What is a Forfeited Share
A forfeited share is a share in a company that the owner loses (forfeits) by failing to meet the purchase requirements. Requirements may include paying an allotment or call money owed, or avoiding selling or transferring shares during a restricted period. When a share is forfeited, the shareholder no longer owes any remaining balance and surrenders any potential capital gain on the shares, and the shares become the property of the issuing company.
BREAKING DOWN Forfeited Share
A forfeited share works like this. Suppose David has agreed to purchase 5,000 shares of a company with a 25% initial payment requirement, followed by three subsequent installments (call money) of 25% at a time specified by the company. If David fails to make payment on an installment, the company seizes the 5,000 shares and he loses any money paid for earlier installments. In practice, the company may offer David additional time to pay the installments. If he still fails to make payment, he forfeits his shares back to the company.
Employee Share Forfeiture
In certain cases, companies allow executives and employees to receive a portion of their cash compensation to purchase shares in the company at a discount; this is commonly known as an employee stock purchase plan. Typically, restrictions apply to this type of purchase (i.e., a stock cannot be sold or transferred within a defined period after the initial purchase). If an employee remains with the company and meets the specified qualifications, they become fully vested in those shares on the stated date. If the employee leaves the company and/or violates the terms of the initial purchase, they may forfeit those shares. For instance, Jennifer may have received 10,000 restricted stock units on a four-year vesting schedule as part of her compensation package. If she leaves the company after two years, she forfeits 5,000 shares.
Reissue of Forfeited Shares
Forfeited shares are the property of the issuing company. The issuing company can reissue forfeited shares at par, a premium or a discount as determined by the board of directors. Typically, forfeited shares are reissued at a discount, i.e., at a price below their nominal value. If the shares were initially issued at par, the maximum discount for the reissued stock is equal to the amount forfeited on the shares. Reissued shares must not be discounted more than the amount forfeited on them. If a company’s articles of association permits, the board of directors may reissue forfeited shares to a third party, but not back to a shareholder that has defaulted.