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A forfeited share is a share that is annulled by the company if the purchaser of the share has not complied with the requirements for buying it. These requirements can involve payment of call money due. Forfeiture of shares is only applied to publicly listed companies whose Articles of Association contain a provision for share forfeiture.
After the shares are forfeited, the shareholder loses complete ownership of all of his shares in the company. These shares are reverted to the issuing company and any potential capital gain is surrendered.
The primary reason for forfeiture of shares is when a shareholder fails to pay the call money owed to the company. Let’s illustrate this with an example.
Suppose, an investor has subscribed to 1000 shares of a company. He is required to pay 25% of the face value at the time of subscription and the rest is payable in three installments. The investor fulfills his obligation at the first installment date. However, he defaults on the payment of the second installment. In case of such a default, the company has the right to forfeit all of the investor’s shares. As a result, the investor would lose the ownership of his 1000 shares, as all the call money was paid before the default.
Other than the non-payment of call money due, there are other violations of requirements that can lead to share forfeiture. Such requirements can include:
After shares are forfeited, they are available to the company for reissue. The reissuing of these forfeited shares is done at a price predetermined by the company at a discount, par, or premium. However, the discount on the reissue price cannot exceed the amount forfeited on such shares. The purchaser of the reissued shares becomes the company’s shareholder and his name is added to the Register of Members.
In some cases, if a shareholder requests the company to cancel the forfeiture, the board of directors has the power to cancel it as per their discretion.
These are the immediate impacts when the company forfeits shares:
The proceeds received from the shareholders whose shares have been forfeited go back to the company. These proceeds can be useful in helping fund future development projects or paying off liabilities.
If the company reissues the forfeited shares at a price higher than their face value, this premium can be directly recorded into the company’s reserves and surplus.
A company may forfeit (or cancel) the shares of a shareholder if he is unable to fulfil any obligations. The investor then ceases to exist as a shareholder of the company and his shares are revoked. After the forfeiture, the company can dispose of these shares. However, if the board of directors pass a resolution, the shares can be reissued in the market.
A company can forfeit a shareholder’s shares due to the following reasons:
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