Can a shareholder be liable in case of bankruptcy of one of the companies he invested in?
"No. One of the key ideas behind a corporation is that an investor's liability is limited to the amount he invests, i.e. the amount of stock he buys. This is the primary reason why small businesses become corporations, even though one person owns 100% of the stock. Then if the business goes broke, he won't lose his house, retiretment fund, etc. He'll lose everything he had in the business, but at least there's a limit to it. (In some countries there are other ways to achieve the same results, like creating a ""limited liabililty company"", but that's another story.)" "No, assuming by ""public company"" you mean a corporation.  The shareholder's individual liability is limited to their investment.  Your shares can go to zero value, but that's the limit. EDIT In regard to the follow-up question in the comments: ""Are all companies in the stock market corporations?"" the answer is definitely ""no.""  I cannot say much about other countries, but the US markets have some entities which are known as ""master limited partnerships.""  These trade shares on the market by the usual rules, but if you buy you become a partner in the company rather than a shareholder.  You still have limited liability in this case, but there will be differences, for example, in how you're are taxed." The answer depends on whether the company involved has 'limited liability'. Most, but not all public and listed companies and corporations have this, but not all so it is worth checking and understanding what you are getting involved with.   The expression 'limited liability' means that the owners (shareholders) of a company have a liability up to the amount of the face value of the shares they hold which they have not yet paid for. The difference is usually minor but basically it means that if you buy $10 of shares you have no liability, but if the company gives you $10 of shares, and you pay them (in cash or kind) $5, then you still have a liability of $5. If the company fails, the debtors can come after you for that liability.  An 'unlimited liability' company is a different animal altogether. Lloyds insurance is probably the most famous example. Lloyds worked by putting together consortiums to underwrite risk. If the risk doesn't happen, the consortium keeps the premiums, if it does, they cover the loss. Most of the time they are very profitable but not always. For example, the consortiums which covered asbestos caused the bankruptcies of a great many very wealthy people. "Not normally, for a limited liability company anyway. In extreme circumstances a court may ""lift the veil"" of incorporation and treat shareholders as if they were partners. If you are an office bearer or a director that is found to have breached duties/responsibiities then that is another matter. Dim views can be taken of shonky arrangents for companies formed for activites not of a bona fide business nature too." "I am a tax lawyer and ALL the RESPONSES ABOVE are 1/2 Correct but also 1/2 Wrong and in tax law this means 100% WRONG (BECAUSE ANY PART INCORRECT UNDER TAX LAW will get YOU A HUGE PENALY and/or PRISON TIME by way of the IRS!  So in ESSENCE ALL the above answers are WRONG! Let me enlighten you to the correct answer in 5 parts, as people that do not practice tax law may understand (but you still probably will not understand, if you are NOT a Lawyer). 1) All public companies are corporations (shown by Ltd.), 2) only Shareholders of Public companies (ie, traded on the NYSE stock market) are never liable for debts of a bankrupt company, due to the concept of limited liability. 2) now Banks may ask a sole proprietorship (who wants to incorp. for example) to give collateral, such as owners stocks/bonds or his/her house, but then of course the loanee can tell the Bank No Thanks and find a lender that may charge higher interest rates but lend money to his company with little to NO collateral. 3) Of course not all companies are publicly traded and these are called private companies. 4)""limited liability"" has nothing to do directly with subsequent shareholders (the above answer is inaccurate!), it RELATES rather to INITIAL OWNERS INVESTMENT in their company, limiting the amount of owner loss if the company goes bankrupt. 5) Share Face-value is usually never related to this as shares are sold at market value in real life instances (above or below face-value), or the most money Investments Banks or owners can fetch for the shares they sell (not what the stock's face-value is set at upon issuance). Never forget, stocks are sold in our Capitalistic System to whomever pays the most, as it is that Buyer who gets to purchase the stock!" In an open corporation scenario a stock holder may well be found liable. It's a very narrow and uncommon bunch of scenarios but it's well worth sharing. See the paragraph on open corporations in the following document: http://nationalparalegal.edu/public_documents/courseware_asp_files/businessLaw/RightsOfShareholders/LiabilityOfShareholders.asp
