What is a forfeited share?
A forfeited share is a share in a publicly traded company that the owner loses (or loses) by neglecting to meet a number of purchase requirements. For example, a lapse may occur if a shareholder does not pay a due allocation (call money), or if he sells or transfers his shares during a limited period.
When a share is lost, the shareholder no longer owes any remaining balance and cedes any potential capital gain on the shares, which automatically reverts to the property of the issuing company.
Key points to remember
- Shares of listed companies that an owner loses or abandons by not respecting certain purchase agreements or restrictions are considered lost.
- With the shares confiscated, the shareholder no longer owes any balance and renounces any possible gain on the shares.
- Confiscated shares are returned to the issuing company, for example when an employee leaves before the stock options are fully vested.
- The issuing company may reissue confiscated shares at the price of its choice; generally, the reissue is priced lower than the original price.
Operation of confiscated actions
Suppose an investor named David agrees to buy 5,000 shares of a company, with an initial payment requirement of 25%, followed by three annual payments of 25%, which are due on a schedule dictated by the company. If David is abandoned on a scheduled payment, the company can choose to seize all of his 5,000 shares, and David would unfortunately lose all the money he had previously paid.
Companies are not required to seize the actions of delinquent shareholders and may instead offer investors grace periods to pay the money owed.
Confiscation of employee actions
In some cases, companies offer employee stock purchase plans, where employees can allocate part of their salary to buy discounted shares of a company’s shares. However, these programs often have restrictions. In many cases, a stock cannot be sold or transferred within a defined period after the initial purchase.
In addition, if an employee leaves the company before a certain mandatory waiting period, he may be forced to give up the shares he has purchased. Conversely, if an employee remains in the company for a fixed period, he becomes fully invested in these actions and can cash them at will.
Once an employee loses shares purchased under a stock purchase plan, they can never receive those shares again if the company re-issues them.
Example of forfeited shares
Companies use stock purchase plans to inspire employee loyalty. In the same vein, companies offer employees bonuses in the form of restricted share units, which they gradually spread out over time. For example, an employee may receive 80 restricted share units as part of an annual bonus. But to encourage this precious employee to linger longer, the stock acquires the first 20 units the second year after the bonus, 20 the third year, 20 the fourth year and 20 the fifth year. If the employee leaves after the second year, only 20 units of inventory would be acquired and the remaining 60 would be confiscated.
Reissue of forfeited shares
The confiscated shares become the property of the issuing company, which has the right to reissue the shares at par, at premium or at discount (at a price lower than their nominal value). This decision rests with the board of directors of a company, which generally reissue the confiscated shares at a discount.
But if the shares were initially issued at par, the maximum discount for the reissued shares is equal to the amount lost on the shares. In addition, if the statutes of a company allow it, the board of directors may reissue forfeited shares to a third party, but may not reissue them to the defaulting shareholder.