what happens to common stock in chapter 11

Feb. 3, 2009

What Every Investor Should Know ...

Corporate Defalcation

What happens when a public company files for protection under the federal bankruptcy laws? Who protects the interests of investors? Do the quondam securities have any value when, and if, the company is reorganized? We promise this information answers these and other oft asked questions about the lengthy and sometimes uncertain bankruptcy process.

What Happens to the Company?

How Are Assets Divided in Bankruptcy?

1. Secured Creditors - oft a bank, is paid commencement.
2. Unsecured Creditors - such as banks, suppliers, and bondholders, accept the adjacent merits.
3. Stockholders - owners of the company, accept the last claim on assets and may not receive annihilation if the Secured and Unsecured Creditors' claims are not fully repaid.

Federal bankruptcy laws govern how companies become out of business or recover from crippling debt. A bankrupt company, the "debtor," might employ Chapter 11 of the Defalcation Code to "reorganize" its business and try to become profitable again. Direction continues to run the 24-hour interval-to-twenty-four hour period concern operations merely all meaning business organization decisions must be approved by a bankruptcy court.

Under Chapter 7, the visitor stops all operations and goes completely out of business. A trustee is appointed to "liquidate" (sell) the company'south assets and the money is used to pay off the debt, which may include debts to creditors and investors.

The investors who have the least chance are paid first. For instance, secured creditors take less risk because the credit that they extend is normally backed by collateral, such as a mortgage or other assets of the visitor. They know they will go paid beginning if the company declares bankruptcy.

Bondholders accept a greater potential for recovering their losses than stockholders, because bonds represent the debt of the company and the company has agreed to pay bondholders interest and to render their master. Stockholders own the company, and take greater risk. They could make more money if the visitor does well, but they could lose money if the company does poorly. The owners are last in line to exist repaid if the company fails. Bankruptcy laws determine the club of payment.

What Will Happen to My Stock or Bond?

A company's securities may proceed to merchandise even after the visitor has filed for bankruptcy under Chapter 11. In most instances, companies that file under Affiliate 11 of the Bankruptcy Lawmaking are generally unable to run into the listing standards to continue to trade on Nasdaq or the New York Stock Exchange. Still, even when a company is delisted from i of these major stock exchanges, their shares may proceed to merchandise on either the OTCBB or the Pink Sheets. There is no federal law that prohibits trading of securities of companies in defalcation.

Note: Investors should be cautious when buying common stock of companies in Affiliate 11 defalcation. It is extremely risky and is likely to lead to fiscal loss. Although a company may emerge from defalcation every bit a viable entity, mostly, the creditors and the bondholders become the new owners of the shares. In well-nigh instances, the visitor's programme of reorganization will abolish the existing equity shares. This happens in bankruptcy cases because secured and unsecured creditors are paid from the company'due south assets before common stockholders. And in situations where shareholders do participate in the plan, their shares are normally field of study to substantial dilution.

If the company does come up out of bankruptcy, in that location may be ii different types of common stock, with different ticker symbols, trading for the aforementioned company. One is the old common stock (the stock that was on the market when the visitor went into defalcation), and the second is the new common stock that the company issued equally part of its reorganization plan. If the old mutual stock is traded on the OTCBB or on the Pink Sheets, it will accept a five-letter ticker symbol that ends in "Q," indicating that the stock was involved with bankruptcy proceedings. The ticker symbol for the new mutual stock will non terminate in "Q". Sometimes the new stock may non accept been issued past the visitor, although it has been authorized. In that situation, the stock is said to exist trading "when issued," which is autograph for "when, as, and if issued." The ticker symbol of stock that is trading "when issued" volition stop with a "V". In one case the company actually issues the newly authorized stock, the "V" will no longer announced at the finish of the ticker symbol. Be sure yous know which shares you are purchasing, because the old shares that were issued before the visitor filed for defalcation may be worthless if the company has emerged from bankruptcy and has issued new common stock.

During bankruptcy, bondholders will stop receiving involvement and main payments, and stockholders will end receiving dividends. If you are a bondholder, y'all may receive new stock in commutation for your bonds, new bonds, or a combination of stock and bonds. If you lot are a stockholder, the trustee may ask you to send dorsum your sometime stock in substitution for new shares in the reorganized visitor. The new shares may be fewer in number and may be worth less than your sometime shares. The reorganization programme will spell out your rights as an investor, and what yous can expect to receive, if annihilation, from the company.

