The Law Dictionary

Featuring Black’s Law Dictionary Free Online Legal Dictionary 2nd Ed.

When A Company Files for Chapter 11 Bankruptcy Court Protection What Happens to the Stock?

When a company files Chapter 11 bankruptcy, the company is restructured, not liquidated. In other words, the company remains open and develops a plan to pay its creditors. Unfortunately, corporate stock suffers almost certain death.

Stock shares decrease in value or become worthless. Most of the time the stocks can no longer trade on The New York Stock Exchange or Nasdaq due to their low value. Shares of stock can be sold as over the counter stocks. The stock ticker will have a Q at the end of it to identify it as an OTC stock.

An OTC stock does not have to meet the strict SEC listing requirements. Traders know that stocks on the OTC market are low in value and high in risk. OTC companies only have to file current financials with the National Association of Securities Dealers (NASD). The NASD oversees OTC stocks.

During a Chapter 11 bankruptcy, stocks no longer produce dividends. Old stocks become worthless and must be exchanged for new shares of stock from the reorganized corporation. Stockholders may receive fewer shares in the new company as in the old company. The new shares could be worth even less than the old shares.

When a company goes through Chapter 11 bankruptcy, the bankruptcy court appoints a committee to protect the interests of the stockholders and creditors. Creditors, stockholders, and bond holders vote to approve the company's reorganization plans. The court must also approve of the plan. Courts can disregard the wishes of the creditors, stock holders, and bond holders and approve the plan even if the others disapprove. The court's main concern is that both stockholders and creditors are treated fairly.

In addition to the courts, the SEC also reviews the reorganization plan to make sure that it contains enough information for investors and creditors as to their standing with the restructured company. The SEC makes sure the court has appointed a committee to represent the rights of the stock holders.

Companies intending to go through Chapter 11 bankruptcy must send written notification to the stockholders. Stockholders should also receive the reorganization plan, the court's opinion, a voting ballot, and notification of hearing date confirming the plan.

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