Legal Question in Investment Law in California

Re: What happens to my investments ?

Without commenting on investments in any particular company or industry, I can give you the following general information about the impact of bankruptcy on holders of common stock.

First, the price of any stock is influenced -- some would say determined -- by the collective opinion(s) of its holders and prospective holders as to the company's prospects. Therefore, if the matters leading to bankruptcy are a closely-kept secret, the bankruptcy filing comes as a big surprise to the holders and prospective buyers of the stock, and there is a sudden plunge in the stock price as holders try to bail out and would-be buyers change their minds.

On the other hand, if the company's financial woes are already widely known, the bankruptcy filing isn't much of a surprise, and the market reaction is relatively mild.

Ordinarily, bankruptcy isn't good for shareholders. As you note, the company no longer has to pay certain bills, but similarly it cannot pay dividends. Ultimately, the bankrupt company will be reorganized or liquidated. In a reorganization, we often see the secured and unsecured creditors getting newly-issued stock and for former stockholders either suffering "dilution" by the issuance of many new shares, or being forced to take lower-ranked shares.

In a liquidation (as distingished from a reorganization), the company ceases to exist, and its assets are sold to pay its bills. If anything is left over after all the bills are paid, it goes to the owners (shareholders). Usually, the shareholders get nothing or just cents on the dollar. In a few rare cases, companies turn out to be worth more in liquidation than they were as going concerns, and the shareholders profited mightily from the liquidation. This was the case with some railroad bankruptcies in the 1980s, where the lines had extensive landholdings that were sold for huge sums by the trustees in bankruptcy.

So, the value of stock in a bankrupt company is set by market forces. However, the market's view of fair value is influenced by what happens in the bankruptcy proceedings, including the actions of the trustee and the decisions of the court.