Forfeiture of Shares

As the owner of a Private Limited Company, you probably dont have to worry too much about forfeiture of shares, as there are no provisions for it in the Model Articles of Association. However, if youre the owner of a Public Limited Company, you have to ensure your shareholders are fulfilling their obligations.

So, what should you do if one of your shareholders fails in their duties to the company? If a shareholder fails to fulfil their obligations, they may lose their entitlement to the shares they own. This is known as forfeiture of shares. Since this isnt a common occurrence, well outline when it can be used and the process you need to follow.

Reasons That Forfeiture Can Occur

There are three main reasons forfeiture can occur:

• The company has issued a call payment on unpaid or part-paid shares, and the shareholder has failed to pay.
• Fully paid shares that were 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 for forfeiture.

The Forfeiture Process

The process is likely to be different depending on why the forfeiture is taking place and what the articles state. However, there are common aspects which can be outlined.

1. Forfeiting fully paid shares

There may come a time when the shareholder has breached their rights to own shares. In these circumstances, the shareholder loses all rights attached to the shares and is typically not entitled to any amount if the shares are later 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, these shares can be forfeited. However, it should be noted that shares will not ordinarily be forfeited if the employee leaves for one of the following reasons:

• Injury or disability
• Redundancy
• Retirement
• Death

In these circumstances, its seen as though the employee isnt leaving on their own accord; therefore, they are still entitled to their shares.

2. Forfeiting 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 partly 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 by, then the shares will be liable for forfeiture.

If the shareholder fails to comply with the notice by the date requested, the directors then pass a resolution that any shares highlighted in the notice can 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, 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, which then updates 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 relating to the shares and any interest. The directors may waive payment of these wholly or in part.

Holding Of Forfeited Shares By The Company

Any shares which have been forfeited will be held by the company and can be dealt with as the directors see fit.

• Sale: the company can sell the forfeited shares and update the register of shareholders.
• Forfeiture cancellation: if the call payment (plus interest) has been paid while the company holds the shares, the directors can decide to cancel the forfeiture. The shares are now owned by the original shareholder.

Any forfeited shares held by the company do not entitle the company to vote or receive dividend payments.

Public Limited Companies can only hold forfeited shares for up to three years. If the company still holds them 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.

All facts correct as of July 2025. Please seek professional advice before carrying out any of the processes mentioned in this post.

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