The bankruptcy court may decide that stockholders don't go annihilation because the debtor is insolvent. (A debtor's solvency is adamant past the divergence between the value of its assets and its liabilities.) If the company's liabilities are greater than its avails, your stock may be worthless. Contact your local Internal Revenue Service (IRS) office or call 1-800-829-1040 for information about how to written report worthless securities every bit a loss on your income tax render. If you don't know whether your stock has value, and y'all can't find a stock or bail cost in the newspaper, ask your broker or the visitor for data.

Why Would a Visitor Choose Chapter 11?

"Prepackaged Bankruptcy Plans"

Sometimes companies gear up a reorganization programme that is negotiated and voted on by creditors and stockholders earlier they actually file for bankruptcy. This shortens and simplifies the process, saving the company money. For example, Resorts International and TWA used this method.

If prepackaged plans involve an offering to sell a security, they may have to be registered with the SEC. Yous will get a prospectus and a ballot, and it'southward of import to vote if you want to have any impact on the procedure. Nether the Bankruptcy Code, two-thirds of the stockholders who vote must have the plan before it tin exist implemented, and dissenters will have to go along with the majority.

Most publicly-held companies volition file under Chapter 11 rather than Affiliate 7 because they tin can still run their concern and command the bankruptcy process. Chapter xi provides a procedure for rehabilitating the visitor's faltering business. Sometimes the company successfully works out a program to render to profitability; sometimes, in the end, it liquidates. Under a Affiliate eleven reorganization, a company usually keeps doing business and its stock and bonds may proceed to trade in our securities markets. Since they still trade, the visitor must keep to file SEC reports with data almost pregnant developments. For example, when a company declares bankruptcy, or has other significant corporate changes, they must report it within 15 days on the SEC's Grade viii-Thou.

How Does Affiliate xi Work?

The U.South. Trustee, the bankruptcy arm of the Justice Department, will appoint one or more than committees to represent the interests of creditors and stockholders in working with the company to develop a programme of reorganization to go out of debt. The plan must be accepted by the creditors, bondholders, and stockholders, and confirmed by the courtroom. Yet, even if creditors or stockholders vote to reject the programme, the court can condone the vote and still confirm the plan if it finds that the plan treats creditors and stockholders fairly. In one case the plan is confirmed, another more detailed report must be filed with the SEC on Form 8-K. This report must incorporate a summary of the plan, but sometimes a copy of the complete plan is fastened.

Who Develops the Reorganization Plan for the Company?

Committees of creditors and stockholders negotiate a plan with the company to relieve the company from repaying part of its debt and then that the company can try to go back on its feet.

• One committee that must exist formed is called the "official committee of unsecured creditors." They represent all unsecured creditors, including bondholders. The "indenture trustee," often a depository financial institution hired past the company when information technology originally issued a bond, may sit down on the committee.
• An additional official committee may sometimes be appointed to represent stockholders.
• The U.S. Trustee may engage another committee to represent a distinct grade of creditors, such equally secured creditors, employees or subordinated bondholders.

After the committees piece of work with the company to develop a plan, the bankruptcy court must discover that it legally complies with the Bankruptcy Code earlier the programme can be implemented. This procedure is known as plan confirmation and is usually completed in a few months.

Steps in Development of the Plan:

• The debtor company develops a plan with committees.
• Company prepares a disclosure statement and reorganization program and files it with the court.
• SEC reviews the disclosure argument to be sure it'southward complete.
• Creditors (and sometimes the stockholders) vote on the plan.
• Courtroom confirms the plan, and
• Company carries out the plan by distributing the securities or payments called for past the plan.

What is the Role of the U.Due south. Securities & Commutation Commission in Affiliate eleven Bankruptcies?

Generally, the SEC'due south role is limited. The SEC will:

• review the disclosure document to decide if the visitor is telling investors and creditors the important information they need to know; and
• ensure that stockholders are represented by an official committee, if appropriate.

Although the SEC does not negotiate the economic terms of reorganization plans, we may take a position on of import legal issues that will touch the rights of public investors in other bankruptcy cases as well. For example, the SEC may footstep in if nosotros believe that the visitor's officers and directors are using the bankruptcy laws to shield themselves from lawsuits for securities fraud.

How Will I Know What'southward Going On?

Sometimes, y'all may outset learn nigh a defalcation in the news. If you agree stock or bonds in street name with a broker, your broker should forward information from the visitor to you. If you hold a stock or bond in your own name, yous should receive information directly from the company.