You should double-check what it means to be in [Chapter 11](http://en.wikipedia.org/wiki/Chapter_11,_Title_11,_United_States_Code)  Yes, by filing for bankruptcy, the company gets some protection from creditors and some of their investment dries up, but it's the owners who take it on the nose first.  Also, individuals can file for Chapter 11, too.  It's not just corporations. Strange that they're holding you personally legally liable rather than the company. That's normally a big part of the corporate veil. You need a lawyer, not a stackexchange. *sigh* So I guess you don't understand why they would care about no risk....  If the sub company fails, but had no debt, then the parent company only loses whatever money they invested in the sub company  If the sub company fails and had debt:    The parent company is responsible for those debts and must pay them if in the agreement with the bank the parent company is responsible.    The parent company is not responsible for those debts if in the agreement with the banks, they did not agree to be collateral if the sub company went bankrupt. Not likely that a bank would agree to this though. They might even try to sue the parent company so they could get some reimbursement. &gt; If the investor is a partner in the company then they're just as responsible for the debts of their business as any other partner.  Umm, one of the benefits of creating a corporation is to keep personal money separate from the business.  http://www.nolo.com/legal-encyclopedia/corporation-basics-29867.html  There are exceptions to that of course.  &gt; The registered owners of the company can also be held liable for it's debts if it's a corporation.  This is false. Baring in mind that you can prove separation of assets and aren't doing anything illegal.  &gt; Or you can always just have them sign as guarantor for your back pay.  This is of course one of the exceptions. "First off, the jargon you are looking for is a hedge. A hedge is ""an investment position intended to offset potential losses/gains that may be incurred by a companion investment"" (http://en.wikipedia.org/wiki/Hedge_(finance)) The other answers which point out that put options are frequently used as a hedge are correct. However there are other hedging instruments used by financial professionals to mitigate risk.  For example, suppose you would really prefer that Foo Corporation not go bankrupt -- perhaps because they own you money (because you're a bondholder) or perhaps because you own them (because you're a stockholder), or maybe you have some other reason for wanting Foo Corp to do well. To mitigate the risk of loss due to bankruptcy of Foo Corp you can buy a Credit Default Swap (http://en.wikipedia.org/wiki/Credit_default_swap). A CDS is essentially a bet that pays off if Foo Corp goes bankrupt, just as insurance on your house is a bet that pays off if your house burns down.   Finally, don't ever forget that all insurance is not just a bet that the bad thing you're insuring against is going to happen, it is also a bet that the insurer is going to pay you if that happens.  If the insurer goes bankrupt at the same time as the thing you are insuring goes bad, you're potentially in big trouble." It would depend on the bounds of your hypothetical.    If the investor group is blind to cost + has infinite money and the existing management is unwilling to comply at any cost, then management will destroy the company before the investor group can take it over.    If the existing management follow rational choice theory; then an investment group with unlimited money could take over, hold a special meeting on it, etc.  Shareholders can't force management to do anything per se, as management decisions that violate fiduciary duty aren't criminally liable unless the act itself is a crime.  So if an investor group were to try a hostile takeover, and Twitter mgmt said we'll see you in hell; then they could just shut down every data center, sell off twitter.com, terminate all the employees, issue a billion new shares, issue every employee a million $0.01 strike warrants, etc. until there's nothing left to take over just to spite them.  Defensive strategies get pretty creative and are highly amusing to watch if you don't have a dog in the fight. IANAL.  In the UK, you (as a Director) would have obligations to minimise any tax liabilities under these two clauses:  http://www.legislation.gov.uk/ukpga/2006/46/section/172  http://www.legislation.gov.uk/ukpga/2006/46/section/174  Although I can't see the CPS bringing any cases of criminal charge against over-payment of taxes. It wouldn't be unrealistic to have a scenario where shareholders of a failed enterprise sued a Director who was negligent in minimising tax liabilities.  That said, I think the Starbucks strategy is flagrantly breaching the intent of the law, if not the letter. In most cases , preferential sharesholders are paid dividends first before common shareholders are paid . In the event of a company bankruptcy , preferential shareholders have the right to be paid first before common shareholders. In exchange for these benefits , preferential shareholders do not have any voting rights. The issuing of preferential shares has no impact on share prices or issuing of bonuses , it is a mere coincidence that the stock price went up Once the business is shut down, you'll need to show that the corporation is in bankruptcy and the amounts are unrecoverable. You can then report it as investment loss. I suggest talking to a tax adviser (EA/CPA licensed in your State), and maybe an attorney, on what the specific technical details are. You can avoid companies that might go bankrupt by not buying the stock of companies with debt. Every quarter, a public company must file financials with the EDGAR system called a 10-Q. This filing includes unaudited financial statements and provides a continuing view of the company's financial position during the year. Any debt the company has acquired will appear on this filing and their annual report. If servicing the debt is costing the company a substantial fraction of their income, then the company is a bankruptcy risk. My understanding was that if a company buys back shares then those shares are 'extinguished' I.e. the rest of the shareholders now own