DEFINITION of Official Committee Of Equity Security Holders
An official committee of equity security holders is a group of shareholders that is formed to represent all the other shareholders during bankruptcy proceedings in the United States, and give them a voice in the reorganization process.
BREAKING DOWN Official Committee Of Equity Security Holders
During Chapter 7 and Chapter 11 bankruptcy proceedings, shareholders have to ask the office of the United States Trustee (UST) to appoint an official committee of equity security holders, in addition to an official committee of creditors. If the UST declines, shareholders can ask the court to appoint an equity committee, if they can persuade the judge that the debtors are not “hopelessly insolvent," and that the enterprise value of the firm is large enough for shareholders to receive some of the proceeds.
Shares in bankrupt companies that cannot pay their debts, are usually worthless – as shareholders are last in line to recover any proceeds, after secured lenders, unsecured creditors, bondholders and preferred stock shareholders. But sometimes shareholders can make the case that they can turn around the company, or should recover something. For example, in 2016, a rebound in oil prices led to a wave of requests from desperate retail shareholders seeking the appointment of equity committees in bankrupt energy companies. SunEdison's shareholders failed to persuade the court to appoint an equity committee, and ultimately received nothing.
The Cost of An Official Committee of Equity Shareholders
An official committee of equity security holders is typically made up of several of the largest shareholders, who stand to have the most to gain or lose during the bankruptcy proceedings, and can, therefore, be expected to represent the interest of all the shareholders — though the court may appoint additional committees to represent small shareholders. If an equity committee is appointed, the debtors’ estate pays for its fees and expenses, instead of the shareholders having to fund their own quest for recovery. However, the risk for shareholders is that an equity committee ends up costing so much that they get less than they would have if it had not been appointed in the first place.