Yous may exist asked to vote on the plan of reorganization, although you may not become the full value of your investment back. In fact, sometimes stockholders don't get annihilation back, and they don't get to vote on the plan.

Earlier y'all vote, yous should receive from the company:

• a copy of the reorganization plan or a summary;
• a courtroom approved disclosure statement which includes data to aid y'all make an informed judgment about the plan;
• a ballot to vote on the plan; and
• notice of the appointment, if any, for a hearing on the courtroom's confirmation of the plan, including the deadline for filing objections.

Even when stockholders do not vote, they should get a summary of the disclosure statement, and a notice on how to file an objection to the program.

Stockholders may besides receive other notices unrelated to the plan of reorganization, such as a notice of a hearing on the proposed auction of the debtor's assets, or find of a hearing if the visitor converts to a Chapter seven bankruptcy.

What is Chapter 7 Bankruptcy?

Some companies are so far in debt or have other problems so serious that they can't go along their business operations. They are likely to "liquidate" and file nether Chapter vii. Their avails are sold for cash by a court appointed trustee. Administrative and legal expenses are paid first, and the remainder goes to creditors. Secured creditors will accept their collateral returned to them. If the value of the collateral is not sufficient to repay them in full, they will be grouped with other unsecured creditors for the residual of their claim. Bondholders, and other unsecured creditors, will exist notified of the Chapter 7, and should file a claim in case at that place's money left for them to receive a payment.

Stockholders do not take to exist notified of the Chapter 7 case considering they mostly don't receive anything in return for their investment. Only, in the unlikely event that creditors are paid in full, stockholders will exist notified and given an opportunity to file claims.

Does My Stock or Bond Have Any Value?

Unremarkably, the stock of a Chapter vii visitor is worthless and y'all accept lost the money you invested.

If you hold a bond, you might only receive a fraction of its confront value. It will depend on the amount of avails available for distribution and where your debt ranks in the priority list on the first page. If your bond is secured by collateral, your payment volition depend in large part on the value of the collateral.

Where Can I Find More than Data?

The Company. - Contact the investor relations department in the company's home office. They tin can requite you more data on the bankruptcy proceeding, including the name, address, and phone number of the court handling the bankruptcy.

Your Broker. - If yous can't find information in the newspaper or the library, or yous oasis't received any correspondence from the company, call the person who sold you the investment.

The SEC. - Companies file regular reports with the SEC in a reckoner database known as EDGAR. For example, a visitor declaring bankruptcy will file a form eight-K that tells where the case is pending and which chapter of defalcation was filed. You can access EDGAR through your reckoner at: http://world wide web.sec.gov If you don't have access to a reckoner, your public library may have a estimator you can apply. You lot can also request a copy of Grade 8-1000, or any other reports that the visitor files with the SEC, run across "How to Request Public Documents". Y'all might besides exist able to get copies of SEC filings from your total-service stockbroker, or the company itself.

Defalcation Court. - If the company is in Chapter 7, and has not filed reports with the SEC, or y'all need more data, the bankruptcy court itself is another source. This court is usually located where the company has its main identify of business or where the company is incorporated. (At that place is at to the lowest degree one bankruptcy court in each land and the District of Columbia.) Once you know a company'southward main place of business or state of incorporation, you tin obtain the accost and phone number of the bankruptcy courtroom for that region by visiting the website of the Part of the The states Courts or past calling (202) 502-1900. Court addresses and phone numbers are also listed in the publication, The American Bench, which you tin can discover at your local library. In addition, you'll notice links to U.Due south. Defalcation Court websites at world wide web.uscourts.gov/services-forms/defalcation.

U.South. Trustee at the Department of Justice. - The U.South. Trustee has wide administrative responsibilities in bankruptcy cases. Cheque the U.Due south. Trustee's website, your local phone book, or the public library for the field office closest to you, and contact them for information on the status of the bankruptcy.

A Securities or Bankruptcy Attorney. - You may want to talk to an chaser, particularly if you believe that the debtor defrauded you and you want to know your legal options. If you suspect fraud, you should also report it to the SEC or your state securities regulator.

For a more detailed discussion of different types of bankruptcy, delight read Bankruptcy Nuts, which the Bankruptcy Sectionalization of the Administrative Function of the United states of america Courts produced to assist the public in understanding defalcation.

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Source: https://www.sec.gov/reportspubs/investor-publications/investorpubsbankrupthtm.html

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