Forfeiture of shares

3 key takeaways

• Forfeiture of shares occurs when a shareholder fails to pay the required call money or breaches the terms of the share agreement.
• The company reclaims the forfeited shares, which can then be reissued or canceled.
• Forfeited shares result in the shareholder losing their rights and benefits associated with the shares.

What is forfeiture of shares?

Forfeiture of shares is a process in which a company reclaims and cancels the shares of a shareholder who fails to meet the payment obligations or violates the terms specified in the company’s share agreement. This typically happens when a shareholder does not pay the call money – the remaining unpaid portion of the share price that the company requests after the initial payment.

When shares are forfeited, the shareholder loses all rights and privileges associated with those shares, including the right to dividends and voting rights. The company can then reissue the forfeited shares to new shareholders or cancel them, reducing the total number of issued shares.

Reasons for forfeiture of shares

Shares can be forfeited for several reasons, primarily related to financial obligations and compliance with company policies:

• Non-payment of call money: The most common reason for forfeiture is the failure of a shareholder to pay the call money when it is due.
• Breach of share agreement: Violations of the terms outlined in the company’s share agreement, such as engaging in prohibited activities, can also lead to forfeiture.
• Failure to comply with company regulations: Non-compliance with specific company regulations or policies related to shareholding may result in forfeiture.

These reasons ensure that only compliant and financially responsible shareholders retain ownership of shares in the company.

Process of forfeiture

The forfeiture process typically involves several steps:

• Notice to the shareholder: The company issues a notice to the shareholder, informing them of the default and providing a deadline for payment or rectification.
• Resolution for forfeiture: If the shareholder fails to comply, the company’s board of directors passes a resolution to forfeit the shares.
• Cancellation of shares: The forfeited shares are canceled, and the shareholder loses all associated rights and benefits.
• Reissue or sale: The company may reissue the forfeited shares to new investors or retain them for future sale.

This structured process ensures that forfeiture is conducted transparently and fairly.

Impact on shareholders

Forfeiture of shares has significant implications for the affected shareholder:

• Loss of investment: The shareholder loses the initial investment made in the forfeited shares.
• Loss of rights: The shareholder forfeits all rights associated with the shares, including voting rights and the right to receive dividends.
• Credit impact: Forfeiture can negatively impact the shareholder’s creditworthiness and reputation.

These impacts underscore the importance of meeting financial obligations and complying with company policies to avoid forfeiture.

Legal and regulatory considerations

Forfeiture of shares is governed by company law and the company’s articles of association:

• Company law: Many jurisdictions have specific legal frameworks governing the forfeiture of shares to ensure fairness and transparency in the process.
• Articles of association: The company’s articles of association typically outline the terms and conditions for forfeiture, including the procedures to be followed and the rights of the shareholder.

Adherence to these legal and regulatory frameworks is crucial for ensuring that the forfeiture process is conducted properly and legally.

Examples and case studies

Forfeiture of shares can occur in various scenarios:

• Initial public offerings (IPOs): Shareholders who purchase shares during an IPO may face forfeiture if they fail to pay the subsequent calls on their shares.
• Corporate financing: Companies issuing shares as part of a financing strategy may forfeit the shares of investors who do not fulfill their payment obligations.

These examples illustrate how forfeiture can occur in different contexts and the importance of understanding the associated risks.

Forfeiture of shares serves as a mechanism for companies to enforce payment obligations and ensure compliance with share agreements. By understanding the reasons, process, and implications of forfeiture, shareholders can better manage their investments and avoid the potential loss of their shares.