Definition
Forfeited shares refer to stock shares that a company takes back from an investor because of a failure to meet certain conditions, such as not paying for the shares as agreed. This forfeiture means the investor loses any rights or dividends associated with those shares. Once forfeited, the shares may be resold or cancelled by the company.
Key Takeaways
- Forfeited Shares refer to shares that are taken back by a company due to non-payment of call money. This usually occurs when shareholders fail to meet the obligation of making defined payments.
- When shares are forfeited, they are canceled and can no longer yield rights to the original shareholder. However, the company can choose to reissue these shares, often at a discount, to new investors.
- The process of forfeiture is governed by specific rules and laws that vary by jurisdiction to protect both the rights of the shareholders and the interests of the company.
Importance
Forfeited Shares is an important finance term due to the implications it has on both the company and the shareholder.
When a shareholder fails to pay calls on shares by the deadline issued by the company, the company may choose to forfeit these shares, cancelling them and effectively reducing the financial obligation of the shareholder.
However, this also means the shareholder loses all the rights and benefits that come with those shares, including voting rights and dividends.
For the company, this action may harm their reputation and investor relations, but it also provides an opportunity to resell the shares to recoup the unpaid amount.
Hence, Forfeited Shares are at the intersection of financial management, corporate governance and investor relations, making it a vital concept in the financial world.
Explanation
Forfeited Shares represent a company’s stock shares that the original holder has lost due to not meeting the standards or obligations set by the company. The most common reason for forfeiture is typically a failure to meet a certain payment deadline.
It serves as the means for a corporation to enforce its rules and regulations regarding the payment for shares. These forfeited shares are then often resold or reissued by the entity, at a lower price than the original issue price, unless otherwise specified in the company’s bylaws.
The main purpose of forfeiture of shares is to ensure fairness and adherence to the company rules. It acts as a deterrent for shareholders who might otherwise fail to follow due payment obligations, which could potentially destabilize the company’s financial structure.
Therefore, it’s a tool which enforces discipline among shareholders and maintains the financial integrity of the corporation. However, it’s essential for companies to deal with forfeiture of shares transparently and fairly, to maintain shareholder trust and confidence.
Examples of Forfeited Shares
1) Real Estate Company Scenario: Let’s say an investor purchased 200 shares of a real estate company for $20 each, costing him $4000 in total. However, if he fails to pay the remaining amount due on these shares despite repeated reminders and warnings, the company may choose to forfeit his shares. This means the investor will lose his ownership of the shares and they could be further reissued by the company as per their rules and policies.2) Startup Company Scenario: A startup company may issue shares to its employees as part of its employee stock ownership plan (ESOP) scheme, ‘subject to vesting’. This could mean the employee owns the shares immediately, but the company has the right to buy them back (i.e., ‘forfeit’ them) if the employee leaves the firm within a certain time period (usually within four years). For example, if an employee leaves in the second year, say, the company could take back 50% of the shares.3) Telecom Company Scenario: A telecom company may issue shares to its suppliers or contractors in lieu of payments for business supplies. If the supplier or contractors are unable to meet the terms and conditions as agreed, the company has the right to forfeit their shares. This way, the company ensures that it doesn’t suffer from potential business losses and it could possibly reissue or resell these forfeited shares in the open market or to another interested party to recover the cost.
FAQs about Forfeited Shares
What are Forfeited Shares?
Forfeited shares are shares that a shareholder loses as a consequence of failing to comply with the requirements that were set during the issuance of those shares. This scenario generally occurs when a shareholder fails to pay the call money within the specified time.
What happens to Forfeited Shares?
Once shares are forfeited, they become the property of the company. The company can then either cancel these shares or reissue them to the public at a discounted rate.
What are the consequences of share forfeiture for an investor?
One of the immediate consequences of share forfeiture is the loss of capital for the investor. In addition to this, the investor also loses all rights to future dividends, voting rights, and any capital gains arising from the said shares.
Can Forfeited Shares be reissued?
Yes, forfeited shares can be reissued by the company. They are usually reissued at a discount and do not take on the status of new shares. The reissued shares retain their original number.
Is there a possibility to recover Forfeited Shares?
Typically, once shares are forfeited, they cannot be recovered by the original shareholder. The company can, however, at its discretion, decide to annul the forfeiture if the shareholder pays all due amounts.
Related Entrepreneurship Terms
- Share Capital
- Company Shareholder
- Equity Financing
- Stock Repurchase
- Corporate Restructuring
Sources for More Information
- Investopedia: A comprehensive web resource dedicated to investing and personal finance where specifics about forfeited shares can be found.
- CFA Institute: A global association of investment professionals offering wide range of financial education and resources.
- Accounting Tools: A resource focused on accounting methods and rules that often discusses various stock events, including the forfeiture of shares.
- Corporate Finance Institute: A professional skills training and certification provider with a wide array of resources on finance and accounting topics.
