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How does Chapter 11 impact stocks?

On Behalf of | Nov 10, 2022 | Chapter 11 Bankruptcy

For many business owners, Chapter 11 bankruptcy is the preferable option when encountering financial or operational difficulties. In contrast with Chapter 7, Chapter 11 allows a business to regain its footing after a reorganization process. In Chapter 7, a company ceases to exist and its assets are liquidated to fulfill its debts.

Chapter 11 bankruptcy is a complex and often lengthy process, and it’s important to be informed as to how it will impact all aspects of your business. One such area what happens with your company’s stocks and bonds after declaring Chapter 11 bankruptcy.

The aftermath of Chapter 11 bankruptcy

Chapter 11 bankruptcy preserves the chance for your business to survive, but that’s not to say that shareholders will be in for a pleasant experience. In nearly every instance after a business files for Chapter 11, a large number of shareholders sell and share value decreases dramatically.

If a company were listed on a premier stock exchange like the NYSE, declaring Chapter 11 will likely cause it to be de-listed. In these cases, the company will probably end up being traded on the OTCBB (Over The Counter Bulletin Board).

During the period of Chapter 11 bankruptcy, a company will remain in operation. However, significant business decisions will be within the domain of the bankruptcy court.

Frequently, after reorganizing the business, a company will issue a new portion of stock which is considered distinct from the existing pre-bankruptcy stock. When this happens, the value of the old stock drops to zero or near-zero.

When new stock is issued, generally the company will give its existing investors some opportunity to exchange their pre-existing stock for the newly issued stock. This is the point at which, if the reorganization doesn’t succeed, a company may need to transition to Chapter 7 bankruptcy and cease operations.

Chapter 11 bankruptcy can be a terrible event for a business, but it also represents a possible lifeline toward future success. Understanding the ins and outs of the Chapter 11 process is crucial if you find your company in a perilous position.