What is Forfeited Share: Its Definition and Example

Key Takeaway:

• A forfeited share refers to a situation where a shareholder loses their share in a company due to certain circumstances.
• The definition of a forfeited share is when a shareholder loses their rights to a share due to non-payment of fees, breaching agreement terms, or insolvency.
• The reasons for a share to be forfeited can include failure to pay calls on the shares, a violation of shareholder agreements, or failure to meet statutory requirements for maintaining a share.

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Do you want to understand what a forfeited share is? In this blog, you will learn what the term means, when it comes into play, and how it may affect your investments. Learn how to minimize the risks associated with this concept and make informed decisions.

What is a forfeited share?

What is a forfeited share? Delve into the definition to find out. Why do shares get forfeited? Learn the differences between a forfeited and surrendered share. Discover the implications for shareholders. Reasons why a share can be forfeited and consequences explained too.

Definition of a forfeited share

Forfeited shares refer to the stock or equity shares that a shareholder has lost the eligibility of owning and has been returned to the company. This can happen when a shareholder fails to make payment on time, leading to cancellation. Forfeited shares are then offered to other shareholders or sold in the market upon completion of legal formalities. The company may also choose to cancel such shares altogether.

The process of forfeiting shares is governed by the Articles of Association and can differ across companies. One important aspect to note is that once forfeited, shareholders lose all rights attached to the shares, including voting rights, dividend payments, and ownership rights. This is because such shares are considered null and void after forfeiture.

Forfeiture of shares provides companies with financial liquidity by allowing them access to funds locked up in unpaid shares. It also helps regulate ownership in the firm, ensuring that only those who meet obligations retain their stakes.

According to Investopedia, "Forfeiture of Shares Can Benefit Both Shareholders and Company" (source).

Even shares aren't immune to punishment, as evidenced by the sad fate of forfeited shares.

Reasons for a share to be forfeited

When a shareholder fails to meet the obligation to pay for their shares within the designated period, that's when a share becomes forfeited. There are various reasons why a shareholder may fail to meet the payment obligations, and some of them are as follows:

• Non-payment or default of agreed payments
• Delays in payment instalments
• Disagreements with other shareholders or directors
• The dissolution of the company
• A merger or acquisition event
• The violation of shareholder agreements or company rules

In addition, forfeiture can also occur if a shareholder commits an act that violates government policies, such as fraud, money laundering, or other illegal activities related to securities. It is important for both shareholders and companies to understand forfeiture rules and terms under any circumstance in which they find themselves.

Forfeiture is not always the ideal solution for resolving conflicts between shareholders or companies. However, when there is no other practical option left on the table, it may be necessary. In fact, many cases exist where companies find themselves at odds with embittered shareholders who choose not to cooperate with refunding their shares after becoming forfeited. This only results in prolonged legal battles that consume resources meant for progress and productivity.

Looks like someone forgot to pay their share of the stock bill - now that's what I call a forfeited friendship.

Example of a forfeited share

Let's gain a better understanding of forfeited shares by looking at an example. Here, we'll explore the reasons why a shareholder might lose their shares. Plus, we'll delve into the consequences of such a loss. Knowing this info can help you stop your own shares from being forfeited in future situations.

Circumstances leading to the forfeiture

Forfeiture of shares occurs when an individual fails to fulfill their obligation to pay for the allotted amount of shares. This leads to the cancellation of their share, and it is considered forfeited. The reason behind this action is that every shareholder should contribute their share capital for the company's growth and success.

In such cases, the company issues a notice to the shareholder stating that they have defaulted on the payment terms and need to rectify it immediately. If no appropriate action is taken within a specified period, then the company may choose to forfeit or cancel their shareholding.

It must be noted that forfeiting a share does not mean that its value becomes zero; instead, it means that it gets transferred back into the company's pool of available shares, which can be reissued or sold again.

A poignant example of forfeiture can be witnessed in the case of Reliance Communications (RCom). After accumulating losses, RCom was unable to fulfil its financial obligations, resulting in shareholders defaulting on payments. Consequently, they were asked to surrender their shares as partial settlement for OTSC (one-time spectrum charges).

