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If you are a shareholder of a public company and the company goes bankrupt, what would happen to your share?

  • Does the share still represent your holding in the company? And if the company goes out of business, are you held accountable for the debt that company needs to pay?

  • If the share does not go to zero, is there a chance that share value will return to original price after bankruptcy?

  • 13
    What country are you asking about? Bankruptcy laws and codes vary. – Chris W. Rea Jan 14 at 22:11
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    Also, what sort of company. The whole point of a "Limited Liability" company is to eliminate the responsibility of share owners for company debt. – MSalters Jan 15 at 10:43
  • @MSalters: Rather than “eliminate”, I think you meant to say “limit” (usually to unpaid share capital, but publicly held shares are usually fully paid)? </pedant> – eggyal Jan 15 at 20:59
  • 2
    Before the days of limited liability companies, the shareholders were responsible for a bankrupt company's debts. Responsibility was not by share but by ability to pay. If you had saleable assets and your fellow shareholders did not, you were responsible for the entire debt. A plot feature of some historic novels is a character losing everything because they held shares in a bankrupt company. – Tony Dallimore Jan 16 at 12:18
  • @TonyDallimore - very interesting historical context - can you name such a novel so I can take a look? – davidbak Jan 16 at 17:01
28

Under U.S. Bankruptcy Code Chapter 11, the company attempts to reorganize its business and try to become profitable again. Management continues to run the day-to-day business operations but all significant business decisions must be approved by a bankruptcy court.

Under U.S. Bankruptcy Code Chapter 7, the company stops all operations and goes completely out of business. A trustee is appointed to liquidate all assets and the money is used to pay off the debt. Secured creditors are paid first. Owners are last in line to be repaid. Bankruptcy laws determine the order of payment.

As a shareholder, you have no responsibility for company debt.

If the company reorganizes, there's always a chance that share price recovers but that's a long odds bet.

  • 2
    @logger and usually chapter 11. Usually, a company's existing shares do not reemerge from bankruptcy. – quid Jan 14 at 19:09
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    Another common result of bankruptcy is that the company is acquired by another company. Your shares will usually be converted to shares of the new owner. – Barmar Jan 14 at 23:02
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    @Barmar, an answer expanding on the implications of that would be really nice. – Wildcard Jan 14 at 23:41
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    @Istanari In "BKRP.NWA," does "NWA" mean "Not Worth Anything?" – heropup Jan 15 at 4:38
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    Great answer, only suggestion is to clarify that the "Owners` in Owners are last in line to be repaid are the shareholders. Seems obvious but not everyone understands what stock is exactly. – briantist Jan 15 at 21:19
10

You are not liable for the company's additional debts. That is the entire point, the reason the "corporation" was invented. You can't lose more than you willingly invested.

The share is a share of the company's net worth (assets minus liabilities, and its net earnings over time). In a bankruptcy situation, it is expected that the net worth is less than zero. Only a turn of luck would cause otherwise.

As far as paying the company's debts, in bankruptcy a shareholder is considered as a sort of creditor, but one with much lower priority. Everyone else with secured or unsecured debt or obligations gets paid first. There is unlikely to be any left over when it becomes your turn, unless their math was really wrong when they filed bankruptcy, or there was an unexpected turn of fate, e.g. The Only Tiny-Car Company, Inc. suddenly saw gas prices leap to $9/gallon.

  • 9
    It's the reason the limited liability corporation was invented. There are other types, but they're not as popular, for obvious reasons. – Rupert Morrish Jan 15 at 2:54
  • The corporation is a creditor. I don't think the shareholder is considered a creditor. – Acccumulation Jan 15 at 16:43
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    @RupertMorrish I can't say "limited liability corporation" anywhere near a US reader, because America has a thing called a "limited liability company", or LLC, which is a completely different thing altogether (though connected). I can't have the reader thinking what I say applies only to LLCs. – Harper Jan 15 at 18:29
  • @Acccumulation good point. – Harper Jan 15 at 18:36
8

Bob Baerker outlined the two major forms of bankruptcy in the US.

In addition, when a company reorganizes under Chapter 11, a common strategy is to look for another company to acquire the assets of the business. Sometimes this company will acquire the bankrupt company as a whole -- it will typically become a division of the new parent company.

As far as the shareholders are concerned, this is similar to any other merger or acquisition, except the bankruptcy court mediates it, rather than allowing shareholders to vote on it. If the new parent company is a public company, the shareholders of the original company will have their shares converted to the new company; the conversion rate will be pro-rated based on the estimated fair market value of the two companies (I assume this is done by the bankruptcy court). If it's not public, the new parent company will purchase their shares from them (again, I presume the bankruptcy court sets the price).

Sometimes the new company doesn't acquire the business as a whole, but instead the company is broken up and some divisions are sold, while the original company continues to operate with the remaining divisions. When the remaining compoany emerges from bankruptcy, the shareholders will see the value of their shares drop based on the estimated value of the remaining business, and they'll receive either cash or shares of the new parent(s) for the divisions that are sold off.

