What a Forfeited Share Means With Definition and Example
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Andrew Bloomenthal has over 20 years of experience as a financial journalist and services marketing writer.
A forfeited share is a publicly-traded company share that the owner loses by neglecting purchase requirements. For example, a forfeiture may occur if a shareholder fails to pay an owed allotment or sells/transfers shares during a restricted period.
When a share is forfeited, the shareholder no longer owes any balance and surrenders potential capital gain. The shares automatically revert back to the issuing company.
Key Takeaways
- Forfeited shares are shares an owner loses by failing to honor purchase agreements or restrictions.
- With forfeited shares, the shareholder no longer owes any balance and gives up any possible gain.
- Forfeited shares revert back to the issuing company if an employee quits before stock options fully vest.
- The issuing company can reissue forfeited shares at any price they want, typically at a discount.
Suppose an investor named David agrees to buy 5,000 shares of a company, with a 25% initial payment requirement. He also has three subsequent annual 25% installments due according to a company-dictated schedule. If David is delinquent on an installment, the company may choose to seize his 5,000 shares, causing David to lose any money he previously paid.
Corporations are not required to seize shares from delinquent shareholders. They can offer grace periods for shareholders to pay owed money instead.
Some companies offer employee stock purchase plans where employees can allocate a portion of their salary to purchase discounted shares. However, there are often restrictions. In many cases, stocks cannot be sold or transferred within a defined period after the initial purchase.
If an employee quits before a mandatory waiting period, they may forfeit purchased shares. Conversely, if an employee stays for a specified duration, they become fully vested and can cash in their shares at will.
Once an employee forfeits shares purchased through an employee stock purchase plan, they cannot receive those shares again if the company reissues them.
Companies use stock purchase plans to encourage employee loyalty and offer bonuses in the form of restricted stock units. These units are distributed incrementally over time. For example, an employee might receive 80 restricted stock units as part of an annual bonus. The stock vests as 20 units in the second year after the bonus, 20 units in the third year, 20 units in the fourth year, and 20 units in the fifth year. If the employee quits after the second year, only 20 units of stock will be vested and the other 60 will be forfeited.
Forfeited shares become the property of the issuing company, which can reissue them at par, at a premium, or at a discount. The decision is made by the company’s board of directors, who usually reissue forfeited shares at a discount.
If the shares were originally issued at par, the maximum discount for reissued stock equals the forfeited amount. Additionally, if a company’s articles of association permits, the board may reissue forfeited shares to a third party but not to the defaulting shareholder.
