Reorganization is 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 to make arrangements for maintaining repayments. Reorganization is an attempt to extend the life of a company facing bankruptcy through special arrangements and restructuring to minimize the possibility of past situations reoccurring. Generally, a reorganization marks the change in a company's tax structure.
Reorganization can also mean a change in the structure or ownership of a company through a merger or consolidation, spinoff acquisition, transfer, recapitalization, or change in identity or management structure. Such an endeavor is also known as "restructuring."
Breaking Down Reorganization
The first type of reorganization is supervised by the court and focuses on restructuring a company's finances after a bankruptcy. During this time, a company is protected from claims by creditors. Once the bankruptcy court approves a reorganization plan, the company will repay creditors to the best of its ability, as well as restructure its finances, operations, management and whatever else is deemed necessary to revive it.
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.”
Who Loses During Reorganization?
A reorganization is typically bad for shareholders and creditors, who may lose a significant part or all of their investment. 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 stock shareholders.
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.