Forfeiture of Shares: What It Means and How It Works

Shares represent ownership in a company, but failing to meet certain obligations can result in losing that ownership. When shareholders do not fulfill specific requirements—often related to payment—the company has the right to take back their shares through a process known as forfeiture. This action has financial and legal implications for both the shareholder and the company.

Common Reasons for Share Forfeiture

Failure to pay calls on shares is the most common reason for forfeiture. When a company issues shares, it may allow shareholders to pay in installments. If an investor misses these payments, the company can initiate forfeiture. This is particularly relevant for partly paid shares, where only a portion of the share price is paid initially, with the remainder due later.

Regulatory non-compliance can also lead to forfeiture. Some jurisdictions require shareholders to meet legal and financial disclosure requirements, such as identity verification under anti-money laundering laws. If a shareholder fails to provide necessary documentation, the company may revoke their shares. For example, under the UK Companies Act 2006, companies must maintain an accurate register of members, and failure to provide required details could result in forfeiture.

Breach of shareholder agreements is another factor. Some companies impose conditions on share ownership, such as restrictions on transfers or maintaining a minimum investment. If a shareholder violates these terms—such as selling restricted shares without approval—the company may reclaim them. This is particularly relevant in private companies and startups, where ownership structures are tightly controlled.

Company Procedures for Forfeiture

Before forfeiting shares, companies must follow a structured process to comply with corporate laws and their governing documents. The procedure begins with a formal notice to the shareholder, informing them of their default and providing a final opportunity to resolve the issue. This notice specifies the outstanding obligation, the deadline for payment, and the consequences of non-compliance. Most jurisdictions require these formalities to prevent unfair forfeiture. For example, under the Indian Companies Act, 2013, a company must issue at least 14 days’ notice before proceeding.

If the shareholder does not act within the given timeframe, the board of directors will pass a resolution confirming the forfeiture. This decision is recorded in the company’s official registers, and the affected shares are removed from the shareholder’s name. The forfeited shares then become company property, allowing the company to cancel or reissue them. Proper documentation, including board meeting minutes and an updated shareholder register, is required for transparency and legal validity.

Companies may also need to notify regulatory authorities. In the United Kingdom, changes to share capital must be reported to Companies House. In Australia, companies must update the Australian Securities and Investments Commission (ASIC) with details of forfeited shares. Failure to comply with these reporting obligations can result in penalties or legal disputes.

Effects on Shareholder Ownership

Losing shares through forfeiture strips an investor of their stake in the company, along with associated rights such as voting power and dividend entitlements. Shareholders who rely on dividend income will no longer receive payouts, and those with voting shares lose their influence over corporate decisions.

Forfeiture can also damage an investor’s reputation. Shareholders who default on payments may struggle to participate in future capital raises, as companies may view them as unreliable. In private companies, where investor relationships are built on trust, this can be particularly damaging. Some companies maintain internal records of past forfeitures, which could affect an individual’s ability to acquire shares in future offerings.

Tax implications vary by jurisdiction. In some cases, the original shareholder may be able to claim a capital loss for tax purposes if they had previously paid part of the share value. However, tax authorities may impose restrictions on how these losses can be applied. Investors should consult tax professionals to determine whether any deductions or credits are available.

Financial Statement Considerations

Forfeited shares require companies to adjust their financial records to reflect changes in equity, asset valuation, and potential liabilities. The most immediate impact is on the share capital and share premium accounts. If the forfeited shares were only partially paid, the company must remove the unpaid amount from its receivables to avoid overstating assets. Under IFRS and US GAAP, any previously recognized receivable related to unpaid share capital must be written off as a bad debt expense or directly adjusted against equity.

Forfeited shares may also affect retained earnings if the company cancels them or resells them at a different price. If reissued at a premium, the excess amount is credited to a separate forfeited shares account within equity rather than being recognized as revenue. If reissued at a lower price than the original subscription price, the deficit may need to be absorbed by retained earnings, depending on jurisdictional accounting rules.

Reissue or Disposal of Forfeited Shares

Once shares have been forfeited, companies must decide whether to reissue them to new investors or cancel them. This decision affects the company’s share capital structure, financial statements, and regulatory compliance.

Reissue of Forfeited Shares

Companies often reissue forfeited shares to recover lost capital. These shares can be sold at the original issue price or at a discount, depending on company policies and legal restrictions. Some jurisdictions impose rules on the minimum price at which forfeited shares can be reissued to prevent unfair dilution of existing shareholders. Under the Indian Companies Act, 2013, reissued shares cannot be sold at a price lower than the amount previously paid by the original shareholder.

When reissuing shares, companies must adjust their financial records accordingly. If shares are reissued at a premium, the excess amount is credited to the securities premium account, which can be used for specific corporate purposes such as issuing bonus shares or writing off expenses. If reissued at a discount, the shortfall is typically adjusted against a forfeited shares reserve account. Proper disclosure in financial statements is necessary, and in some cases, shareholder approval may be required before reissuing forfeited shares.

Cancellation or Disposal of Forfeited Shares

Instead of reissuing, companies may cancel forfeited shares, reducing the total number of outstanding shares. This approach can help consolidate ownership or maintain a stable capital structure. In publicly traded companies, reducing the number of shares can impact earnings per share (EPS), potentially increasing the value of remaining shares.

Regulatory filings are often required when shares are canceled. In the United Kingdom, companies must notify Companies House of any reduction in share capital. In Australia, a company canceling forfeited shares must update the Australian Securities and Investments Commission (ASIC). The cancellation process may also involve adjusting the company’s articles of association if specific provisions govern the handling of forfeited shares.