Bankruptcy 101

[Justme]

Would someone help me clear up some questions?

1. RSA's equity investment was 240 mil, correct? If U enters BK does the stock (all classes) necessarily get canned like it did the last time? Do they have a special class of stock that wouldn't be cancelled?

2. If all of the stock does gets canned, then who in the heck owns the company between that action and the awarding of other stock? Does RSA maintain any ownership? Do they continue holding their board seats?

3. If the company is liquidated aren't they left with a total loss since there is no way that U's assest would even come close to paying off secured and unsecured creditors?

thanks for you help in understanding this,
jm

 

[jimntx]

1. It is not automatic, but it is usual, that any existing stock goes down the tubes in BK. There have been BKs where the stock is "reformulated"--i.e., 1 share of "new" stock for every 5 shares of "old" stock. However, most BK filers want to hose the existing stock because the new money people want a substantial equity stake in return for their investment. The only way to do that other than all new stock is to issue new shares of the old stock which just dilutes the hosed value even further.

2. The assets are "held in trust" by the BK court until the new stock is issued. Makeup of the Board of Directors and ownership of stock are not necessarily related. It is usual that ownership of large blocks of stock--such as, RSA's ownership of 37% of the common stock--results in the owner gaining a seat on the Board, but it is not automatic. In some cases, Board members are selected for their "community prominence"--i.e., college presidents and the like--and may not own any stock at all. Years ago, Joan Crawford was appointed to the BOD of Pepsi because she was a famous star and the widow of Pepsi's dearly departed CEO, not because of her business acumen.

3. More than likely. The basic reason that companies go into BK is that the company debts exceed the company assets--that's over-simplified, but for the purpose of the discussion, let it go. In Ch. 7 (liquidation) the assets are sold and the proceeds are distributed to the creditors in a predetermined order--secured before unsecured, etc--using a predetermined formula. The order and the formula are either determined by the creditors committee or by the court if the committee can not agree. It can be as simple as
a. Company has $100 million in debts.
b. Asset sale garners $50 milllion.
c. Each creditor gets 50 cents for every dollar owed to them.

In reality it usually results in secured creditors--those who had liens on the tangible assets (mortgages on office buildings, liens on a/c, etc)--get paid as near to IN FULL as possible. Unsecured creditors, such as employees and stockholders, get nothing, nada, zilch, zippo. In Ch. 7, there is no law which says some amount has to be set aside for employee wages or benefits, such as vacation pay.

If the BK is a Ch. 11, none of the above applies because it can vary from one reorganization to the next. It depends upon what the creditors committee, the court and the company can agree to.