Unraveling the Mystery of Forfeited Shares
A forfeited share is a share in a publicly-traded company that the owner loses (or forfeits) by failing to meet specific purchase requirements. For instance, share forfeiture can occur if a shareholder does not pay an owed allotment, or if they sell or transfer shares during a restricted period.
When a share is forfeited, the shareholder no longer bears any remaining balance and surrenders any potential capital gain on the shares, which automatically revert to the issuing company.
Key Takeaways
- Forfeited shares arise when an owner does not comply with purchase agreements or restrictions.
- Shareholders with forfeited shares relinquish any remaining balance and potential gains on the shares.
- Such shares revert back to the issuing company, often exemplified when an employee leaves before stock options fully vest.
- Issuing companies can reissue forfeited shares at any permissible price, often at a discount.
How Forfeited Shares Operate
Imagine an investor named David who agrees to purchase 5,000 shares of a company, with a 25% initial payment and three subsequent 25% annual installments, due on a company-defined schedule. If David fails to honor a scheduled installment, the company might reclaim his entire 5,000 shares, leading David to lose any payments made.
Though companies can seize shares from negligent shareholders, they may also allow grace periods for owed payments.
Employee Share Forfeiture Explained
Companies often provide employee stock purchase plans, permitting employees to dedicate a portion of their salary to buy discounted company shares. These programs typically come with restrictions, including sale or transfer limitations within a specified timeframe after the initial purchase.
Moreover, if an employee leaves the company before a required waiting period, they may need to forfeit purchased shares. Conversely, if they retain employment for a specified period, they fully vest in those shares, free to cash them in.
Forfeited shares acquired through employee stock purchase plans generally cannot be reclaimed by employees upon reissue by the company.
Illustration of Forfeited Shares
Companies offer stock purchase plans to foster employee loyalty. As part of strategies to extend employee tenure, companies also occasionally provide bonuses in restricted stock units (RSUs) spread over several years. For example, an employee might receive 80 RSUs as an annual bonus, vesting in increments of 20 units from the second to fifth year.
Should the employee leave after year two, merely 20 units would be vested, while the remaining 60 units would be forfeited.
Reissuing Forfeited Shares
Once reclaimed, forfeited shares belong to the issuing company, which can reissue the shares at par, premium, or discount—typically at a discount. This decision lies with the company’s board of directors, and the maximum discount generally corresponds to the amount forfeited on the shares.
If the company’s articles of association permit, the board may also reissue forfeited shares to a third party, excluding the original defaulting shareholder.
Related Terms: Call Money, Shares, Employee Stock Purchase Plan, At Par.
