Forfeiture of shares is where the shareholder loses their entitlement to them as well as all rights under them. Shares are forfeited when a shareholder fails to meet an obligation under which the shares were issued to that person. In this article, we explain the main circumstances where forfeiture of shares may occur and how a company can apply share forfeiture provisions. We’ve also created a number of handy share forfeiture templates.
Reasons for forfeiture
The main time when shares are forfeited is where a call payment has been requested by the company on nil or partly paid shares and the shareholder has failed to pay the amount called by the required date. There are, however, other instances where shares may be forfeited where a shareholder fails to meet certain conditions. For example:
- Fully paid shares issued on the proviso that the recipient remains employed by the company for a set period of time; or
- Fully paid shares issued subject to a restriction on sale or transfer for a set period of time.
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For a company to be able to forfeit a shareholder’s holding the articles of association must specifically allow for the relevant scenario or scenarios and set out the required procedures.
The model articles of association for private limited companies do not allow for the issue of nil or partly paid shares and so do not include any forfeiture provisions. Article 21 of these model articles specifically states that all shares will be fully paid. This means that a private company with model articles cannot apply forfeiture to its shares. Therefore, such a company would need to amend its articles before issuing shares that are nil or partly paid or that have any other restrictions imposed.
However, the model articles for public limited companies do allow for the issue of nil or partly paid shares and so do include the necessary forfeiture provisions. For this reason, the forfeiture or shares is most likely to be carried out by public limited companies rather than by private companies.
The procedure for the forfeiture of shares is likely to be different depending on the reason for forfeiture arising and what the articles state.
Fully paid shares
It is likely that forfeiture will arise on fully paid shares by a breach of an applicable restriction under which the shares were issued without any further ado other than informing the shareholder of the forfeiture. In these instances the former shareholder is likely to lose all rights from the shares and is unlikely to be entitled to receive any amount if the forfeited shares are subsequently sold by the company.
For example, an employee leaves the company’s employment two years after being allotted shares on the proviso that the employee remains employed for three years from the date of allotment. Note, however, that shares will not ordinarily be forfeited if an employee leaves employment for any of the reasons below:
- Injury or disability;
- Redundancy or transfer of employment;
- Retirement; or
Nil or partly paid shares
Where the shares are nil or partly paid shares it is unlikely that the shares can be forfeited just on the shareholder not paying the sums due under a call payment request by the company.
In line with the provisions included in the model articles for public limited companies, the company will also need to issue a notice of forfeiture following the non-payment. The forfeiture notice must:
- be sent to the registered shareholder of the shares or to a person entitled to it by reason of the registered shareholder’s death, bankruptcy or otherwise;
- request payment of the call and any accrued interest by a date that must be 14 days or more after the date of the forfeiture notice;
- state how the payment is to be made; and
- state that if the forfeiture notice is not complied with the shares will be liable to be forfeited.
We have produced examples of a directors’ resolution for issuing a forfeiture notice and the associated forfeiture notice to a shareholder that you can adapt and use, although the exact contents will vary depending on the situation and the company’s articles of association.
Where the shareholder fails to comply with the notice by the date stated, the directors can then decide that any share in respect of which it was given is forfeited. We’ve also produced an example of a director’s resolution approving the forfeiture. The forfeiture will generally include all dividends or other monies payable in respect of the forfeited shares and not paid before the forfeiture.
The exact requirements to follow on failure to pay a call payment will depend on the company’s articles, which you should consult before you start.
Consequences of share forfeiture
When shares are forfeited the shareholder generally ceases to have any rights under them and, if the shares are partly paid, has no right to recover the amount already paid to the company. This includes all claims and demands against the company in respect of the forfeited shares and other rights and liabilities incidental to the shares as between the shareholder and the company.
The former shareholder remains liable to the company for all sums payable
The forfeited shares will then be deemed to be owned by the company from the date agreed by the directors. The company must then notify the former shareholder that the forfeiture has occurred and update the register of members to reflect this. The former shareholder then ceases to be a shareholder and should return the share certificate to the company for cancellation.
The former shareholder remains liable to the company for all sums payable under the articles at the date of forfeiture in respect of those shares, including any interest. The directors may waive payment of such sums wholly or in part. Alternatively, they may choose still to enforce payment without any allowance for the value of the shares at the time of forfeiture or for any consideration received on their disposal.
Holding of forfeited shares by the company
Forfeited shares are held by the company and can then be sold, re-allotted, cancelled or otherwise disposed of as the directors think fit.
When forfeited shares are sold by the company, the company will receive the consideration for the transfer and make the necessary entries into the register of shareholders. This is conclusive proof that the new owner is the true shareholder of the forfeited shares even if there was any irregularity of invalidity in the forfeiture process.
Where the share forfeiture arose for failure to make a call payment, the company may pay to the former shareholder the proceeds of such sale, net of any commission, interest due from the former shareholder and the amounts payable but unpaid on those shares at the date of the sale. The amounts payable but unpaid on those shares will include the call payment not paid and any subsequent call payments on the shares.
A private company can hold indefinitely the forfeited shares awaiting sale or re-allotment.
At any time before the company disposes of or cancels forfeited shares, the directors may decide to cancel the forfeiture on payment of all calls and interest due on the shares. The directors may include such other terms as they think fit. The shares are then again owned by the original shareholder.
Any shares held by the company do not entitle the company to vote or receive dividends declared. A private company can hold indefinitely the forfeited shares awaiting sale or re-allotment.
However, a public company can only hold forfeited shares for up to three years. If they are still held by the company at this date, the shares must be cancelled and reported to Companies House using form SH07. Care should be taken in this instance, as if the cancellation reduces the issued share capital below the statutory minimum for public companies, the company would have to re-register as a private limited company.
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