Lost shareholders: Overview, definition, and example
What are lost shareholders?
Lost shareholders refer to individuals or entities that hold shares in a company but are no longer reachable or identifiable by the company due to changes in contact information, failure to update their details, or lack of activity. These shareholders may have moved without informing the company, forgotten about their holdings, or become unresponsive to communications. In some cases, they may have inherited shares but have not claimed them or are unaware of their ownership.
Companies are required by law to make reasonable efforts to locate lost shareholders, as their shares often remain in the company’s shareholder register, creating legal and administrative challenges. Lost shareholders can also result in unclaimed dividends, potential legal disputes, or complications in corporate governance.
Why are lost shareholders important?
Lost shareholders are important because they can create administrative and financial issues for a company. For instance, unclaimed dividends may accumulate, or the company may face difficulties in determining the actual number of shareholders for certain votes or corporate decisions. Lost shareholders can also complicate the process of distributing assets in the event of a merger, acquisition, or liquidation.
It is also critical for companies to locate and communicate with lost shareholders because, under certain legal frameworks, they may have the right to claim dividends or participate in company meetings and decisions. Additionally, unclaimed shares and dividends may eventually need to be escheated (transferred to the state), depending on the jurisdiction.
Understanding lost shareholders through an example
Imagine a company conducts an annual shareholder meeting and needs to determine how many shares are eligible to vote on a critical business decision. However, the company has several "lost shareholders" whose contact information is outdated, making it difficult to confirm their holdings and whether they should be counted in the voting process.
In another example, a company declares a dividend payment to shareholders. Some shareholders, however, have not updated their address or contact details, meaning they do not receive their dividend checks. The company then classifies these shareholders as "lost shareholders" and may have to follow specific procedures to resolve the situation, including legal notifications or working with a third-party service to locate these shareholders.
Example of lost shareholders clause
Here’s what a lost shareholders clause might look like in a company policy or shareholder agreement:
“In the event that a Shareholder’s contact information is deemed to be invalid or that they cannot be contacted after reasonable efforts by the Company, the Shareholder shall be considered a Lost Shareholder. The Company shall attempt to locate the Lost Shareholder through public records, mail forwarding, or third-party locator services. If the Lost Shareholder cannot be located within [X] years, their shares may be transferred to a designated account or escheated in accordance with applicable law.”
Conclusion
Lost shareholders are a common challenge for companies, particularly those with a large and dispersed shareholder base. Managing and locating lost shareholders is crucial for ensuring accurate shareholder records, proper dividend distribution, and compliance with legal obligations. Companies must take reasonable steps to locate these individuals and resolve any issues related to unclaimed dividends or shareholder rights.
For businesses, developing procedures for dealing with lost shareholders can help avoid potential disputes and ensure proper governance, while for shareholders, keeping contact information up-to-date ensures they can maintain their rights and benefits within the company.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.