It depends on the reorg plan's projections and the Judge's rules. In most BK's creditors take haircuts, but since the bonds are trading at their value as of now, we can ASSUME that they are either thinking they will get the company or new equity instruments and cancel the existing equity (which will most likely not happen once EC is formed) and therefore own the company. Some will take stock as part payment, leaving more wiggling room for equity.
Anything can happen in a New WAMU Year! Stay tuned.
The board of directors of a solvent corporation owes fiduciary duties to its shareholders. As a
fiduciary, directors have duties of loyalty, candour and care. However, under Credit Lyonnais
and subsequent case law, once a board of directors determines that the company may not be able
to pay its debts as they become due, directors cease being solely a fiduciary for the shareholders
and become a watchdog for all creditors and shareholders. At this moment, equity loses its
favoured position in the corporate hierarchy. Moreover, the concerns of shareholders can be
easily forgotten if the directors elect to file for protection under Chapter 11 of title 11 of the US
Code (the “Code”). The Code has built in protections for secured and unsecured creditors, and
these creditors are actively represented in a bankruptcy. Conversely, the appointment of an
official committee of equity holders remains less common in a Chapter 11 case. Consequently,
the advent of fi duciary duties owing to all creditors may leave equity in the precarious position
of not being zealously represented. Since in many bankruptcy cases the interests of shareholders
run contrary to those of creditors, inevitably there will be disagreements regarding valuations of
a company's assets and its chances of survival. The appointment of an equity committee certainly
changes the dynamics of these struggles.
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