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https://www.finra.org/investors/what-corporate-bankruptcy-means-shareholders 

 

A Chapter 7 filing is the more nuclear option. It means that the company stops operating and all its assets are put up for sale by a court-appointed trustee, with the proceeds divvied up to the company’s debtors in order of the seniority of the debt.

A Chapter 11 filing means that the company may undergo reorganization and continue to operate. Still, a Chapter 11 doesn’t rule out the possibility of the sale. The entire company may be sold in what is called a Section 363 sale with the court’s approval. That is generally not a good thing for shareholders, as there is typically not enough cash left over from the sale to compensate stock investors.

Regardless, in the event of Chapter 7 or Chapter 11, Lynn M. LoPucki, a professor at the UCLA School of Law and the founder of the UCLA-LoPucki Bankruptcy Database, warns shareholders to keep their expectations low.

"If a shareholder sees a company they own shares in has filed Chapter 7, it is near certain they’ll receive nothing," he said. "If they see a company has filed Chapter 11, it's highly probable they will receive nothing."

Chapter 11 Reorganization and Investor Compensation

When a Chapter 11 filing doesn't result in a Section 363 sale, however, it may provide a small glimmer of hope for investors seeking to recoup at least some of their money. That's because reorganization plans sometimes include provisions for shareholder relief.

To reorganize under Chapter 11, a company must negotiate a reorganization plan with a government-appointed committee of company stakeholders, which is typically made up of creditors and can also include company stockholders. The plan will stipulate how much of the company’s debt it will pay off, how much it will discharge, and it may also offer shareholders some sort of compensation for their shares.

The plan is typically put to a vote, but even if creditors or stockholders reject the plan, the court may still determine that the plan is fair and should be implemented. (For more information on how reorganization plans are structured, see the SEC's Corporate Bankruptcy page.)

In a small number of cases, shareholders may receive substantial compensation — such as cash or shares in the new company — if the company that filed for Chapter 11 protection was in relatively good health and chose to pursue bankruptcy protection for strategic reasons. Reorganizing under Chapter 11, for instance, can help a company to reduce payments owed for damage claims.

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