Key Takeaways
- Shares reclaimed for non-payment or breach of terms.
- Shareholder loses ownership and dividend rights.
- Company can reissue forfeited shares as treasury stock.
- Forfeiture is involuntary and board-initiated.
What is Forfeited Share?
A forfeited share is a share that a company reclaims from a shareholder due to non-payment of calls, installments, or violation of terms set out in the company's articles of association. This process extinguishes the shareholder’s ownership rights, including dividends and voting privileges, and the shares revert to the company for potential reissuance.
Forfeiture serves as a mechanism to enforce compliance and protect the company’s capital structure, ensuring shareholders meet their financial obligations.
Key Characteristics
Forfeited shares have distinct features that differentiate them from other equity transactions:
- Involuntary Process: Initiated by the company’s board following shareholder default, unlike voluntary surrender.
- Extinguishment of Rights: The shareholder loses rights to dividends, voting, and future earnings on the shares.
- Liability on Unpaid Amounts: Shareholders may remain liable for any unpaid calls even after forfeiture.
- Reissuance Potential: Forfeited shares become treasury shares that the company can resell at face value, premium, or discount.
- Legal Compliance: The procedure must follow the articles of association and relevant laws to avoid disputes.
How It Works
The forfeiture process begins when a shareholder fails to pay a call or installment within the stipulated time. The company issues a notice demanding payment, and if the default persists, the board passes a resolution to forfeit the shares. This resolution serves as conclusive evidence of forfeiture and updates the company’s register by removing the shareholder’s name.
After forfeiture, the company can reissue the shares as treasury shares, which is treated as a transfer rather than a new allotment. This allows flexibility in pricing and timing, helping the company manage its capital effectively, similar to how bonds or other financial instruments may be managed within investment portfolios.
Examples and Use Cases
Forfeiture applies in various scenarios, protecting companies from shareholder defaults or breaches:
- Non-Payment of Installments: A shareholder subscribing to 1,000 shares at $100 each pays only the first installment. Failure to pay the second installment triggers forfeiture, and the company may reissue the shares to new investors.
- Minimum Holding Period Breach: Shareholders who fail to maintain a minimum shareholding as per the articles may have their shares forfeited and reclaimed by the company.
- Corporate Examples: Companies like Delta and American Airlines often deal with complex shareholder structures where forfeiture policies help maintain compliance and capital integrity.
- Tax Implications: Forfeiture can result in a capital loss situation for shareholders, relevant when considering capital loss carryover strategies.
Important Considerations
Forfeiture protects the company but requires strict adherence to procedural rules and transparency to avoid legal challenges. You should review the company’s articles and applicable laws before initiating forfeiture to ensure compliance.
Additionally, the company’s board may annul forfeiture before reissuance by passing a resolution to restore the shareholder’s rights. Understanding these nuances helps investors and companies manage equity stakes responsibly, just as assessing earnings is critical for investment decisions.
Final Words
Forfeited shares serve as a safeguard for companies to maintain financial discipline and protect capital integrity by reclaiming ownership when payment obligations are unmet. Review your shareholder agreements carefully to understand the conditions that could trigger forfeiture and consult a financial advisor if you face potential default.
Frequently Asked Questions
A forfeited share is one that a company reclaims from a shareholder due to non-payment of required calls or breaches of the shareholder agreement. This causes the shareholder to lose ownership rights, and the shares revert to the company for possible reissuance.
Companies forfeit shares primarily when shareholders fail to meet payment obligations like unpaid installments or violate terms such as minimum holding periods. This ensures compliance and protects the company's capital structure.
Once shares are forfeited, the shareholder loses all ownership rights including dividends, voting rights, and claims on profits. However, they may still be liable for any unpaid amounts on those shares.
The process starts with a notice demanding payment, followed by a board resolution declaring forfeiture if payment is not made. The shareholder is then removed from the register, and the company can reissue the shares under new terms.
Yes, forfeited shares become treasury shares and can be reissued by the company at a premium, discount, or face value. This reissuance is treated as a sale rather than a new allotment.
New buyers acquire forfeited shares through reissuance, which is treated as a transfer. The board has discretion over pricing, and the new buyer obtains full ownership rights without restrictions.
Forfeiture is involuntary and initiated by the company’s board, unlike surrender which is a voluntary act by the shareholder.
Generally, a shareholder cannot reclaim forfeited shares once reissued, unless the forfeiture is annulled before reissuance. Otherwise, the loss of ownership and payments is final.
