Corporate Governance Standards: GS 009 Forfeiture of Shares

Introduction

Forfeiture of shares occurs when a shareholder loses their ownership rights and privileges over the shares they previously held. This can happen for various reasons, such as non-payment of allotted shares, violations of company policies, or breaches of shareholder agreements.

The power to forfeit shares cannot be implied and must be expressly given in the Company’s Articles of Association (Articles). In most cases, the Articles grant the Board of Directors the authority to authorize such forfeiture.

For a forfeiture to be validly conducted, certain critical aspects must be adhered to. First, there ought to be a call for unpaid shares made in good faith and in circumstances where it is necessary for the promotion of the objects of the Company.  The Call must be made under the resolution of the Board of Directors passed in a properly constituted and convened meeting of directors. Additionally, the Call must specify the amount of the call, the time and place of payment for the call.

Second, a notice of demand must be issued.  A default in payment does not on its own bring about forfeiture. There ought to be a notice of demand requiring the member to pay calls within a reasonable fixed period as outlined in the Articles. In the event that no such period is prescribed, GS 009 recommends that there should be 21 (Twenty-one) clear calendar days from the date of the Notice.  The notice should also state that in the event of non-payment of calls, shares shall be forfeited.

Third, if the amount payable as set out in the notice is not paid on the stipulated date, any share in respect of which the notice has been given may at any time thereafter be forfeited by way of resolution of the Board of Directors in a properly convened meeting.

As a result of an authorized forfeiture, there shall be cancellation of the shareholder membership and the removal of the member’s name from the register in respect of those shares. Further, any entitlement of the defaulting member to dividends on his partly paid-up shares may be adjusted against his dues on calls.

Governance Audits on the  Forfeiture of Shares Function.

Governance audits are essential in helping organizations evaluate and improve their governance practices and milestones. The Institute of Certified Secretaries of Kenya has developed a corporate governance toolkit. A specific focus is to champion quality assurance and uniformity in governance audit practices. Among these, the ninth governance standard focuses on the forfeiture of shares; it provides for definitions, provisions, procedures, and consequences of the forfeiture of shares.

Forfeiture of Shares is a governance audit standard that’s anchored on laws, regulations, and global best practices.

The objective is to assess how the forfeiture process is conducted and whether it aligns with the principles of good governance.

Importance of Good Governance Practices

Good governance practices are essential for the long-term sustainability and success of any organization. It ensures that the company is managed responsibly, ethically, and in the best interests of all stakeholders. Some key aspects of good governance include transparency, accountability, fairness, and adherence to laws and regulations.

When it comes to the forfeiture of shares, adherence to good governance practices becomes crucial to prevent any misuse of power or unfair practices. Properly conducted share forfeitures inculcate confidence in shareholders and investors.

1. Policy Framework: It involves examining the company’s policies and guidelines related to the forfeiture of shares. This includes understanding the circumstances under which shares can be forfeited, the process involved, and the rights of shareholders throughout the process.
2. Transparency and Communication: Transparency is a cornerstone of good governance. The audit assesses whether the forfeiture process is clearly communicated to shareholders, ensuring they are aware of the consequences of non-compliance with company policies.
3. Fairness and Consistency: The audit evaluates whether the forfeiture decisions are made impartially and consistently across all shareholders, irrespective of their position or influence within the company.
4. Compliance with Regulations: It is vital to ensure that the forfeiture process complies with relevant laws, regulations, and the company’s Articles of Association. This parameter also verifies that the process respects the rights of minority shareholders.
5. Board Oversight: The governance audit assesses the role of the board of directors in overseeing the forfeiture process. It ensures that the board is actively involved, exercises due diligence, and acts in the best interest of the company and its shareholders.

Implementing and adhering to good governance practices concerning the forfeiture of shares offers several advantages for a company:

1. Enhanced Stakeholder Trust: Transparent and fair forfeiture processes foster trust among shareholders, investors, and other stakeholders, ultimately enhancing the company’s reputation.
2. Risk Mitigation: By following a well-defined forfeiture process, companies reduce the risk of legal disputes and controversies arising from arbitrary decisions.
3. Long-Term Sustainability: Good governance practices contribute to the long-term sustainability and growth of the company, attracting potential investors and partners.
4. Regulatory Compliance: Adhering to set procedures ensures that the company meets its legal and regulatory obligations, avoiding penalties and potential legal liabilities.

Governance audits on forfeiture of shares play a crucial role in promoting good governance practices within a company. By ensuring transparency, fairness, and compliance with regulations during the forfeiture process, companies can build trust among stakeholders and demonstrate their commitment to responsible management. Embracing good governance practices not only benefits the company’s reputation but also contributes to its long-term success and sustainability in a competitive business environment.