What is a share?
Before getting into what forfeited shares are, its good to cement our understanding of what shares are. A share is just a piece of ownership of a company. Let’s say that a company has 1 million shares. If you own 100,000 shares, that means you own 1/10th of the company. The share price of a company may go up and down, but that would still reflect the total value of the company. Meaning, even if the share price were to change, your percentage of ownership would not, if the amount of shares have not changed.
Companies can either be limited by shares or guarantee. If you are interested in this topic, feel free to read our quick legal guide explaining the basics of company structure.
What is a forfeited share?
A forfeited share is a share that is lost if the purchaser does not comply with the requirements for buying it. Forfeited shares only apply to publicly listed companies, meaning companies that the public can purchase shares in. These requirements can involve paying a certain amount of money for the shares by a certain date, or they can be of a restrictive nature. Such as requiring that the shares do not be transferred or sold before a certain date. Regardless of which requirement is broken, if any are not complied with the shares are considered forfeited.
If you wish to read up on how shares trade hands or are disposed of click here.
The effect of forfeited shares
In the event shares are forfeited, the shareholder no longer owes any money to the company for the shares. The ownership of the shares go back to the company, including any potential money from the shares. Now that the shares are back in the company’s ownership, if the company wishes to reissue, they can do three things. They can reissue the shares at face value, at a premium, or at a discount. Re-issuing would just mean to let people purchase the shares again instead of holding onto it.
Example
To better explain the concept here is an everyday example. Let’s say that you are working at a company. This company offers its employees employee stock purchase plans. These plans just mean that you as an employee can choose to put away a certain amount of your salary towards purchasing shares in the company. By purchasing these shares however, there are certain requirements in place. It may require that you don’t sell the shares until a certain amount of time has passed. It could also require that you don’t leave the company before a certain time period, or you lose the shares.
Lets say that you don’t comply with the requirements of the plan. What would then happen, as discussed before, is that you would have forfeited these shares. You will lose your ownership of these shares, and they will go back to the company. The company can then choose to reissue these shares at its face value, at a premium, or a discount.
If you have any questions about your current situation with shares that carry restrictions we recommend seeking legal advice. This would provide that extra level of security to make sure that the shares do not become forfeited. Feel free to reach out to our network of expert lawyers.
Conclusion
You need to honor the requirements for shares otherwise they will become forfeited. Forfeited shares go back to the company that issued them out, and the shareholder will lose all ownership and benefits of the shares. Generally, the requirements would be either paying a certain amount of money before a period of time, or a restriction on handling the shares. No matter the requirements, if any are broken then the shares are forfeited. It is important to seek legal advice to make sure that you are satisfying the requirements for certain shares.
