A:

In declaring bankruptcy, a company is basically telling the market that it owes more money than it is worth. If the company undergoes an approved reorganization, previous shareholders are likely to be wiped out, because new shares are often issued once the company emerges. If it's an out and out bankruptcy, the company's existing assets are then sold off and the money is given to creditors before shareholders. In the vast majority of cases, there is little or nothing to pass on to shareholders.

Now, if another company wants to buy up a company after it has filed for bankruptcy, it could swap stock, giving shareholders in the bankrupt company a chance to make back their losses. Unfortunately, it makes far more sense for the acquiring company to simply bid on the specific assets that interest it, rather than acquiring a defunct company and its debts. This way, the acquiring company pays less for what it wants and the money paid will most likely go towards trying to satisfy creditors.

In the unlikely case of this happening, it is possible (but far from probable) that shareholders in a bankrupt company could end up with shares of the acquiring company. If it were a cash transaction for the whole or any part of the company, most (likely all) of the money would still go to creditors and senior lenders. In nearly all bankruptcy proceedings involving liquidation rather than a reorganization, existing shareholders see no return. (Learn more more about bankruptcy from a shareholders perspective in our article An Overview Of Corporate Bankruptcy.)

This question was answered by Andrew Beattie

RELATED FAQS
  1. What happens to the shares of a company that has been liquidated?

    Learn what happens to a company's shares during Chapter 11 and Chapter 7 bankruptcy proceedings, and understand how much ... Read Answer >>
  2. What happens to a company's stocks and bonds when it declares chapter 11 bankruptcy ...

    Filing for chapter 11 bankruptcy protection simply means that a company is on the verge of bankruptcy, but believes that ... Read Answer >>
  3. Does a shareholder lose all of their equity once a Chapter 11 bankruptcy is filed ...

    When a company files for Chapter 11 bankruptcy, the management of the company is still in charge of the daily operations. ... Read Answer >>
  4. What are the financial consequences of filing for bankruptcy?

    Learn about the various consequences, both positive and negative, that you can expect to result from your filing for bankruptcy. Read Answer >>
  5. How will bankruptcy affect my ability to get credit in the future?

    Learn how filing bankruptcy affects your ability to obtain credit in the future, and find out how long a bankruptcy stays ... Read Answer >>
Related Articles
  1. Small Business

    Taking Advantage Of Corporate Decline

    A bankrupt company can provide great opportunities for savvy investors.
  2. Financial Advisor

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  3. Taxes

    When To Declare Bankruptcy

    When is bankruptcy the best or only route– and when is it better to look at alternative solutions? And should you always hire a lawyer?
  4. Small Business

    Chapter 11 Bankruptcy: Is It Better To Be a Stockholder or Bondholder? (BTU)

    Discover why energy companies are struggling to stay solvent, while examining the basics of Chapter 11 bankruptcy and its effect on stock and bond holders.
  5. Taxes

    Bankruptcy

    Learn what happens when an individual or an organization files for bankruptcy.
  6. Financial Advisor

    Should You File For Bankruptcy?

    Find out how to determine whether this option will help or hurt your financial situation.
  7. Small Business

    Alternatives To Business Bankruptcy

    Bankruptcy isn't the only alternative for a struggling business. It can try negotiating with creditors or liquidating assets outside the U.S courts.
  8. Taxes

    How To Survive A Bankruptcy Filing

    Learn how to make filing for bankruptcy less painful so you can successfully rebuild your financial life.
  9. Taxes

    Changing The Face Of Bankruptcy

    A 2005 law attempts to unmask fraudulent debtors and still save those who are struggling. Will it affect you?
  10. Investing

    What is the Shareholder Equity Ratio?

    The shareholder equity ratio shows how much money shareholders will receive if a company has to liquidate its assets.
RELATED TERMS
  1. Prepackaged Bankruptcy

    A plan for financial reorganization that a company prepares in ...
  2. Reorganization

    A process designed to revive a financially troubled or bankrupt ...
  3. Technical Bankruptcy

    The state of a company or person who has defaulted on a financial ...
  4. Official Committee Of Equity Security Holders

    A small group of the largest shareholders in a company formed ...
  5. Crammed Down

    1. A situation in which venture capitalists refuse to invest ...
  6. Quick-Rinse Bankruptcy

    A bankruptcy proceeding that is structured to move through legal ...
Hot Definitions
  1. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that decreased and eventually eliminated tariffs to encourage economic activity ...
  2. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  3. Derivative

    A security with a price that is dependent upon or derived from one or more underlying assets.
  4. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  5. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  6. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
Trading Center