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Chapter 11: Reorganization

Chapter 11 is a complex form of bankruptcy and is generally filed to restructure their capital allocation to operate more efficiently and effectively, primarily by eliminating debts and contracts (such as office leases or union contracts) that they can no longer afford. Chapter 11 involves the reorganization of a debtor business affairs, assets and liabilities. The bankruptcy gives the debtor a fresh start, subject to the debtor’s fulfillment of its obligations under its plan of reorganization (a company must file a Plan of Reorganization for the Bankruptcy Court’s approval demonstrating it will be viable after exiting bankruptcy). Chapter 11 bankruptcy can also be used to liquidate some of the assets of a private company and pay the creditors from the proceeds of the sale (these are referred to as “Section 363 sales transactions; PrivCo tags M&A transactions resulting from a bankruptcy order as a Section 363 sale).

Chapter 11 is available to companies (corporations, partnerships or sole proprietorships) that are plagued by severe financial distress. Permission for filing Chapter 11 bankruptcy is given, if debt repayments can be abated or postponed. The private company is protected by an automatic stay that is initiated upon approved filing of the petition. As a result, creditors cannot take any action against the debtor. The stay eases the financial burden of the debtor, during which negotiations can also take place to try to resolve the difficulties in the debtor’s financial situation.

After filing for bankruptcy, the debtor is relieved of payments for 120 days, during which, the debtor must formulate and file a plan of reorganization with the court of bankruptcy. If the debtor fails to submit a plan during the 120-day period, or if creditors fail to adhere to the debtor’s plan during the first 180 days, creditors can submit a plan of reorganization.

Compromises are often made in the process. Creditors of the companies such as banks and lenders may take the stock of the private company upon exit from Chapter 11 and essentially become the new owners of the company. In some cases the private company and its creditors agree in advance on what the outcome will be and will file what is referred to informally as a “prepackaged bankruptcy”, which also will tend to be completed much faster than an ordinary bankruptcy since the private company and its creditors agree in advance and don’t need to “duke it out” in court.

Example: Private company Merisant Worlwide, Inc. and its affiliates filed for Chapter 11 to restructure its balance sheet and improve its long-term growth and financial well-being. The company’s operations in the US and worldwide proceeded without interruption after the bankruptcy filing. Merisant that restructuring its balance sheet was the ideal way to increase the success of its products in the market.

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Change of Control Without a TransactionChapter 12: Reorganization
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