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How does a bankruptcy affect my shareholders?

On Behalf of | Feb 26, 2024 | Firm News

Filing for a Chapter 11 bankruptcy might be your best option to save your Anchorage, Alaska, based company. Chapter 11 bankruptcy allows you to restructure your debt while keeping your company running.

Although you may need to sell some assets, Chapter 11 bankruptcy could be the solution you need when your company is struggling in today’s challenging economic times.

However, one concern holding you back from filing may be how bankruptcy could affect your shareholders.

There is a possibility your company could be sold in a Chapter 11 bankruptcy in what is called a Section 363 sale. This is not good news for your shareholders as it typically results in lirrle leftover cash from the sale to compensate stock investors.

However, if a Section 363 sale can be avoided, the impact on your shareholders could be minimal. Chapter 11 bankruptcy involves a reorganization plan for your company.

Negotiating your reorganization plan to include shareholders

The terms of this reorganization plan are negotiated with the help of a committee of company stakeholders who are appointed by the government. The committee can include creditors and/or company stockholders.

The reorganization plan determines how your company’s debt is handled in bankruptcy. The debt may be discharged or paid off.

The plan can also include a provision for shareholder relief, requiring shareholders to receive some compensation, either in the form of cash or shares in the new company.

The amount of compensation shareholders receive depends on the specific situation, but sometimes the amount can be substantial.

Security trading during bankruptcy is permitted

Additionally, there is no federal law that forbids trading stocks in bankrupt companies. Therefore, securities can usually keep trading even while your company is in bankruptcy.

Overall, bankruptcy is likely to have some type of negative impact on your shareholders. However, the way you negotiate and structure your reorganization plan can make a huge difference in the outcome.