I've worked for companies that have gone through both types of bankruptcies, although the one that was split up was a startup that hadn't yet gone public. In that case, some of my compensation was in incentive stock options, but they became worthless since we never went public.

Often the selloff strategy is attempted as a way to forestall bankruptcy. The reason the company is struggling is because it's trying to do too many things at once; selling some divisions to a company that it fits into better can allow the remaining company to be more manageable, and avoid having to declare bankruptcy. Once you declare bankruptcy, many decisions are forced upon the company by the court.

5

Answering for the situation in Germany.

Does the share still represent your holding in the company?

Yes.

And if the company goes out of business, are you held accountable for the debt that company needs to pay?

That depends on the legal form/type of the business and its constituting contract/statutes.

  • Aktiengesellschaft (AG, ≈ public limited company) and Gesellschaft mit beschränkter Haftung (GmbH, ≈ private limited company; beschränkte Haftung = limited liability) by default limit the liability of the shareholders to the value of their share.
  • However, the corporation's contract and the shareholders' meeting can decide a so-called Nachschusspflicht (reserve liability? not sure about English term - please help!) which means that shareholders have to pay additional money into the corporation. In some cases, this is offset by givng the shareholder the right to abandon their share.
  • In contrast, a cooperative by default has unlimited liability of its members - unless the cooperative's contract limits their liability (typically to their deposit).
1

Does the share still represent your holding in the company?

Yes.

And if the company goes out of business, are you held accountable for the debt that company needs to pay?

No. Limited Liability corporations are set up so that you are limited to the amount you have invested in stock. Investors in unlimited liability companies (such as "Names" at Lloyds of London - but they stopped signing up new "Names" in 1994) could have all of their personal wealth at risk.

If the share does not go to zero, is there a chance that share value will return to original price after bankruptcy

In the past, this could happen with Chapter 11 bankruptcy. Nowadays, what happens is that a new company is created with a similar name to the old one. The "bad debts" are retained in the old company (which you have shares in), while the good assets and good liabilities are transferred to a new company. In those days, when a company got "bailed out", the stock would recover in price (the bailout of Chrysler in the 1980s would be an example of this).

As an example, I used to work for General Motors Corporation and had shares of GM stock. When they went into bankruptcy, the existing GM stock was renamed MOTQQ (with some reverse splits, now called MTLQU) in 2009. The "old GM" was renamed "Motors Liquidation Corp" and got stuck with all the liabilities that they wanted to get rid of. The "new GM" was called "NGMCO, Inc" and later renamed to "General Motors Company." Most of the stock of the "New GM" went to the US Treasury Department.

1

In Australia we have voluntary administrators (that the board appoints), receivers (that banks etc appoint), and liquidators when it's been determined that it can't be sold or rescued.

Subject to negotiations between the above and creditors (but not shareholders) if there is any money left after creditors have been paid in full then the shareholders get it. It almost never happens.

What sometimes happens is a major shareholder buys the business at a bargain price from Admin/Receivers disenfranchising all minor shareholders, which was their plan.

Lachlan Murdoch et al put Channel 10 into administration expecting to buy it back at a cheap price and breaking it's expensive contract with CBS. CBS was the major creditor and bought the business.


EDIT

I forgot as I wrote this that I am also a victim of this.

Allco Finance went bankrupt during the GFC. The directors owned sub prime worthless US real estate. Allco leased planes, ships, locomotives, and wagons to major airlines, shipping companies, and rail freight companies.

The directors sold their worthless US assets to the company. You need independent reports etc to do this.

The advisors were all sued for bad advice in a class action and had to pay 1/3 of the shareholders losses.

0

In a company re-organization the company stock is usually wiped-out.

Then the senior debt holders, in addition to current business creditors, likely or often become the new stockholders.

And so as a company gets into trouble, the senior debt holders can short the stock while holding the debt. The gain on the short stock can be much larger than the loss on the senior debt because the senior debt does have significant value in a the re-organization.

  • 2
    This doesn't really address the question. Any potential trades for the debtors also carry their own risks for the debtors, and don't directly affect what happens to OPs shares. – SafeFastExpressive Jan 15 at 0:36
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    There's nothing about owning senior debt that gives the owner of that debt any opportunity to short the stock that everyone else doesn't have. In fact, if being a senior creditor somehow gives them knowledge of the company's trouble earlier than the public gets it, then it would almost universally be insider trading (a criminal offense) to short the stock based on that knowledge. – Henning Makholm Jan 15 at 3:01
  • The bankruptcy court, in a substantial re-organization, has a legal obligation to settle with the senior debt holders and that is a major factor on the value of the company left to the stockholders. The senior debt holders are just additionally inclined to short the stock because the bonds are less liquid but have a value if held into a re-organization. – S Spring Jan 15 at 3:20
  • Again, whatever is advantageous for senior debt holders is immaterial to the actual question of what happens to public shareholders. – SafeFastExpressive Jan 15 at 19:05

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