Forfeited shares are shares that are canceled by the issuing company when the shareholder doesn’t meet certain requirements or restrictions. The shareholder can no longer earn capital gains on their shares, and they’ll no longer owe a balance.
Want to learn more about forfeited shares? Find out how forfeited shares work and some scenarios where share forfeiture may occur.
Definition and Examples of Forfeited Shares
Forfeited shares are shares that are canceled by a company’s board of directors if the shareholder neglects to live up to their purchasing agreement. When your shares are forfeited, you lose ownership, meaning that you can no longer make money from capital gains and dividends. However, any outstanding balance you owe will be canceled as well.
One situation where shares may be subject to forfeiture is a stock subscription agreement. With this type of agreement, a company agrees to sell and issue its stock before it receives payments, which may be made in multiple installments. However, if the shareholder doesn’t make agreed-upon payments, the company’s board of directors can revoke the shares.
Forfeited shares are common in employee stock option plans (ESOPs), too. ESOPs allow workers to buy a specified number of shares at a predetermined price. These plans typically follow a vesting schedule, which is the amount of time an employee needs to remain with a company before they’re fully entitled to their benefit. Employees who quit their jobs or are terminated before they’re fully vested will forfeit some or all of their shares.
If you’re buying shares using a cash account, you’ll typically have to follow the T+2 timeline—you’ll have the trade date plus two days to cover your purchase. Should you fail to deposit enough funds to cover the T+2 trade, you won’t receive your shares and the brokerage firm will typically be required to freeze your account for 90 days. While not technically a forfeiture, you will lose any stock that you received or, in some cases, you might receive an extension to pay for the purchase.
How Forfeited Shares Work
An ESOP is probably the most likely scenario where you could face share forfeiture. A company that offers one must follow one of two minimum vesting schedules. (“Minimum” means these are the strictest requirements the company can impose. A company can follow a different vesting schedule if its rules are less stringent.)
- No vesting in the first years, followed by 100% vesting in three years of service. If you left your job after two years, you’d forfeit all of your shares.
- Employees can vest 20% each year after the end of the second year of service until they’re 100% vested by the end of year six. In this scenario, if you left your job after two years, you’d keep 20% of your shares and forfeit the remaining 80%.
Once you’ve met vesting requirements, your company can’t make you forfeit your shares. You’re free to sell or hold them, just as with any stock you own.
A year of service typically refers to a plan year where the employee has worked at least 1,000 hours. If you decide to leave the company after your shares have vested, you typically have 90 days to vest your stock before it’s forfeited.
Sometimes stock compensation is tied to performance for key executives. If the employee fails to meet certain goals, they could be required to forfeit their shares. Former GameStop CEO George Sherman forfeited more than 587,000 company shares in April 2021, after failing to achieve performance targets. Based on the corporation’s closing share price of $141.09 around the time of his forfeiture, this amounted to a loss of more than $80 million worth of equity.
When an investor’s shares are forfeited, they become the property of the issuing company. The company can then reissue those shares. If an employee forfeits unvested shares, their shares are typically reallocated to remaining participants. Under rare circumstances, the company can use those forfeited shares for administrative expenses.
- Forfeited shares are shares that are revoked by the issuing company when the shareholder fails to meet a condition of the purchasing agreement.
- Employees who leave their companies before their stock options have fully vested may forfeit shares.
- When shares are forfeited, they become the property of the issuing company. The shareholder no longer has an outstanding balance, but they will no longer earn gains.