Bankruptcy Treatment of Common Shareholders

In the equity markets, common shares play a crucial role for investors. When a company decides to issue common shares, it raises funds for various needs, such as expansion, paying off debt, or investing in new projects. Shareholders owning common shares typically have the right to vote on corporate matters and may receive dividends, although this is not guaranteed. One characteristic of common shares is their ranking in the event of a liquidation; they are considered residual claims. With this context, consider the following scenario:

A company, ABC Corp., has issued common shares and has outstanding debt obligations. If ABC Corp. were to face bankruptcy, which statement is true regarding the treatment of common shareholders?