Question

What is the motivation for a company to legally reorganize? What parties are the “losers” of a reorganization? What parties are the “winners”?

Answer 1

Reorganization is needed to stabilize a company that is facing bankruptcy. It involves discussions with creditors about repayment so that the recurrence of the financial debts is minimized. One of the aims of reorganization is to repay creditors as much of the debt amount as possible, and restructure the company’s management, operations, and finances keeping in mind that the same problem (of bankruptcy) does not reoccur.

• Reorganization can also refer to the sale or merger of a company that involves a change in ownership, legal and management level changes, as well as a change in stocks.
• Reorganization makes sure that new opportunities are opened up, there is a rise in profits, and updated legal and financial protections are given to companies during trying times
• It is a court-supervised formal process that restructures a company’s finances after it faces bankruptcy. During the period when a company files for bankruptcy and the court reviews it, the company is saved from the creditors. Reorganization can also occur to take advantage of any changed tax regulations. This brings about legal as well as corporate structural changes to the firm involved.

Motivation for a company to reorganize

Restructuring/Reorganizing is a necessary process our businesses will need to go through from time to time, in order to react and accommodate changes in our market place. Company's reorganization typically badly impacts the shareholders and creditors, who may lose a significant part or all of their investment. Here are some reasons which results into reorganization.

1. Lower gross margin
2. Poor internal communication
3. Higher cost of operating
4. Bad cash flow
5. Lack of proper designs of processes
6. High labor costs
7. New trends in the consumer/client sector
8. Implementing strategies that redefine the market
9. Due to the competitor’s actions, the share market of the company decreases

Losers or winners

It depends on the method of reorganization and reasons resulting restructuring. A party can be loser and winner also at the same time. For example, employee lay off as a part of restructuring can be crucial for some employees who lost their jobs simultaneously, results into benefiting certain employees as there role and responsibilities got increased.

• Employees get affected if the company decides to dismiss some of it employees as a result of reorganization.
• Shareholders and creditors, who may lose a significant part or all of their investment.
  • If the company emerges successfully from the reorganization, it may issue new shares, which will wipe out the previous shareholders.
  • If the reorganization is unsuccessful, the company will liquidate and sell off any remaining assets.
  • Shareholders will be last in line to receive any proceeds and will usually receive nothing unless money is left over after paying creditors, senior lenders, bondholders and preferred stock shareholders.
• The benefits of reorganization can be cost savings to the business, the streamlining of its management, the opening of lines of communication and the ability to put the business on a path toward long-term sustainability.