What Is Share Forfeiture?

Share forfeiture is a phenomenon in which an investor fails to honor all commitments connected with the ownership of stock issued by a particular company. When those commitments are not settled in full within the time frame allowed, the issuer of the shares has the right to cancel all ownership privileges extended to the investor, including the right to collect dividend payments. Unless the situation is corrected, the shares are forfeited and the name of the investor is removed from the shareholder register maintained by the issuer.

The possibility of share forfeiture occurs when an investor fails to comply with specific responsibilities outlined in the contract governing the original purchase of those shares. One common example is the failure of the shareholder to tender what is known as call money to the issuer of the stocks. Call money is money that is borrowed to manage short-term investments and may be demanded by the issuer under certain circumstances. If the investor does not tender the money within the time frame allotted, usually 14 calendar days, then the company has the right to take back the investor’s shares.

Specific criteria must be met before a share forfeiture can be processed. Unless the conditions surrounding the forfeiture are in full compliance with the conditions set forth in the bylaws and founding documents of the issuer, taking away the investor shares may be impossible. In addition, the forfeiture must result in some sort of definite benefit to the issuer. As a final requirement, the share forfeiture cannot proceed unless the issue has made what is considered a reasonable effort to resolve the problem with the investor. Depending on the reasons behind the failure to comply, it is often within the discretionary powers of the issuer to create some sort of alternative solution that does allow the investor to retain the shares, possibly by allowing upcoming dividends to be utilized as payment of the call money.

Share forfeiture is often a serious loss for the investor. Once the forfeiture is processed and the shares are taken away, the opportunity to receive any further dividend payments is invalidated. Depending on the laws that prevail in the jurisdiction in which the issuer is based, the investor may or may not receive some sort of final compensation for those forfeited shares. In some nations, the investor will receive nothing other than a formal notification that the forfeiture is complete and advising that the investor no longer has any claim on the shares or any of the benefits connected with the stock.