PREFERRED STOCK VALUATION IN RECAPITALIZATIONS

Abstract

CHAPTER X AND SECTION 77 of the Bankruptcy Act now provide the machinery through the use of which an insolvent corporation may be reorganized by legal mandate. After the petition to reorganize, filed in a federal court of bankruptcy by creditors or by the corporation itself, has been approved, the court appoints a disinterested trustee whose primary function is to formulate and present to the court a plan for reorganization of the insolvent company. To the appropriate Commission (S.E.C. or I.C.C.) has been relegated the responsibility of advising the court (in cases involving substantial creditors' claims) as to whether or not the trustee's plan is fair and equitable to the parties concerned. Thus, for situations of insolvency or impending insolvency, clearcut principles of valuation and procedures for determining values in terms of these principles have evolved. Over the years, including the earlier period of equity receivership, the principles of valuation to be applied with respect both to the over-all value of the corporation and to the value of the various claims against the corporation have been established by court decisions. Valuation of the going concern on the basis of capitalized expectable earnings and distribution of this over-all value, until exhausted, to existing securities in order of their priority and to the full amount of their liquidation preferences are the two basic principles applied by the regulatory commission and the courts to reorganization plans proposed by a disinterested trustee and the parties at interest. These are the principles which apply in the valuation of the preferred stocks, as well as the bonds, of corporations being reorganized under the Bankruptcy Act.