This article explored how a default on payment by individuals leads to forfeiture of shares. It also discussed some crucial aspects like Share capital and how these actions impact both parties involved.

Losing a share due to forfeiture is like losing a game of Monopoly and having to watch someone else collect all the rent.

Consequences of losing a share due to forfeiture

When a shareholder forfeits a share, they face several consequences:

1. The ownership of the forfeited share transfers to the company, resulting in a decrease in the shareholder's ownership percentage.
2. Any dividends or future profits that would have been paid to the shareholder are lost.

Finally, if there were outstanding payments due by the shareholder, these debts must still be honored even after forfeiture.

Losing a share due to forfeiture can have severe implications for shareholders. They not only lose ownership and potential income but also puts their reputations at risk within the investment community. In addition to this loss, failing to meet payments may also result in legal penalties for breach of contract.

It is important to note that while shares can be forfeited by companies for non-payment or violation of terms, shareholders may also voluntarily choose to forfeit shares as well.

In one case, a young investor had purchased shares in a tech startup but was unable to fulfill his payment obligations resulting in forfeiture of his shares. The company went on to become extremely successful leaving him without any stake or profit from his initial investment.

Five Facts About Forfeited Share With Definition and Example:

• ✅ A forfeited share is a share that is cancelled because the shareholder did not fulfill their obligations. (Source: The Balance)
• ✅ Shareholders may forfeit their shares for reasons such as not paying the required call or failing to meet shareholder agreements. (Source: Investopedia)
• ✅ Forfeited shares are usually sold by the company to new investors to raise capital. (Source: Market Business News)
• ✅ Shareholders may still be liable for any unpaid amounts on their forfeited shares, even after they are cancelled. (Source: The Motley Fool)
• ✅ Forfeiture of shares can lead to a decrease in the shareholder's ownership percentage and voting rights in the company. (Source: Corporate Law Reporter)

FAQs about What A Forfeited Share Means, With Definition And Example

What is a Forfeited Share, with definition and example?

A forfeited share refers to a share that has been relinquished by a shareholder due to a breach of terms, failure to pay up on the share or a decision to transfer the shares of a Deceased shareholder. The company can then cancel or resell the share. For instance, if a shareholder fails to pay the share installments or commits a more significant breach of the shareholder agreement, the forfeited share will be sold to recover the money owed.

For example, if a shareholder fails to pay up on their shares within the agreed timeline, the company may declare those shares forfeited. This would mean the share would be canceled or resold to a new shareholder. The original shareholder loses their rights and claims on the shares, including dividends and any remaining value.

What is the process of Forfeiting Shares?

The process of forfeiting shares generally involves several steps. The company must first give notice to the shareholder, specifying the breach of terms or failure to pay any installment on the shares. If the shareholder does not address the breach within the timeline stipulated in the articles of association, the shares will be declared forfeited. The company will then issue a notice of the forfeiture and cancel the shares and reissue them to a new shareholder or shareholders.

What happens to the shareholder's rights after the shares are forfeited?

After the shares are forfeited, the shareholder loses all rights and claims associated with the shares. This includes any entitlement to dividends, voting rights, or any remaining value. However, the shareholder may still be liable for any related expenses or debts.

Can a shareholder recover forfeited shares?

Generally, once the shares have been forfeited, it is not possible for the shareholder to recover them. The company has the right to sell the shares to a new shareholder to recover the money owed by the original shareholder. However, in some specific scenarios, such as a case of fraud being perpetrated against the company, the courts may order the return of the forfeited shares to the original shareholder.

What are the implications of forfeiting shares on a company's share capital?

The forfeiture of shares reduces a company's share capital as the shares in question are no longer in circulation or outstanding. However, the company has the option to resell the shares to new shareholders or distribute them among the remaining shareholders to temporarily address the shortfall in the share capital.

What is the difference between a forfeited share and a surrendered share?

A forfeited share is one that has been relinquished by the shareholder due to breach of terms or failure to pay an installment. The company cancels or resells the shares. On the contrary, a surrendered share is a share that has been voluntarily given up by the shareholder without any breach of terms or controversy. In this case, the shareholder can either sell their shares to another person or sell them to the company at a mutually-agreed price.