One of the most important decisions that a company has to make is how

to finance its operations and investments. The capital structure of a

company refers to the mix of debt and equity that it uses to fund its
activities. The legal structure of a company refers to the type of entity
that it is, such as a corporation, a partnership, or a sole proprietorship.
Both the capital structure and the legal structure can have significant
implications for the company's performance, risk, taxation, and
governance. However, sometimes a company may face financial distress
and be unable to meet its obligations to its creditors and other
stakeholders. In such cases, the company may have to go through the
bankruptcy process, which is a legal procedure that allows the company
to reorganize or liquidate (Chapter 11 or Chapter 7) its assets and
liabilities under the supervision of a court. The bankruptcy process can
be very complex and costly, and it can affect the company's value,
reputation, and future prospects (Bankruptcy | United States Courts,
n.d.; How Bankruptcy Costs Affect a Company’s Capital Structure, n.d.;
SEC.Gov | Bankruptcy: What Happens When Public Companies Go
Bankrupt, n.d.; Dauderis & Annand, n.d.).

To illustrate how the bankruptcy process, the capital structure, and the
legal structure can impact a company's progress, let us consider the case
of Hertz Global Holdings Inc., a car rental company that was founded in
1918 as a sole proprietorship by Walter L. Jacobs, who later sold it to
John D. Hertz in 1923. Hertz became a public corporation in 1953 and
went through several mergers and acquisitions over the years. The
company filed for Chapter 11 bankruptcy protection in May 2020 due to
the COVID-19 pandemic's impact on its business model, which relied
heavily on debt financing. Hertz had more than $19 billion of debt and
over 500 subsidiaries with various tax and regulatory obligations. During
the bankruptcy process, Hertz faced legal disputes and operational
issues but was able to obtain financing from creditors, reduce its debt by
$5 billion through a debt-for-equity swap, and raise $1.8 billion of equity
capital from new investors. In October 2021, Hertz announced a plan of
reorganization that would reduce its debt by over $16 billion and give it
access to $5.9 billion of new financing, allowing it to exit bankruptcy by
early 2022 while giving existing shareholders a recovery of about $8 per
share (Investor Relations | Hertz Global Holdings, Inc., n.d.).

Thus, the bankruptcy process, the capital structure, and the legal
structure can have significant impacts on a company's progress through
the bankruptcy process. These factors can create challenges and costs
for the company, but they can also create opportunities and benefits for
the company. The case of Hertz shows how a company can use the
bankruptcy process to restructure its debt and equity and emerge as a
more viable and competitive company.

References:

Bankruptcy | United States Courts. (n.d.). Retrieved February 2, 2024, from

https://www.uscourts.gov/services-forms/bankruptcy

Dauderis, H., & Annand, D. (n.d.). Introduction to Financial Accounting.

How Bankruptcy Costs Affect a Company’s Capital Structure. (n.d.). Investopedia.

Retrieved February 2, 2024, from
https://www.investopedia.com/ask/answers/061515/how-do bankruptcy-costs-
affect-companys-capital-structure.asp

Investor Relations | Hertz Global Holdings, Inc. (n.d.). Retrieved February 2, 2024,
from https://ir.hertz.com/investor-relations/

SEC.gov | Bankruptcy: What Happens When Public Companies Go Bankrupt. (n.d.).

Retrieved February 2, 2024, from https://www.sec.gov/reportspubs/investor
publications/investorpubsbankrupt