Chapter 11 Effect On Shareholders
When a company goes for reorganization or in other words files for Chapter 11 bankruptcy, the shareholders stand to be the biggest losers of them all. The company that is filing for Chapter 11 bankruptcy will tell the court that they have a plan to repay the creditors. The creditors, or in other words the shareholders, are given an equity stock in the company as compensation. |
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However, in the new reorganized company the new stock is actually worthless. The common stock that was performing well is gone anyway. Only in rare cases the company allows the shareholders to keep their commons tock.
That is why several shareholders are advised to sell of the stocks when a company files for bankruptcy. If somehow, as a shareholder, you believe that the stocks of the reorganized company will do well, then you call always purchase the newer stocks and see how they perform.
In bankruptcy Chapter 11 history, the shares of a reorganized company have never performed well unless there was an external alliance of some kind. The shareholder can virtually do nothing with the stocks of the new company and they have to wait for a really long time until the value of the shares start increasing.
The reorganized company has to come out its debts and then start making profits. When a company gets reorganized and the news of it reaches the stock exchange they immediately realize that the company is not making profits and is unable to clear of the debts. That is the main reason why the share prices drop.
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