14.2.3. Interests
If there is money left over after all claims, including general unsecured claims, are paid off, the debtor’s equity holders are paid. Even among these residual interests, there is an order of priority. Preferred shareholders have a higher priority than common shareholders. Preferred shareholders are paid up to the amount of the par value of their shares. In the unlikely event that money remains after everyone else has been paid in full, it goes to the common stockholders.
Preferred shares’ priority over common shares is a result of the terms offered by the company when it initially sells the shares. Additionally, one class of preferred shares might have liquidation preference over another class of preferred shares. As mentioned in Appendix A, preferred stock with the highest priority when it comes to both liquidation preference and paying dividends is called “prior preferred,” and preferred stock with the second-highest priority is called “preference preferred.”
Holders of unexercised warrants are not due anything in bankruptcy. If the warrants were issued as a sweetener for a bond offering, as described in Appendix A, then of course there is a claim associated with holding the bonds. But there is no claim or interest associated with holding a warrant itself. A warrant is not equity, but merely the right to acquire equity at a certain price—a price that is virtually certain to be too high if the company is anywhere near declaring bankruptcy.
Warrants do sometimes play a role in Chapter 11 bankruptcy, but as a form of compensation for creditors. Creditors are sometimes willing to accept warrants, even though the warrants’ value is contingent on the company getting back on its feet.
Example: The Whale Oil Lamp Company (WOLC), unable to adapt to marketplace changes and evolving consumer tastes, files Chapter 7 bankruptcy. It has $3 million in assets. Legal and administrative expenses for the bankruptcy total $100,0