Definition
A forfeited share is a partly paid share in a company that a shareholder is forced to forfeit due to a failure to make a subsequent or final call payment on the share. Companies typically issue partly paid shares with the agreement that shareholders will pay the unpaid portion when called to do so. When a shareholder fails to meet this obligation, the shares are deemed forfeited. In public companies, forfeited shares must be either sold or canceled. However, private companies do not face the same regulatory requirements and can handle forfeited shares at their discretion.
Examples
Example 1: Public Company
John holds partly paid shares in XYZ Corporation. He has paid half the cost of the shares and is required to make additional payments as called by the company. John fails to make the final payment by the due date. As a result, XYZ Corporation forfeits John’s shares. The company must now either sell or cancel these shares according to regulation.
Example 2: Private Company
Samantha owns partly paid shares in ABC Pvt Ltd. Just like John, she is required to pay the remaining amount on her shares. When Samantha fails to make the payment, ABC Pvt Ltd forfeits her shares. Being a private company, ABC Pvt Ltd has more flexibility on how to manage these forfeited shares and can choose to handle them without selling or canceling.
Frequently Asked Questions
What happens to forfeited shares in a public company?
Public companies must either sell forfeited shares to recover unpaid amounts or cancel them. Typically, they aim to minimize the negative impact on their share capital by reissuing the shares to a new investor.
Are shareholders entitled to any refunds on forfeited shares?
No, shareholders generally lose the amount already paid on forfeited shares and have no right to retrieve it.
Can a forfeited share be reissued?
Yes, after forfeiture, shares can often be reissued by the company. These shares may be sold at a price determined by the company’s board of directors.
What kind of notice is issued before shares are forfeited?
Companies usually issue a “call notice” to shareholders, which specifies the payment required and the due date. Failure to respond to this notice can lead to forfeiture of the shares.
Do forfeited shares impact company accounts?
Yes, forfeited shares can affect the company’s equity accounts, as the amount paid until forfeiture is credited back and the shares are either reissued or canceled.
Are forfeited shares common?
While not the norm, forfeited shares can be common in situations where shareholders are unwilling or unable to make additional payments.
Related Terms with Definitions
Partly Paid Shares
Shares that are issued to a shareholder with the understanding that a portion of the total share price will be paid at a later date upon the company’s request.
Call Money
The portion of the share price demanded by a company from shareholders of partly paid shares.
Outstanding Shares
Shares that have been issued by the company and are held by investors, regardless of payment status.
Share Capital
The total value of the shares issued by a company, including both fully paid and partly paid shares.
Online References
- Investopedia: Forfeited Shares
- AccountingCoach: Types of Shares
- Corporate Finance Institute: Calls on Shares
Suggested Books for Further Studies
- “Financial Accounting: An Introduction” by David Kolitz
- “Company Accounting” by Ken Leo, John Hoggett, John Sweeting
- “Financial Reporting and Analysis” by Charles H. Gibson
Accounting Basics: “Forfeited Share” Fundamentals Quiz
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