The fate of a liquidating company’s shares depends on the type of liquidation the company is undergoing. The most common type of liquidation is bankruptcy, of which there are two types.
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy proceeding, the company stops all business and operations while a trustee is appointed to liquidate the company’s assets and pay off creditors and investors. In a Chapter 7 bankruptcy, there are usually very few assets left to pay shareholders, and the stock is generally worthless. The company is going out of business, and a trustee is appointed to wind down its affairs and sell off any assets. The assets are used to pay administrative expenses first, followed by the claims of secured creditors. The trustee then distributes any remaining assets according to a hierarchy of interest holders. Bondholders and preferred shareholders are paid first if there are any remaining assets. Common shareholders are last in line. As a practical matter, common shareholders do not typically receive anything.
Chapter 11 Bankruptcy
In a Chapter 11 bankruptcy proceeding, the shares of a company may continue trading during the reorganization process, although likely at a much lower value. During a Chapter 11 bankruptcy, the company continues its daily operations, but all significant business decisions are made by the bankruptcy trustee. The stock continues to trade during that time. However, the stock is usually de-listed from the major exchanges since the company no longer meets the listing requirements. This usually has a significant impact on the stock’s price and liquidity. The stock may continue to trade over the counter or on the pink sheets as there is no federal law that prohibits trading. Still, no dividends are paid by the company while it is in the bankruptcy process. Studies show the shares of companies that undergo Chapter 11 reorganization have a track record of performing poorly subsequent to the reorganization.