20

I was reading a newspaper article in the FT where a journalist wrote "shareholders wiped out in restructuring deal". As a novice I'm struggling to conceptualize what "wiped out" means, I tried searching Google but still couldn't really grasp it.

When someone says "shareholders wiped out" what do they actually mean?? And in this specific situation how can a restructuring deal cause a wipe out??

link to article: https://www.ft.com/content/ce42bcb7-d9ee-4667-910a-b6c7a419449b

Improve this question
2

5 Answers 5

Reset to default
33

It means that the company is effectively bankrupt, so its existing shares are now worthless. The restructuring will cancel those shares and create new ones that belong to the company’s debtors rather than the previous shareholders. It has happened because the company is unable to pay its debts, and in that situation the shareholders lose their investment and all available assets are used to pay off the creditors, in this case by giving them the new shares in the company.

Improve this answer
6
  • 1
    your first sentence is not really relevant. That's what triggers the restructuring, but that alone would not necessarily lead to wiping out existing equity.
    – littleadv
    May 22 at 17:07
  • 3
    @littleadv I don't see how shareholders can be "wiped out" unless the company is bankrupt. Not every bankruptcy makes all the shares worthless, as it depends on the type of bankruptcy, but many/most do
    – user253751
    May 22 at 19:16
  • @user253751 well yes, that's my point - bankruptcy triggers restructuring, but not every restructuring means shareholders are wiped out (although, in most cases they'd be)
    – littleadv
    May 22 at 19:38
  • 11
    It's possible for creditors to make a deal with shareholders so that they don't have to go through a formal bankruptcy which will save everyone money and will leave the shareholders with pennies on the dollar instead of nothing on the dollar. That being said, I don't view the first sentence as irrelevant. It seems quite concise given the question about a generic phrase. The word "effectively" should allay concerns about technicalities.
    – Dean MacGregor
    May 23 at 9:38
  • 2
    @user253751 Not relevant to the question at hand, but speaking generally it is possible for a VC-invested company with different share classes to be solvent but disappointing, and sold at a valuation that pays out nothing to (i.e. "wipes out") common shares.
    – GrandOpener
    May 23 at 18:07
13

If the assets of a corporation are valued at more than the debt, then the company can sell those assets to raise money to pay off the creditors and/or transfer the assets to the creditors to fulfill the debt. Whatever money is left over when debt is subtracted from the value of the assets is how much value the shareholders get to keep, either as shares in the corporation, or a payout. If the value of the assets is less than the debt, then the corporation defaults on the debt, and the creditors take ownership of the corporation (and take the difference between the debt and the value of the assets as a loss), and the previous shareholders are left with nothing.

Improve this answer
1
  • 2
    Great answer, when you say "transfer money to debtors" do you not mean creditors.
    – troy beckett
    May 23 at 10:45
7

“Shares” are fractions of ownership.

A company is worth something when it’s assets have more value than it’s debts. (This is known as having a positive net worth.)

When a company has a negative net worth and sales are too low to cover expenses, then the company must go bankrupt.

The most “severe” form of bankruptcy is liquidation, where all of the assets are sold to pay the debtors a fraction of what they are owed. The owners of the company (aka shareholders, since shares are a fraction of ownership) lose their ownership rights to the company.

Thus, they are “wiped out”. This can be a mild inconvenience, it can be a Big Deal, leading to divorce, unlife, or anything in between.

Improve this answer
8
  • The OP is asking about restructuring, which is a typical bankruptcy proceeding (In the US - Sec. 11 as opposed to the Sec. 7 liquidation you're talking about). Even in restructuring the shareholders can be wiped out.
    – littleadv
    May 23 at 4:34
  • @littleadv that’s why I mentioned that there is a “most severe” form of bankruptcy. But honestly, aren’t shareholders wiped out even during a restructuring? I seem to recall when GM was restructured a couple of decades ago; it’s existing shareholder value was wiped out.
    – RonJohn
    May 23 at 5:13
  • @littleadv it was 14 years ago, and all GM common stock shareholders lost all the value of their investment.
    – RonJohn
    May 23 at 5:22
  • 1
    I think it depends, not necessarily. In some cases restructuring just means extending deadlines or pausing payments, which then resume after a while - this happens in case of a cashflow crisis. The debtors may not necessarily want to become shareholders, so they renegotiate the terms of the deal under the bankruptcy protection without the payment deadlines looming over refinancing efforts (that may fail because who wants to give a new loan to someone who can't abide by the terms of the old one)
    – littleadv
    May 23 at 5:24
  • 1
    Yes, when talking about restructuring, it is usually handled under chapter 11 of the bankruptcy law (in the US). If that fails, it moves to chapter 7 which is liquidation. See the chapters here and a nice writeup here
    – littleadv
    May 23 at 7:44
6

It means that the shares in the company are now worthless, so the shareholders' investment in that company is a total loss. If your life savings were wholly invested in that company, then you really would be financially wiped out.

This can happen as a result of a restructuring because the company owed more money than it was worth. The company can continue to operate, but can end up being fully owned by the people it owed money to, or by a new group of investors, in which case the old stock is worthless.

This system actually protects stockholders. You can own stock in a company that could never pay off its debts, but the creditors can't come after you personally as part-owner and make you help pay. Your only financial risk is the money you put into the stocks.

Improve this answer
3

"Wiped out" is the final consequence of a particular sequence of steps:

  1. The creditors take out the company assets;

  2. This leaves the company with liabilities (taxes, fixed costs) and no assets;

  3. The company is bankrupt, it goes into liquidation and exists no more;

  4. Shareholders are paid last, but there is nothing to be paid to shareholders;

  5. The shareholders are wiped out of their investment/capital/whatever.

You may be confused with 'restructuring deal" meaning the original company may continue. No. This is a general term meaning any change in company structure, voluntary or not, terminal or not.

Some restructuring processes may leave the company assets intact, others may create various separated companies, some will wipe out the original shareholders.

Improve this answer

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .