Forfeiture of shares: Overview, definition, and example
What is forfeiture of shares?
Forfeiture of shares refers to the legal process by which a shareholder loses their ownership of shares in a company due to a failure to meet certain obligations outlined in the shareholder agreement or the company’s articles of association. Typically, forfeiture occurs when a shareholder fails to pay for shares they have subscribed to or fails to comply with other terms and conditions set by the company, such as meeting a required minimum holding period or adhering to contractual obligations. Once shares are forfeited, they revert to the company and can be reissued to another party.
For example, a shareholder may have subscribed to buy shares but has not paid the necessary calls (payments) on those shares. If the company’s articles allow for forfeiture, the company may cancel the shares and reclaim them.
Why is forfeiture of shares important?
Forfeiture of shares is important because it provides a mechanism for the company to deal with shareholders who fail to meet their financial or legal obligations. This ensures that the company maintains control over its equity and that shareholders are held accountable for their commitments. It also provides a way for the company to retrieve shares and redistribute them to other parties, which can be vital for maintaining a balanced shareholder structure.
For companies, the ability to enforce forfeiture of shares ensures that they are not left with unpaid or non-compliant shareholders. For shareholders, it emphasizes the importance of adhering to the company’s terms and obligations to avoid losing their investments.
Understanding forfeiture of shares through an example
Imagine a company issues 1,000 shares to a shareholder who agrees to pay $100 per share. After a few months, the shareholder fails to pay the second installment of $50 per share, as required under the terms of the shareholder agreement. The company, as per its articles of association, decides to forfeit the shares. As a result, the shareholder loses ownership of the 1,000 shares, and those shares are returned to the company, which can then sell or reissue them to another investor.
In another example, a shareholder fails to maintain the minimum required number of shares as per the company’s rules. As a result, the company enforces the forfeiture clause in its articles of association, reclaiming the shares and offering them for sale to another party.
Example of a forfeiture of shares clause
Here’s how a forfeiture of shares clause might appear in a contract or company’s articles of association:
"If any shareholder fails to pay any call or installment of the subscription price on their shares as required by this Agreement or the Company’s articles of association, the Company may, at its discretion, forfeit such shares. The forfeited shares shall revert to the Company, and the shareholder’s rights to those shares shall cease, provided that the company has followed the required procedures for notice and resolution."
Conclusion
Forfeiture of shares is a critical mechanism for ensuring that shareholders meet their obligations and that the company maintains control over its share capital. By reclaiming and reissuing forfeited shares, the company can protect its financial and operational interests.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.