares to themselves or their friends and thereby dilute the value of shares held by other existing shareholders. So, for example, a minority shareholder could essentially have their stake in a company reduced to zero.

This just seems like theft to me. What is the legal basis for it?

  • 1
    [citation needed]. The board can vote to issue new shares, but i've yet to hear of them legally taking ownership this way. If it were legal, you'd think it would be more common.
    – cHao
    Mar 12, 2018 at 15:40

1 Answer 1


Corporations are creatures of statute. In the U.S., the vast majority of corporations (99.9999%) are organized under state or territorial, rather than federal law. Those statutes generally authorize the issuance of new shares for new consideration, although the process by which this is authorized differs from state to state.

These statutes or case law also usually impose fiduciary duties, or at least some sort of duties, on the board and majority shareholders to minority shareholders. Sometimes this is also called the law of "majority oppression." Some corporate statutes also allow minority to cash out if dilution is alleged.

Issuance of new shares only dilutes existing shareholders when the price of the new shares is less that the per share market capitalization of the old shares. If the price is the same, the value of the existing shares doesn't change. If the price is lower, the new shares dilute existing shares. If the price is higher, the new shares increase the value of existing shares.

A bright line rule is difficult because the value of shares is not self-evident and is to some extent a matter of opinion upon which informed people can differ to some extent. So, a blanket prohibition makes no sense and it isn't a good fit for "theft". "Theft" usually involves an actual taking of property (like a share) not merely a change in its value, which can happen for all sorts of legitimate reasons as well as illegitimate ones.

Since shareholders are usually similarly situated, in an arms-length transaction, corporations will not knowingly issue new shares that dilute existing shareholders. Instead, this only happens when there is collusion between controlling shareholders/board members and new share purchasers, something that mostly happens in closely held companies and is where the case law on the duties of boards and majority shareholders arises.

  • Just to mention, dilution isn't just about price -- it's also about voting power. If there are twice as many shares now, then shareholders now have relatively half as much voting power as they used to.
    – cHao
    Mar 13, 2018 at 21:40

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