You could own stock or shares in a business for a number of different reasons. Maybe you know the people who started the company, so you invested as a way to support their enterprise. Perhaps you worked for a company that issued shares to employees as a benefit of employment or as a performance bonus.
You may have simply purchased the stock because you believed in the company’s business model and hoped to profit off of their success. Regardless of how you came to own shares of stock in a company, you may find yourself wondering what rights you have if the business has begun to struggle or has announced a plan to file for bankruptcy.
Common shareholders have the lowest priority for repayment
Whether the business has chosen to restructure or is in the process of liquidating assets, any revenue generated by the sale of business assets will typically go to help repay creditors. However, secured creditors, such as the company holding the mortgage on the business’s real estate and other priority debts will be the first to receive repayment.
After that, bondholders are second in line to receive some form of repayment from the liquidated assets. Common shareholders will be among the last group to receive a portion of the value of liquidated assets. In many business bankruptcies, there will not be enough assets to repay shareholders fully or even partially.
The potential financial risk involved in investing in a business is one reason why businesses incentivize those investors with a share of the profit. There is always a risk involved in holding a share in a company, and if the business fails, you could potentially lose that investment. However, if you believe fraud or other wrongful acts played a role in the company’s failure, you may be able to take legal action by filing a civil lawsuit.