Does Equity Get Wiped Out in Chapter 11?
In Chapter 11 bankruptcy, equity holders, particularly common stock shareholders, are at the bottom of the payment hierarchy and are often at risk of having their equity wiped out. Here are some key points to consider:
- Payment Hierarchy: The absolute priority rule dictates that creditors are paid in a specific order, with secured creditors and priority unsecured creditors being paid before general unsecured creditors and equity holders. 46
- Equity Holder Rights: Equity security holders can vote on the reorganization plan and file a proof of interest, but their recovery is typically limited and often results in receiving pennies on the dollar or nothing at all. 12
- Reorganization Plan: The reorganization plan must be in the best interests of creditors, meaning that impaired creditors must either accept the plan or receive as much repayment as they would in a Chapter 7 liquidation. This often leaves little to no value for equity holders. 5
- Delisting and Trading: Companies in Chapter 11 are often delisted from major exchanges, and their shares may continue to trade over-the-counter with a "Q" appended to the stock symbol to denote bankruptcy. However, these shares typically lose most of their value and may be canceled as part of the reorganization plan. 6
- Subchapter V: Subchapter V of Chapter 11 provides a more favorable environment for small businesses, allowing them to retain equity in the reorganized firm and potentially deviate from the absolute priority rule. However, this does not guarantee that equity will not be wiped out. 3