Reorganization

AAA

DEFINITION of 'Reorganization'

1. A process designed to revive a financially troubled or bankrupt firm. A reorganization involves the restatement of assets and liabilities, as well as holding talks with creditors in order to make arrangements for maintaining repayments. Reorganization is an attempt to extend the life of a company facing bankruptcy through special arrangements and restructuring in order to minimize the possibility of past situations reoccurring.

2. A change in the structure or ownership of a company through a merger or consolidation, acquisition, transfer, recapitalization or change in identity.

INVESTOPEDIA EXPLAINS 'Reorganization'

1. The first type of reorganization is typically bad news for shareholders, who are likely to lose everything. If the company emerges successfully from the reorganization, it may issue new shares, which will wipe out the previous shareholders. If the reorganization is unsuccessful, the company will liquidate and sell off any remaining assets. Shareholders will be last in line to receive any proceeds, and will usually receive nothing unless money is left over after paying creditors, senior lenders, bondholders and preferred shareholders.

U.S. bankruptcy law gives public companies an option for reorganizing rather than liquidating. Through chapter 11 bankruptcy, firms can renegotiate their debt with their creditors to try to get better terms. The business continues operating and works toward repaying its debts. It is considered a drastic step and the process is complex and expensive. Firms that have no hope of reorganization must go through chapter 7 bankruptcy, also called “liquidation bankruptcy.”

2. The second type of reorganization is more likely to be good news for shareholders in that it is expected to improve the company’s performance. To be successful, the reorganization must improve a company’s decision-making capabilities and execution. This type of reorganization can take place after a company gets a new CEO.

In some cases, the second type of reorganization is a precursor to the first type. If the company’s attempt at reorganizing through something like a merger is unsuccessful, it might next try to reorganize through chapter 11 bankruptcy.

RELATED TERMS
  1. Bifurcation

    The splitting of a larger whole or main body into two smaller ...
  2. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
  3. Discharge In Bankruptcy

    A permanent order that releases the debtor from personal liability ...
  4. Write-Down

    Reducing the book value of an asset because it is overvalued ...
  5. Restructuring

    A significant modification made to the debt, operations or structure ...
  6. Prepackaged Bankruptcy

    A plan for financial reorganization that a company prepares in ...
RELATED FAQS
  1. 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 Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    How To Profit From Debt Securities In Failing Companies

    Learn about the vulture funds that prey on the market's weakest companies by investing in distressed debt.
  2. Bonds & Fixed Income

    An Overview Of Corporate Bankruptcy

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

    Municipalities Free Up Cash With Chapter 9

    Find out what happens to municipalities when they need money, but have no other option than bankruptcy.
  4. Bonds & Fixed Income

    Taking Advantage Of Corporate Decline

    A bankrupt company can provide great opportunities for savvy investors.
  5. Stock Analysis

    Will American Airlines Fall Back To Earth In 2015?

    The airline industry enjoys blockbuster profits, and American Airlines Group has been a key beneficiary of the favorable trends that have lifted stocks.
  6. Investing

    What is Equity Financing?

    Companies that are short on cash may need financing to pay for short-term needs or long-term capital expenditures.
  7. Stock Analysis

    What’s The Best Airline Stock In the Industry?

    With many airlines forced to seek bankruptcy protection, Southwest Airlines stands out as having consistently remained profitable throughout its history.
  8. Investing

    What's a Sunk Cost?

    A sunk cost was incurred in the past, is independent of future events and cannot be recouped. Economists teach that sunk costs should not be considered when making a financial decision. Rather, ...
  9. Investing

    What's a Divestiture?

    Divestiture is when a company, government or other organization sells, shuts down or otherwise eliminates a division or operating unit. Divestitures happen for many reasons. Management may decide ...
  10. Fundamental Analysis

    Capital Budgeting

    Capital budgeting is a planning process used by companies to evaluate which large projects to invest in, and how to finance them. It is sometimes called “investment appraisal.”

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center