What are Forfeited Shares?

A forfeited share is a share that is annulled by the company if the purchaser of the share has not complied with the requirements for buying it. These requirements can involve payment of call money due. Forfeiture of shares is only applied to publicly listed companies whose Articles of Association contain a provision for share forfeiture.

After the shares are forfeited, the shareholder loses complete ownership of all of his shares in the company. These shares are reverted to the issuing company and any potential capital gain is surrendered.

Reasons for Share Forfeiture

The primary reason for forfeiture of shares is when a shareholder fails to pay the call money owed to the company. Let’s illustrate this with an example.

Suppose, an investor has subscribed to 1000 shares of a company. He is required to pay 25% of the face value at the time of subscription and the rest is payable in three installments. The investor fulfills his obligation at the first installment date. However, he defaults on the payment of the second installment. In case of such a default, the company has the right to forfeit all of the investor’s shares. As a result, the investor would lose the ownership of his 1000 shares, as all the call money was paid before the default.

Other than the non-payment of call money due, there are other violations of requirements that can lead to share forfeiture. Such requirements can include:

• Fully paid shares are issued on the condition that the shareholder remains an employee at the issuing company for a given amount of time.
• Fully paid shares are subject to restrictions on the sale or transfer of the share for a given period.

Reissue of Forfeited Shares

After shares are forfeited, they are available to the company for reissue. The reissuing of these forfeited shares is done at a price predetermined by the company at a discount, par, or premium. However, the discount on the reissue price cannot exceed the amount forfeited on such shares. The purchaser of the reissued shares becomes the company’s shareholder and his name is added to the Register of Members.

In some cases, if a shareholder requests the company to cancel the forfeiture, the board of directors has the power to cancel it as per their discretion.

Effects of Share Forfeiture

These are the immediate impacts when the company forfeits shares:

• Termination of Membership: The shareholder ceases to be a member of the company whose shares have been forfeited.
• Cessation of Liability: The obligation of the shareholder to pay any future calls is terminated after his shares are forfeited. However, he is still liable to pay the unpaid call money to the company, like a debtor.
• Liability as a Past Member: If the issuing company happens to liquidate within one year of the forfeiture of shares, the former shareholder can be added to ‘List B’ of contributors of the company. This means that the shareholder is still considered a past member of the company.

Benefits of Forfeited Shares

The proceeds received from the shareholders whose shares have been forfeited go back to the company. These proceeds can be useful in helping fund future development projects or paying off liabilities.

If the company reissues the forfeited shares at a price higher than their face value, this premium can be directly recorded into the company’s reserves and surplus.