What Is a Forfeited Share?
A forfeited share is a share that reverts to the issuing company because the shareholder failed to meet conditions attached to ownership. Common triggers include non‑payment of an instalment or sale/transfer during a restricted/vesting period. Once forfeited, the shareholder loses title to the shares and any unpaid balance obligation is typically extinguished; the company regains control of the shares and decides whether to cancel, hold, or reissue them.
Key takeaways
– Forfeiture occurs when a shareholder does not satisfy contractual requirements (e.g., call money, transfer restrictions, or vesting conditions).
– The shareholder loses ownership and any potential capital gains; the company regains the shares.
– Companies can reissue forfeited shares at par, at a premium, or at a discount (subject to legal/constitutional limits).
– Employee plans (ESPPs, restricted stock units) commonly use forfeiture to enforce retention or vesting.
(Source: Investopedia — https://www.investopedia.com/terms/f/forfeited-share.asp)
How forfeited shares work (mechanics)
– Trigger event: missed payment (call money), breach of transfer restrictions, failure to satisfy vesting conditions, or other contractual breach.
– Company response options:
– Seize/declare forfeiture immediately,
– Offer a grace period or accept late payment,
– Accept a negotiated settlement or repurchase,
– Reissue forfeited shares (to the market or a third party) or cancel them.
– Legal and company‑document constraints: Articles of association, bylaws, and applicable corporate law typically govern the process (including whether shares may be reissued and any price limits).
– Accounting/financial effect: the company records the shares returned to treasury or canceled; previously received amounts may be transferred to share capital or a forfeiture reserve depending on accounting policy and local regulations.
Example (numeric)
– David agrees to buy 5,000 shares with a 25% initial payment and three annual instalments of 25% each.
– If David fails to pay one instalment and the company enforces its right, the company may forfeit all 5,000 shares. David loses the shares and any prior payments; the shares revert to the company.
Employee shares and forfeiture
– ESPPs and restricted stock/RSUs frequently include vesting schedules and sale restrictions. If an employee leaves before full vesting, unvested shares are often forfeited.
– Example: Employee receives 80 RSUs with vesting 20 units per year starting year 2. If they leave after year 2, they vest 20 units and forfeit the remaining 60.
– Once forfeited, shares generally become company property and may be reissued; companies may have rules preventing reissue to the original defaulting employee.
Reissue of forfeited shares
– The company’s board typically decides whether to reissue forfeited shares and at what price.
– They may reissue at par, above par (premium), or below par (discount). If shares were issued originally at par, the maximum discount is often limited to the amount previously forfeited on those shares (check local law/articles for specifics).
– Articles of association may permit reissue to third parties but often prohibit reissue back to the defaulting shareholder.
Practical steps for companies (to manage forfeiture risk and process)
1. Draft clear share documents:
– Explicitly state vesting rules, payment schedules, consequences of default, grace periods, and reissue policy in articles, bylaws, share subscription agreements, and employee plan documents.
2. Communicate terms:
– Provide investors/employees with written summaries of forfeiture triggers and timelines at issuance.
3. Monitor compliance:
– Track payments, vesting milestones, and transfer restrictions; maintain an accurate share register.
4. Apply consistent enforcement:
– Use consistent procedures (board resolutions, notice requirements) when declaring forfeiture to reduce litigation risk.
5. Follow formal procedure:
– Issue written notice of default; allow any contractual cure period; document board resolutions authorizing forfeiture and subsequent reissue or cancellation.
6. Accounting and regulatory compliance:
– Record forfeiture entries per applicable accounting standards; ensure securities filings and shareholder registers are updated.
7. Consider alternatives:
– Before forfeiture, evaluate repurchase offers, restructuring payment terms, or negotiated settlements to preserve relations and reduce disputes.
Practical steps for shareholders/employees (to avoid or respond to forfeiture)
1. Read agreements carefully:
– Understand payment schedules, vesting requirements, restrictions on transfer, and cure periods before accepting shares.
2. Meet obligations proactively:
– Make timely payments, respect transfer restrictions, and confirm vesting dates.
3. If at risk of default:
– Contact the company immediately to request a grace extension, negotiate a repayment plan, or pursue a voluntary repurchase.
4. If forfeiture is declared:
– Ask for written notice, the basis for forfeiture, and the company’s calculation of amounts forfeited.
– Seek internal appeal mechanisms if provided.
– Consider legal counsel if you believe the company did not follow contract or statutory procedures.
5. Tax and financial planning:
– Check tax consequences of forfeiture and any refunds; tax treatment varies by jurisdiction and plan type—consult a tax advisor.
Legal, regulatory, and tax considerations
– Legal formalities: Forfeiture often requires strict adherence to procedures specified in corporate charters and local corporate law. Failure to follow procedures can make forfeiture voidable.
– Reissue restrictions: Articles of association and securities laws may limit how forfeited shares are handled (e.g., reissue price limits, prohibition on reissuing to the defaulting shareholder).
– Tax implications: Tax treatment of forfeited shares and previously paid amounts varies by country and by whether the shares were part of an employment plan. Tax advice is recommended.
Common FAQs
– Can a company reissue forfeited shares back to the same shareholder?
– Many companies prohibit reissuing forfeited shares to the defaulting shareholder; whether this is allowed depends on the articles and local law.
– Does forfeiture relieve the shareholder of unpaid amounts?
– Typically the remaining unpaid balance is extinguished when the shares are forfeited, but check the subscription agreement and local law.
– Are companies required to seize forfeited shares?
– No — companies can choose to allow a cure period, negotiate, or repurchase rather than immediately forfeit.
Summary
Forfeited shares are a mechanism companies use to enforce payment, transfer restrictions, and retention/vesting conditions. They are common in structured share issuances and employee equity plans. Companies should use clear documentation and consistent procedures; shareholders should understand and meet their obligations or promptly seek alternatives to avoid losing equity.
Source
– Investopedia — “Forfeited Share”: https://www.investopedia.com/terms/f/forfeited-share.asp
If you’d like, I can:
– Draft sample forfeiture clauses for a subscription agreement or employee equity plan, or
– Provide a checklist/template for company directors to use when processing a forfeiture. Which would you prefer?