Information for Investors: Corporate Bankruptcy
A corporation may file for bankruptcy when a trustee desires to liquidate assets or when the corporations decides to restructure its debt and operations. An investor might be wondering what happens to his or her interests when the corporation files for bankruptcy. Below, our experts at ZocLaw.com highlight some of the most important investor bankruptcy information.
Federal law is involved and governs bankruptcy pertaining to corporations. Depending on the corporation’s financial conditions and prospective business-related inclinations, a corporation can file either a Chapter 7 or Chapter 11 bankruptcy. Under a Chapter 7 bankruptcy, a company stops its operations and liquidates its assets, which are used to pay back the debts owed to the creditors. Under Chapter 11, the corporation restructures its business while ridding itself from debt and achieving normal business conditions.
A company that files for Chapter 11 bankruptcy will usually continue trading its stocks but will most likely be removed from the exchange like NASDAQ or NYSE. The company can still trade on OTCBB or Pink Sheets, even when removed from a major exchange. During the bankruptcy, a company takes a major hit on their stock value and the company’s stockholders stop garnering dividends. The common stock of a company may be diluted. A stockholder can obtain new stocks in return for old ones. However, the stockholder should keep in mind that there are fewer of the new ones at a cheaper price. If a court determines that a company isn’t able to pay its debts, the stockholders will not receive anything after the bankruptcy.
In a Chapter 11 bankruptcy, a company is able to operate while it goes through the reorganization and bankruptcy process. It is able to continue to trade its stocks and bonds, but such actions have to be recorded on Form 8-K within 15 days. The U.S. Trustee will appoint committees, during the company’s reorganization process to represent the stockholders and creditors who have to accept the reorganization plan. If they don’t accept, the court can overrule and accept the plan. A synopsis of the plan must be filed in Form 8-K after its confirmation.
The reorganization plan is negotiated by various committees to resolve the company’s problems. There are three major types of committees. One of them is the Official Committee of Unsecured Creditors, which represents all unsecured creditors. Then there is the Official Committee Representing Stockholders, which answers to the concerns of the stockholders. Lastly, additional committees are designated for specific creditors like employees or bondholders. Once a plan is created and concurred by all relevant parties, the court will do a plan confirmation to see if the plan complies with the Bankruptcy Code.
The Securities and Exchange Commission (SEC) handles disclosure documents and examines if they contain the necessary information relevant to the SEC’s requirements. If the SEC becomes suspicious of unscrupulous or unfair practices by the executives of the company, the SEC might file a lawsuit as needed.
If a corporation goes through bankruptcy, stock or bondholders will be notified through mail. If a stockholder is able to vote on the reorganization plan, the company will render the stockholder a synopsis of the plan, a disclosure statement, a ballot, and sometimes a notice that has information about the hearing and filing objections of the plan. Stockholders who can’t vote have the right to the synopsis of the disclosure statement and full information about the filing objections of the plan.
In a Chapter 7 bankruptcy, a company ends its operations and liquidates all of its assets. The proceeds of the liquidated assets are used to pay for legal and administrative expenses. Secured creditors receive collateral, while unsecured creditors like bondholders get the remaining money. Stockholders may not receive notification as it is not required. Usually if a company files for Chapter 7 bankruptcy, its stocks become worthless.
If you’re a concerned investor and you want to make sure you have all the necessary information you need relevant to your investments, it would be wise to contact the company you have shares in, your broker, SEC’s EDGAR database, or even a bankruptcy court.
An an investor in a company that is undergoing bankruptcy, it is important to get your hands on as much investor bankruptcy information as possible.