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. Discharge In Bankruptcy

    A permanent order that releases the debtor from personal liability ...
  2. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
  3. Write-Down

    Reducing the book value of an asset because it is overvalued ...
  4. Bifurcation

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

    A plan for financial reorganization that a company prepares in ...
  6. Restructuring

    A significant modification made to the debt, operations or structure ...
Related Articles
  1. Investing

    What happens to a company's stocks and ...

  2. Mutual Funds & ETFs

    How To Profit From Debt Securities In ...

  3. Bonds & Fixed Income

    An Overview Of Corporate Bankruptcy

  4. Options & Futures

    Municipalities Free Up Cash With Chapter ...

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  3. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  4. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  5. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center