Forfeited Share

A forfeited share, in the context of stock market trading and investment, refers to a stock that an investor or company has forfeited or surrendered back to the issuing company because of non-payment or non-adherence to the company’s rules.

Understanding Forfeited Shares

Forfeited shares arise when a shareholder fails to fulfill his/her obligations to the company which may include non-payment of call money, subscription money, or any other dues. Consequently, the company has the right to reclaim those shares as per the terms laid down in the Articles of Association or the shareholders’ agreement. Upon forfeiture, these shares are essentially taken back by the company, and the shareholder loses all rights associated with them, including any potential dividends or voting rights.

Reasons for Forfeiture

1. Non-Payment of Allotment/Call Money: Companies that issue shares may do so with the stipulation that the payment will be completed in installments. If a shareholder fails to pay any of these installments, the company has the right to forfeit the shares.
2. Violation of Terms and Conditions: Shareholders must adhere to certain terms and conditions as dictated by the company’s rules. A violation can lead to forfeiture.
3. Other Regulatory Reasons: Other potential legal infractions or regulatory non-compliance issues might necessitate forfeiture.

Processes Involved in Forfeiture

1. Notice: The company must usually serve a notice to the shareholder, stating the default and giving a grace period for remedying the default.
2. Resolution: If no action is taken by the shareholder within the specified time, the board of directors has to pass a resolution to forfeit the shares.
3. Re-notification: The shareholder is informed of the forfeiture and the details are recorded in the register of company.
4. Reissue: Forfeited shares can be reissued to new investors as per the company’s discretion. This can sometimes be done at a discount to attract purchasers.

Consequences of Forfeiture for Shareholders

• Loss of Investment: The primary consequence is the loss of the investment put forth to obtain the shares initially.
• Loss of Rights: Any associated rights, such as voting and dividend entitlements, are nullified.
• Financial Penalties: Some jurisdictions may impose additional financial penalties on shareholders involved in forfeiture scenarios.

Reissue of Forfeited Shares

Upon forfeiture, companies may reissue these shares either through public or private placements. The terms of the reissue often involve a lower price to make the shares more attractive to potential investors. Some jurisdictions may have strict rules governing the reissue to ensure fairness and compliance with securities laws.

Legal and Accounting Treatment

• Legal Framework: The legislative frameworks vary by jurisdiction. Most countries have specified guidelines in their company laws that dictate how forfeiture should be conducted.
• Accounting Treatment: From an accounting perspective, the original share capital is reduced by the amount unpaid by the initial shareholder. These are then recorded under ‘forfeited shares account’ until reissued, at which point any excess over the unpaid amount is credited to a share premium account.

Example of Forfeiture in Action

Consider a company XYZ Ltd. Company XYZ issues 100 shares to a shareholder at $10 each to be paid in three installments of $4, $3, and $3. If the shareholder fails to pay the final installment of $3, XYZ Ltd. could serve a notice providing a grace period. Failure to pay within this period results in the shares being forfeited. XYZ Ltd. would then reissue these shares to a new buyer, potentially at a price adjusted for market conditions.

Case Studies and Real-World Examples

A case illustrating the concept might involve a company outlining specific procedures in their Articles of Association for the recovery of unpaid shares. For example, a publicly traded company may occasionally announce forfeiture actions in their financial statements or regulatory filings.

Tech Giants and Startups:

• Facebook (Meta) and Google (Alphabet): Though large tech companies maintain meticulous control over share issuance and collection practices, instances of forfeiture, if any, are disclosed in their detailed quarterly reports. These companies adhere strictly to governance codes to prevent forfeiture occurrences. URL for reference: Meta – Investor Relations and Alphabet – Investor Relations.

Strategic Considerations

For Investors

Investors must be fully aware of the payment schedules and adhere to all specified deadlines to avoid forfeiture. Diversifying investments can also help to mitigate the risk associated with such financial commitments.

For Companies

Companies should design robust mechanisms and clear communication channels to alert shareholders of impending dues and deadlines. Proactive engagement can minimize the need for forfeiture actions.

Legal and Compliance

Companies must ensure their forfeiture processes comply with local and international laws to avoid litigation risks. Consulting with legal advisors can refine these processes to suit specific corporate governance frameworks.

Summary

Forfeiture of shares is a significant regulatory action taken by companies to manage unpaid stock issues. Understanding the intricacies of this process, be it from the legal, accounting, or investment standpoint, is crucial for both companies issuing shares and investors holding them. By staying vigilant and adhering to stipulated guidelines, stakeholders can avoid the complex implications of share forfeiture.