What Is a Forfeited Share?
Let me explain what a forfeited share really means. It's a share in a publicly-traded company that you, as the owner, lose—or forfeit—because you didn't meet certain purchase requirements. For instance, this could happen if you fail to pay an owed allotment, known as call money, or if you sell or transfer your shares during a restricted period.
When a share gets forfeited, you no longer owe any remaining balance on it, and you surrender any potential capital gain. Those shares automatically go back to the issuing company.
Key Takeaways
- Shares in publicly-traded companies that you lose by failing to honor purchase agreements or restrictions are considered forfeited.
- With forfeited shares, you no longer owe any remaining balance and give up any possible gain on them.
- Forfeited shares revert back to the issuing company, like when an employee quits before stock options fully vest.
- The issuing company can reissue these shares at any price they choose, often at a discount to the initial price.
How Forfeited Shares Work
Imagine you're an investor named David who agrees to buy 5,000 shares of a company. The deal requires a 25% initial payment, followed by three more 25% installments each year, as scheduled by the company. If you miss one of those payments, the company might seize all 5,000 shares, and you'd lose everything you've already paid.
Here's a fast fact you should know: Corporations aren't obligated to seize shares from delinquent shareholders. They can offer grace periods for you to pay what's owed.
Employee Share Forfeiture
In some cases, companies provide employee stock purchase plans where you can allocate part of your salary to buy discounted shares of the company's stock. But these come with restrictions. Often, you can't sell or transfer the stock within a defined period after purchase.
If you quit the company before a mandatory waiting period, you might have to forfeit any shares you've purchased. On the other hand, if you stay for the required time, you become fully vested and can cash them in whenever you want.
Something important to note: Once you forfeit shares from an employee stock purchase plan, you may never get them back, even if the company reissues them.
Example of Forfeited Shares
Companies use stock purchase plans to build employee loyalty. They also offer bonuses like restricted stock units, distributed over time. For example, you might receive 80 restricted stock units as an annual bonus. To keep you around, the stock vests 20 units in year two, 20 in year three, 20 in year four, and 20 in year five. If you quit after year two, only 20 units vest, and you forfeit the other 60.
Reissue of Forfeited Shares
Forfeited shares become the property of the issuing company. The board of directors decides whether to reissue them at par, at a premium, or at a discount below nominal value. They usually go with a discount.
If the shares were originally issued at par, the maximum discount on reissue equals the amount forfeited. And if the company's articles allow it, the board can reissue to a third party, but not back to you if you were the defaulting shareholder.
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