Lesson 8 of 8
The new company's share count
Fresh-start reporting makes a reorganised company a new entity. Find the new share count first: every per-share figure before it is someone else's.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Fresh-start reporting makes a reorganised company a new entity for financial reporting, so its accounts before and after the effective date are not comparable.
- Two conditions decide whether it applies, and both are stated in the filing in one sentence.
- The first number to find is the new share count, because every per-share figure, chart and ten-year table built across the date is wrong.
A company that emerges from Chapter 11 looks like a continuation and is not one. The accounting says so explicitly, and the trap is every historical per-share series that does not.
Read a reorganised company's accounts
- Find the effective date. Everything splits on it. Chesapeake's was 9 February 2021, which divides its 2021 reporting into a 40-day Predecessor period and a 325-day Successor period.
- Check whether fresh start applied. Two conditions, both in one sentence of the filing: the holders of the existing voting shares received less than 50 percent of the voting shares after emergence, and the reorganisation value of the assets, about 6.8 billion dollars, was less than the post-petition liabilities and allowed claims of 13.2 billion.
- Read what that did to the balance sheet. The reorganisation value is allocated across the individual assets at fair value, so carrying amounts, depreciation and every ratio built on them reset on one day.
- Find the new share count. 97,097,081 shares of new common stock were issued. The old common and preferred were cancelled.
- Find the claims on those shares. Warrants for 11,111,111, 12,345,679 and 9,768,527 shares at 27.63, 32.13 and 36.18 dollars, exercisable immediately and expiring on 9 February 2026.
- Throw away the history. Any ten-year table, any earnings per share series and any price chart that crosses the effective date is comparing two different companies.
Claims on the new equity at the effective date
- New common stock issued97,097,081 shares
- Class A warrants, at 27.6311,111,111 shares
- Class B warrants, at 32.1312,345,679 shares
- Class C warrants, at 36.189,768,527 shares
Why the share count comes first
Because the denominator changed and nothing on a screen tells you.
A reorganisation typically cancels the old shares entirely and issues new ones to creditors. The new count bears no relation to the old, so earnings per share, book value per share, dividends per share and every price ratio built on them break across the date. So does the market capitalisation history.
The warrants matter for the same reason. Here they could add 33.2 million shares to a 97.1 million share base, a third again, at prices stated in the filing. A per-share figure that ignores them is understating the claims on the business.
How this product handles the same problem
ValueScreener holds back per-share figures when today's share count, implied by the market value over the price, differs from the last annual report's diluted count by more than half. Those rows read as held back rather than showing a number computed across two different share bases.
The rule exists for splits and large issuances, and a reorganisation is the most extreme case of it: one company filed a count 117 times larger than its previous annual report's, which without the guard would have made it read as a net-net.
What is worth knowing beyond the accounting
Three things a filing will tell you about a newly reorganised company.
Who owns it. The creditors who received the equity are frequently funds that never intended to hold shares, and their selling is a known feature of the first year.
What the balance sheet now looks like. Fresh start restates assets at fair value and the plan removed debt, so the leverage that caused the filing is usually gone.
What the plan did not fix. The business that produced the loss is generally the same business. The capital structure was rewritten; the economics were not.
Check yourself
What are the two conditions for fresh-start reporting?
- A plan is confirmed and creditors vote in favour
- Existing shareholders receive less than half the post-emergence voting shares, and the reorganisation value is below the post-petition liabilities and allowed claims
- The company is insolvent and files under Chapter 11
Show the answer
Answer: B.
Both must hold, and the filing states them in one sentence with the two figures attached.Why is the new share count the first thing to find?
- It determines the size of the company
- Because the old shares were cancelled, so every per-share figure crossing the effective date compares two different denominators
- It is needed to compute the debt to equity ratio
Show the answer
Answer: B.
Earnings per share, book value per share and every price ratio break on that date, and most data series stitch across it without saying so.What did fresh start do to the balance sheet?
- Nothing, it is a disclosure requirement
- Allocated the reorganisation value across individual assets at fair value, resetting carrying amounts and every ratio built on them
- Wrote all assets down to zero
Show the answer
Answer: B.
It creates a new reporting entity. Depreciation, asset turnover and return on assets all restart from the new carrying amounts.Sources
- Chesapeake Energy Corporation, Form 10-K, fiscal year ended 31 December 2021, filed 2022-02-24, accession 0000895126-22-000029: the fresh-start conditions, the reorganisation value against allowed claims, the share and warrant counts and the Predecessor and Successor periods.
- ASC 852, Reorganizations: the accounting the filing applies and names.
- ASC 820 and ASC 805: the fair value and business combination guidance the reorganisation value is allocated under.
What this leaves out
- One case. Fresh start does not apply to every emergence, and where it does not, the accounts do continue across the date.
- The warrant counts above are as issued on the effective date. Exercises, expiries and later issuance change the claims on the equity.
- A reorganised company's first annual report covers two stub periods, and no annual growth rate can be computed across them.
- Nothing here is advice about any security.