Forfeiture of Shares
If a shareholder fails in their obligations then they could lose their entitlement to the shares they own. This is known as forfeiture of shares. This article aims to outline the process of forfeiture of shares as well as the main circumstances surrounding the forfeiture.
Reasons that forfeiture can occur
The main reason for forfeiture is where a call payment has been requested by the company on unpaid (or partly paid) shares and the shareholder has failed to pay the amount due. However, there are other reasons to forfeit including:
- Fully paid shares being issued on the guarantee that the recipient remains employed by the company for a set amount of time.
- Fully paid shares that are subject to a restriction on the sale or transfer for a set amount of time.
For this to be able to happen, the Articles of Association must have the specific scenario in them and set out the required procedures.
Part or non payment of shares is not an option for Private Limited Companies that are using the Model Articles, also they do not include other provisions for forfeiture. This means that before the company can apply for forfeiture of shares, it must amend its Articles of Association.
However, this is not the case with Public Limited Companies as their Model Articles are different to those of Private Limited Companies. For this reason, it is usually Public Limited Companies that will carry out forfeiture.
The Forfeiture Process
The process is likely to be different depending on why the forfeiture is taking place and what the articles state.
When Forfeiting Fully Paid Shares
If the rights to shares have been breached, then you can forfeit those shares by informing the shareholder of your intent. In circumstances such as this, the former shareholder is likely to lose all rights from the shares and is unlikely to be entitled to any amount if the forfeited shares are then sold.
Take the following example:
An employee has been issued shares on the understanding that they will stay with the company for at least 4 years after the allotment. If this employee leaves the company after 2 years of allotment then these shares can be forfeited. However, it should be noted that shares will not ordinarily be forfeited if the employee left for one of the following reasons:
- Injury or disability
Partly or non paid shares
It's not just a case of getting the shares back if the shareholder hasn't paid for them, or has only part paid. You will need to look at the Articles of Association for guidance on the next steps to take. You will need to issue a notice of forfeiture which:
- Is sent to the registered shareholder or the person entitled to the shares by way of death or bankruptcy of the registered shareholder.
- Request the payment and any accrued interest by a date which is 14 or more days from the date of the notice.
- State how payment is to be made.
- and; state that if the forfeiture notice isn't abided to then the shares will be liable for forfeiture.
If the shareholder fails to comply with the notice by the date requested, the directors can then pass a resolution that any share highlighted in the notice can then be forfeited.
The exact route to follow and any requirements will be highlighted in the Articles of Association.
What happens once shares are forfeited?
Once shares have been forfeited, generally, the shareholder loses all rights under them and if the share was partly paid, has no right to recover the amount already paid to the company.
The forfeited shares are then deemed to be owned by the company from the date agreed by the directors. The former shareholder is notified by the company, who then has to update its register of members. The former shareholder then ceases to be a shareholder and must return their share certificate to the company for cancellation.
The former shareholder remains liable to the company for all sums payable in relation to the shares and any interest. The directors may waive payment of these wholly or in part. However, they may choose to enforce the payment without any allowance of the value of the shares at the time of forfeiture.
Holding of forfeited shares by the company
Any shares which have been forfeited will be held by the company and can be sold, re-allotted, cancelled or disposed of as the directors see fit.
If the forfeited share is sold by the company, the company will receive the consideration for the transfer and will have to make the necessary changes in the register of shareholders. This will be conclusive proof that the new owner is the true shareholder of the forfeited shares, even if there was any irregularity of invalidity during the forfeiture process.
If a call payment (and interest) is paid at any time during the forfeiture process or while the shares are held by the company, then the directors may decide to cancel the forfeiture. They may also impose other terms as they see fit. If this is the case then the shares are again owned by the original shareholder.
Any forfeited shares held by the company do not entitle the company to vote or receive dividend payments. A Private Limited Company can hold the forfeited shares indefinitely while awaiting sale or re-allotment.
However, a Public Limited Company can only hold forfeited shares for up to three years. If they are still held by the company after this date, the shares must be cancelled and the company must fill out Form SH07 and send this to Companies House. Note: Great care should be taken if this happens, as if the cancellation reduces the issued share capital below the statutory minimum for Public Limited Companies, the company will have to re-register as a Private Limited Company.
As this post has covered, it's highly unlikely that a Private Limited Company will ever need to know about this. However, it's still an option if your company doesn't use the Model Articles for Private Limited Companies.
All facts correct as of December 2017. Please seek professional advice before carrying out any of the processes mentioned in this post.
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