Overview
A forfeited share represents equity in a publicly-traded company that is lost by its holder due to the failure to meet certain conditions or obligations set forth at the time of acquisition. Typically, such situations arise when a shareholder does not fulfill payment deadlines—often referred to as call money—or breaches sale or transfer conditions during restricted periods. Once a share is forfeited, all rights and potential financial gains connected to the share are relinquished, and the share reverts to the company that originally issued it.
Types and Causes of Share Forfeiture
Forfeited shares generally occur under a few common circumstances:
- Non-payment of Calls: When shareholders fail to pay assigned call amounts on their shares by the specified due dates, resulting in forfeiture.
- Breach of Sale Restrictions: Transferring or selling shares during restricted periods, as dictated by shareholder agreements.
- Conditions in Employee Stock Options: Not meeting the stipulated employment period or conditions can lead to forfeiture of shares obtained through corporate employee stock purchase plans.
What Happens to Forfeited Shares?
Upon forfeiture, all shareholder rights terminate, and the company regains ownership of the shares. The company, typically through decisions made at the board level, may then opt to reissue these shares. The reissuing can be at par value or occasionally at a discount, depending on the original issue terms and the company’s current policy and strategy.
Process and Implications of Share Forfeiture
For the Shareholder
When a shareholder forfeits their shares, they lose not just the shares but also any payments made towards them up to that point. This translates to lost capital, and no claims on future profits or dividends that those shares might have earned.
For the Company
From a company’s perspective, forfeited shares can be seen as a mechanism to enforce discipline and commitment among shareholders or employees. Reissuing forfeited shares is often used as a strategic tool, not only to stabilize the company’s equity base but also to attract new investors or reward loyal ones.
Practical Examples and Case Studies
Imagine an employee part of an incentive plan that includes stock options, which vest over a five-year period. If the employee leaves after two years, they forfeit the unvested shares. This often serves as a deterrent against premature departures and enhances long-term commitment to the company.
Related Terms and Insights
- Call Money: Funds that shareholders must pay at specified times as part of their share purchase agreement.
- Equity Investment: Investing capital in a company in exchange for partial ownership, or shares.
- Vesting Period: The period an employee must work before gaining full ownership of shares or other benefits.
- Restricted Stock Units (RSUs): Shares granted to employees as part of compensation but are subject to restrictions and vesting criteria.
Suggested Further Reading
- “Securities Law” by James Cox - Provides an in-depth analysis of regulations concerning securities, including conditions under which shares can be forfeited.
- “Equity Valuation for Analysts and Investors” by James Kelleher - Dive into understanding the implications of shareholder equity, including forfeited shares.
Understanding the nuanced world of forfeited shares is vital for investors and employees within publicly-traded companies, ensuring they are aware of the obligations and risks associated with their investment and employment conditions.
