Forfeited shares refer to shares that were allocated to an individual or entity but are subsequently cancelled or taken back by the company issuing them due to non-fulfillment of certain conditions or obligations. These shares revert to the issuing company and are typically reissued or cancelled depending on the circumstances surrounding their forfeiture.
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Key Points about Forfeited Shares
- Cancellation: Forfeited shares are cancelled by the company and cease to exist as part of its issued share capital.
- Non-Payment: They are usually forfeited due to non-payment of calls (unpaid portion of the share’s value) or failure to meet other obligations specified in the share subscription agreement.
- Reissuance: Forfeited shares may be reissued by the company or permanently cancelled, depending on the company’s policy and legal requirements.
Reasons for Forfeiting Shares
Non-Payment of Calls
When shareholders fail to pay the full amount due on their shares (calls), the company may forfeit the shares.
Breach of Share Subscription Agreement
If shareholders violate terms outlined in the share subscription agreement, such as failing to meet deadlines or conditions, the company may choose to forfeit the shares.
Example of Forfeited Shares
Imagine a company issues 1,000 shares to an investor with a requirement to pay in three installments. The investor pays the first installment but fails to pay the subsequent installments on time. As a result, the company decides to forfeit the shares. The 500 shares already paid for are retained by the investor, while the remaining 500 shares are forfeited by the company.
In this example:
- Forfeiture: The company cancels the investor’s entitlement to 500 shares due to non-payment of the second and third installments.
- Reissuance: The company may choose to reissue the forfeited 500 shares to new investors or cancel them permanently.
This scenario illustrates how forfeited shares result from the failure of shareholders to meet their financial obligations or adhere to contractual terms.
Impact of Forfeited Shares
Financial Impact
Forfeited shares reduce the company’s issued share capital, potentially affecting its financial ratios and capital structure.
Reissuance Potential
Forfeited shares can be reissued by the company to raise additional capital or sold to interested investors.
Legal and Regulatory Compliance
Companies must adhere to legal and regulatory requirements when forfeiting shares, ensuring transparency and fairness in the process.
Example of Financial Impact
A company’s balance sheet reflects forfeited shares as a reduction in its share capital, impacting financial metrics such as earnings per share and return on equity.
Considerations and Procedures
Shareholder Notification
Companies must notify shareholders before forfeiting their shares, giving them an opportunity to rectify any defaults.
Board Approval
Forfeiture of shares typically requires approval by the company’s board of directors or as per the articles of association.
Accounting Treatment
Accounting standards dictate how forfeited shares are recorded in the company’s financial statements, including adjustments to share capital and reserves.
Example of Shareholder Notification
Before forfeiting shares, a company sends a notice to shareholders requesting payment of outstanding calls within a specified timeframe to avoid forfeiture.
Conclusion
Forfeited shares represent shares that are cancelled by a company due to non-payment of calls or breach of share subscription agreements by shareholders. This process allows companies to enforce financial discipline and ensure compliance with shareholder obligations. Understanding the reasons for forfeiting shares, its impact on a company’s financial position, and the procedures involved is essential for shareholders and investors in assessing corporate governance practices and financial health. By adhering to legal requirements and accounting standards, companies maintain transparency and fairness in handling forfeited shares, thereby supporting confidence in the capital markets and corporate governance principles.