Chapter 11 Bankruptcy: 7 Critical Impacts on Stockholders
When a company files for Chapter 11 bankruptcy, several key outcomes affect stockholders:
- Share Value Drops: The value of the company's shares typically plummets immediately after a Chapter 11 filing. This is due to the increased risk and uncertainty associated with the company's financial situation. 138
- Delisting from Major Exchanges: Companies under Chapter 11 bankruptcy are often delisted from major stock exchanges such as the New York Stock Exchange (NYSE) and Nasdaq. Instead, they may continue to trade on the Over-the-Counter Bulletin Board (OTCBB) or the Pink Sheets, with a "Q" appended to their ticker symbol to indicate bankruptcy proceedings. 136
- No Dividend Payments: Stockholders will not receive previously scheduled dividend payments while the company is in bankruptcy. 26
- Reorganization Plan: The company must negotiate a reorganization plan with a government-appointed committee of stakeholders, which may include creditors and stockholders. This plan determines how the company's debt is handled and may offer some compensation to shareholders, though this is not guaranteed. 45
- Potential for New Shares: In many cases, the company's plan of reorganization will cancel existing equity shares and issue new ones. This means that old shares may become worthless, and only new shares issued by the reorganized company will have value. 58
- Trading Risks: Trading in the shares of a company under Chapter 11 bankruptcy protection is highly risky and could result in the loss of the entire investment. The securities of companies in bankruptcy can continue to trade, but investors should be cautious due to the high risk of financial loss. 58
- Last in Line for Compensation: Common stock shareholders are last in line to recover their investments, behind bondholders and preferred shareholders. This means that shareholders may receive pennies on the dollar, if anything at all. 127