Billdo:
The situation is really no different if a parent owns 100% of the shares of a subsidiary. The parent may elect to not have the subsidiary go into bankruptcy, but have the bankruptcy trustee (which in a chapter 11 is the company itself as “debtor-in-possession”) sell its 100% stock ownership of the subsidiary as a unified whole and use the proceeds to pay the parent’s creditors (or to reorganize under chapter 11). Alternatively, the trustee, as controlling parent of the subsidiary, could direct that the subsidiary sell its assets and after satisfying any liabilities of the subsidary, distribute the proceeds to the parent as a dividend, which will be used to pay the parent’s creditors.
Thank you. Now it makes sense. As far as the Cubs/Tribune Co go, the Cubs are not filing bankruptcy on their own behalf - in contrast to the bankruptcy filings of Phoenix Coyotes hockey team at present and of the Seattle Pilots baseball team 40 years ago - despite what the originally quoted news source said, rather, the Tribune Co is selling the Cubs under the aegis of the bankruptcy court and its trustee, with the proceeds ultimately going to the Tribune Co’s creditors (at a penny on the dollar, no doubt).
Billdo:
It’s an inherent part of the corporate parent/subsidiary structure if you think about in some detail. Each corporation, whether parent or subsidiary, is a self-contained business unit with limited liability, meaning that any debts of the corporation are not obligations of the corporation’s shareholders (with exceptions not relevant here). The way a parent owns a subsidiary is that it holds 100% of its stock. Because of this 100% ownership, the parent can elect a board of directors of the subsidiary and the directors elected by the parent can appoint officers, and the officers (there wholly at the behest of the parent) can run the business. This means that the parent controls the subsidiary, but they are still legally separate entities with the only linkage being the stock ownership.
Now consider a corporation that holds shares of a publicly traded corporation, say 1000 shares of IBM. If the corporation goes bankrupt, that won’t bring IBM into bankruptcy. Instead, the bankruptcy trustee may have to sell the shares of IBM to pay off the creditors.
The situation is really no different if a parent owns 100% of the shares of a subsidiary. The parent may elect to not have the subsidiary go into bankruptcy, but have the bankruptcy trustee (which in a chapter 11 is the company itself as “debtor-in-possession”) sell its 100% stock ownership of the subsidiary as a unified whole and use the proceeds to pay the parent’s creditors (or to reorganize under chapter 11). Alternatively, the trustee, as controlling parent of the subsidiary, could direct that the subsidiary sell its assets and after satisfying any liabilities of the subsidary, distribute the proceeds to the parent as a dividend, which will be used to pay the parent’s creditors.
There are tactical and strategic reasons why a corporation would elect to include some subsidiaries in a bankruptcy and exclude others, but (depending heavily on the circumstances) they have the option to do so.
This is a very good explanation. I’ll only add that I believe there are limits on who can file bankruptcy. If a company’s assets exceed their liabilities and they are paying their obligations (debt service etc.) then I don’t believe they are even eligible to file for bankruptcy.
I thought that too, but apparently that isn’t the case.
As was said upthread and as pointed out in this good blog article, “Will the Cubs Get Tagged Out in Bankruptcy?” the Cubs are considering filing a Section 363 Bankruptcy. This is a good discussion of Section 363 sales: A Pathology of Section 363 Sales (Not as Simple as They Look) . This article says that when a parent sells its sub’s stock in a 363 sale, the parents’ creditors can reach the sub stock despite the 363 sale. Bankruptcy Section 363 Sales: Buyers Beware of “Free and Clear” Sales of Non-debtor Subsidiaries
All very interesting. Thanks everyone!