Shareholders of a company never want to hear the word bankruptcy because the shares of a company will lose most or all their value. The exchange may delist them during bankruptcy. Investors can still trade securities during bankruptcy in Texas; there’s no law to stop an investor from trading stocks of a bankrupt company, but the move is risky.
Chapter 7 vs. Chapter 11
Most companies file for either Chapter 7 or Chapter 11 bankruptcy protection. There are differences between Chapter 7 and Chapter 11 bankruptcy options. A Chapter 7 filing means that the company stops operating while a court-appointed trustee puts its assets up for sale. The proceeds of the sale go to the company’s debtors by seniority.
A Chapter 11 filing means that the company may still operate but undergoes reorganization. A sale may still happen under Chapter 11. Section 363 allows the sale of the entire company with the court’s approval. There’s usually not enough cash after the sale to compensate company shareholders.
Chapter 11 reorganization
Chapter 7 and Chapter 11 are typically rough on the shareholders, but a Chapter 11 bankruptcy without a Section 363 sale may offer some hope to the company investors. The reorganization plans may include provisions for shareholder relief to recoup some of their money. A company must negotiate a reorganization with a government-appointed committee of stakeholders, which are creditors and stockholders.
The plan decides how much debt to pay off and may offer shareholder compensation. The creditors and shareholders may vote no, but a court can still approve a fair plan. It’s rare for shareholders to see large compensation from bankrupt companies. Most shareholders see little to no compensation after bankruptcy.
Companies that file for Chapter 11 bankruptcy protection may lose their exchange listing, so investors shouldn’t hope that their stocks regain value after a bankruptcy. Many reorganization plans give value to new stocks and cancel the existing securities.