Chapter 11 is a form of bankruptcy that, though occasionally used by individuals, is more commonly filed by corporations, partnerships, or limited liability companies (LLCs) in California. The major benefit of Chapter 11 over Chapter 7, which can also be filed by business entities, is that Chapter 11 allows the company to continue operating while the bankruptcy case is in progress. Chapter 11 bankruptcy will have major financial impacts on the company, affecting its employees, its investors, its bondholders, and – as our Sacramento bankruptcy attorneys will focus on in this article – its shareholders. Continue reading to learn about how shareholders are affected by Chapter 11, and how the company’s stocks are impacted.
What Happens to Stock in Chapter 11 Bankruptcy?
According to the U.S. Bankruptcy Court for the Eastern District of California, more than 30 companies filed for Chapter 11 bankruptcy in the Sacramento Division during 2016 alone. In 2015, the total was slightly higher at 40 companies filing for Chapter 11 in the Sacramento Division.
If you’re a California business owner who is thinking about filing Chapter 11, you are not alone. With care and diligence, filing Chapter 11 could be the action that transforms your failing business into a successful franchise or establishment. However, before you make such an impactful decision, it is necessary to educate yourself about how your company will be affected, such as effects on your shareholders and stocks.
Unlike Chapter 7, which involves liquidation of the business’ assets, Chapter 11 allows the company to continue operating because the Chapter 11 process centers around a debt restructuring (“reorganization”) plan. This plan must be negotiated with a committee of creditors.
The purpose of the plan is to delineate when, how, and to what extent various debts will be repaid, potentially including provisions for shareholders to receive financial compensation. In most instances, however, shareholders receive only a small amount of compensation, if any. For example, one study, which culled bankruptcy data from 2009 and 2010, revealed that less than 10% of the Chapter 11 cases analyzed resulted in “substantial” compensation for equity holders, including shareholders. Typically, shareholders receive little or nothing unless the company’s creditors are paid in full. Rather than being paid simultaneously, some creditors receive higher priority than others, starting with secured creditors, followed by unsecured or general creditors, followed – where possible – by shareholders. The Chapter 11 trustee may ask shareholders to return stocks, which can then be replaced with shares – though not necessarily as many – in the reorganized business.
Be advised that the Chapter 11 committee may reject your initial proposal for a reorganization plan. However, even in such a scenario, the bankruptcy court may nonetheless decide to approve your proposed plan.
You should also be prepared for stock trading – and, crucially, the value of your stocks – to be affected by the bankruptcy. Even though your company will continue to operate during the bankruptcy (though approval on major financial decisions, particularly those that would result in the company taking on more debt, may require approval from the bankruptcy court), the stock will be “delisted,” or taken off the pertinent stock exchange, such as the New York Stock Exchange or the Nasdaq. However, over-the-counter trading may proceed after the stock is delisted. A letter “Q” designation, which indicates bankruptcy, will appear at the end of the ticker symbol that identifies your business.
As to the bankruptcy’s impact upon stock value, there is both good news and bad news. The good news is that the stock will retain some of its value, but the bad news is that the value is likely to decline significantly. The bottom line is that, while Chapter 11 bankruptcy generally results in financial losses for stockholders, the process can be of immense benefit to struggling businesses. If Chapter 11 bankruptcy is executed with thoughtful planning and meticulous attention to detail, it can save an unprofitable company from collapse.
CA Bankruptcy Attorneys for Businesses in Sacramento, Roseville, and Folsom
While no type of bankruptcy can truly be called “simple,” certain chapters present greater challenges than others. Chapter 11 is one of the most complicated and technical forms of bankruptcy. It is all but impossible for business owners to effectively manage their own Chapter 11 cases, especially while they are occupied by the constant tasks of managing a business. If you are a business owner who is thinking about declaring bankruptcy in California, it is in your best interests to work with a Sacramento Chapter 11 attorney, like those of The Bankruptcy Group.
At The Bankruptcy Group, our Folsom Chapter 11 lawyers have many years of experience assisting S corporations, C corporations, limited liability companies, general partnerships, limited partnerships, and limited liability partnerships with the California bankruptcy process. For a free legal consultation as to whether Chapter 11 could be a suitable course of action for your business, contact The Bankruptcy Group right away at (800) 920-5351.