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Effects of Chapter 11 bankruptcy on shareholders’ equity in Idaho

On Behalf of | Dec 16, 2022 | BANKRUPTCY LAW - Business & Commercial Bankruptcy, BANKRUPTCY LAW - Chapter 11

Filing for Chapter 11 bankruptcy in Idaho can save your company from certain financial distress. It is a restructuring process that allows the business to keep operating while it reorganizes its debt and reaches agreements with creditors. However, this process can have a major effect on shareholders’ equity.

How Chapter 11 affects shareholders

The main effect of Chapter 11 bankruptcy on shareholders’ equity is that stockholders may see their holdings significantly devalued or wiped out entirely. This is because the reorganization of debt will often involve creditors receiving some portion of the company’s assets through liquidation, which reduces both the value and number of outstanding shares. Additionally, any new debt issued as part of the restructuring will require repayment, which also dilutes shareholder equity.

Existing shareholders may receive no benefit from any reorganization plan approved by the court and become minority stakeholders with limited voting rights in the restructured corporation. Although they do not lose all their investments in a Chapter 11 proceeding, they are likely to suffer significant losses.

Furthermore, according to Chapter 11 of the Bankruptcy Code, the court may maintain control over all business decisions until they have repaid all their debts. This means that shareholders may have little say in managing their investments during the bankruptcy process.

If you decide to move forward with a Chapter 11 filing, there are some steps you can take to protect your shareholders; for instance, take measures to reduce dilution of equity and ensure transparency for shareholders. You should also start exploring potential reorganization plans as soon as possible so that stakeholders can have ample time to review the plan prior to voting on it. Finally, try to negotiate with creditors in good faith and keep your stakeholders informed throughout the process. Doing so will help create an atmosphere of trust, which is essential when attempting to make a successful Chapter 11 restructuring.