Bxdty

If you are a shareholder of a public company and the company goes bankrupt, what would happen to your share?

1. Does the share still represent your holding in the company? And if the company goes out of business, are you held accountable for the debt that company needs to pay?




2. If the share does not go to zero, is there a chance that share value will return to original price after bankruptcy?

Under U.S. Bankruptcy Code Chapter 11, the company attempts to reorganize its business and try to become profitable again. Management continues to run the day-to-day business operations but all significant business decisions must be approved by a bankruptcy court.

Under U.S. Bankruptcy Code Chapter 7, the company stops all operations and goes completely out of business. A trustee is appointed to liquidate all assets and the money is used to pay off the debt. Secured creditors are paid first. Owners are last in line to be repaid. Bankruptcy laws determine the order of payment.

As a shareholder, you have no responsibility for company debt.

If the company reorganizes, there's always a chance that share price recovers but that's a long odds bet.

You are not liable for the company's additional debts. That is the entire point, the reason the "corporation" was invented. You can't lose more than you willingly invested.

The share is a share of the company's net worth (assets minus liabilities, and its net earnings over time). In a bankruptcy situation, it is expected that the net worth is less than zero. Only a turn of luck would cause otherwise.

As far as paying the company's debts, a shareholder is considered a creditor, but a very low priority creditor. Everyone else with secured or unsecured debt or obligations gets paid first. There is unlikely to be any left over when it becomes your turn.

In a company re-organization the company stock is usually wiped-out.

Then the senior debt holders, in addition to current business creditors, likely or often become the new stockholders.

And so as a company gets into trouble, the senior debt holders can short the stock while holding the debt. The gain on the short stock can be much larger than the loss on the senior debt because the senior debt does have significant value in a the re-organization.

Bob Baerker outlined the two major forms of bankruptcy in the US.

In addition, when a company reorganizes under Chapter 11, a common strategy is to look for another company to acquire the assets of the business. Sometimes this company will acquire the bankrupt company as a whole -- it will typically become a division of the new parent company.

As far as the shareholders are concerned, this is similar to any other merger or acquisition, except the bankruptcy court mediates it, rather than allowing shareholders to vote on it. If the new parent company is a public company, the shareholders of the original company will have their shares converted to the new company; the conversion rate will be pro-rated based on the estimated fair market value of the two companies (I assume this is done by the bankruptcy court). If it's not public, the new parent company will purchase their shares from them (again, I presume the bankruptcy court sets the price).

Sometimes the new company doesn't acquire the business as a whole, but instead the company is broken up and some divisions are sold, while the original company continues to operate with the remaining divisions. When the remaining compoany emerges from bankruptcy, the shareholders will see the value of their shares drop based on the estimated value of the remaining business, and they'll receive either cash or shares of the new parent(s) for the divisions that are sold off.

I've worked for companies that have gone through both types of bankruptcies, although the one that was split up was a startup that hadn't yet gone public. In that case, some of my compensation was in incentive stock options, but they became worthless since we never went public.

Often the selloff strategy is attempted as a way to forestall bankruptcy. The reason the company is struggling is because it's trying to do too many things at once; selling some divisions to a company that it fits into better can allow the remaining company to be more manageable, and avoid having to declare bankruptcy. Once you declare bankruptcy, many decisions are forced upon the company by the court.