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What Happens When a Company Cancels Its Common Stock?

Original post by Calla Hummel of Demand Media

When a company cancels its common stock, it declares all existing common stock certificates to be null and void. Most often, companies cancel stock when going through bankruptcy proceedings. After canceling, the company may cease to exist or issue new shares in a reorganized company. In either instance, the canceled shares only have value as souvenirs, not as securities.

Contents

Notification

A company can cancel common stock in bankruptcy and occasionally in other situations such as reverse stock splits, though a temporary recall is more common. The company may need authorization from a regulatory power before it can cancel, depending on where the company operates. It then instructs a financial service, called a transfer agent, to notify all investors, exchanges and other parties involved in the exchange of its common stock.

Certificates

The transfer agent notifies all relevant parties and updates databases so that all outstanding shares of common stock appear as "canceled." If an investor holds a paper certificate, the transfer agent may try to recall the certificate but can also simply update databases so that any search for the certificate number will show that it is no longer a valid stock certificate.

Meaning

A canceled share of common stock has no value as a security. The company no longer recognizes that share as representing ownership in the company and therefore other investors no longer recognize it as valuable.

Situations

Companies can cancel shares and not issue any more, which frequently happens in bankruptcy cases. Companies can also cancel existing shares of common stock and reissue new shares. In cases where common stock is reissued, the old shares have no value and no longer represent ownership, while the new shares do.


                   

References

About the Author

Calla Hummel is a doctoral student studying contraband in international political economy. She supplements her student stipend by writing about personal finance and working as a consultant, as well as hoping that her investments will pan out.


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