a greater portion of the company. However, if there is only one share left, then the company could not buy it because doing so would extinguish it leaving the company without an owner. That result would run contrary to the requirements for an incorporated company in countries like NZ and Australia. "Generally ""default"" means that the company cannot pay off their debts, and since debt holders get paid before equity holders, their equity would be effectively worthless. That said, companies can emerge from Chapter 11 bankruptcy (reorganization) and retain equity value, but it is rare. Most times, stocks are de-listed or frozen on stock exchanges, and company's reorganization plan will cancel all existing equity shares, instead focusing all of their attention on paying back as much debt as possible. If the company issues new equity after reorganizing, it might provide a way for holders of the original equity to exchange their shares for the new equity, but it is rare, and the value is usually significantly less that the value of the original equity." yeah but most likely, it's a 1x liquidation preference. The startup isn't going to generate cash flows enough to pay off the initial investment to the investor. Technically it isn't exactly specified as only triggered on a liquidation event because OP didn't specify the real legal language but it seems likely that's the case. Point 2 is exactly what a liquidation preference is. No way the owner of the company is participating in anything until the investor gets his initial investment back. "What drives the stock of bankrupt companies? Such stock is typically considered ""distressed assets"".  Technically, what drives it is what drives every stock - supply and demand. A more interesting question is of course, why would there be demand? First, who exerts the buying pressure on the stock? Typically, three types of entities: The largest ones are financial institutions specializing in distressed assets (frequently, alternatives specialists - hedge funds, private equity firms etc...). Usually, they invest in distressed debt or distressed preferred equity; but sometimes distressed equity as well. Why? We will discuss their motivations separately in this answer. Second one are existing equity holders.  Why? Short answer, behavioral psychology and behavioral economics. Many investors - especially non-professionals - insist on holding distressed stocks due to variety of investment fallacies (sunk cost etc...); usually constructing elaborate theories of why and how the company and the stock will recover Sometimes, people who buy into penny stock scams, pump and dump schemes etc... Why? ""There's a sucker born every minute."" - P.T. Barnum Let's find out why an investment professional would invest in distressed equity? First, the general process is always the same. Company's assets are used to pay off its liabilities; in accordance with applicable law. There are two ways this can be done - either through selling the company; OR through bankruptcy process. The liabilities are paid according to seniority. The seniority priorities rules are covered by 11 U.S. Code § 507 - Priorities A company in bankruptcy can have one of 2 outcomes: Buyout. Some buyer might decide that the company's assets are worth something to them as a whole; and buy the whole enterprise; rather than risk it being destroyed piecemeal in bankruptcy proceedings. In that case, the proceeds from the sale will be used to fund the liabilities as discussed above. This option is one of the possible reasons people might consider investing in distressed equity.  For example, if the company is in bankruptcy because it can't get enough financing right now, but is likely to have good profits in the future. The chances are, some buyer will buy it for a premium that includes those future profits; and that sale amount might possibly exceed the liabilities. Bankruptcy. The assets are sold and liabilities are covered according to priorities. In that case, the investors in distressed equity might be hoping that there are un-obvious assets whose value would also put the total assets above claimed liabilities. Additional possible beneficial factor is that unsecured debtors must file with the court in order to be paid; and the claim must be validated. Some might fail on either count; so total amount of liabilities might lessen once the bankruptcy process goes through. Assets Now, here's where things get interesting. Of course, companies have usual assets. Real estate, inventory, plants, cash, etc... These are all able to be sold to cover liabilities, and at first glance are possibly not enough to cover liabilities, leaving equity holders with nothing (and even that's not a certainty - bankruptcy is simply inability to service debt payments; and while it correlates to assetsliquid assets, not full asset valuation). But some assets are less sure, and are thus rarely included in such calculations. These may include: Chances of winning appeals if specific existing liabilities are results of litigation, e.g. tax appeals, court judgement appeals etc... Clawbacks and lawsuits against former executives, especially in cases where the company's financial distress resulted from executive malfeasance. I was personally involved in one such case as an equity holder, where the company assets were valued at $X; had liabilities of $X*2; but had a real possibility of winning about $X*3 in a lawsuit against former CEO accused of various malfeasance including fraud and insider trading. As such, the best case scenario was literally 100% profit on holding that distressed equity." As others have said, it simply makes you a part owner. Even if you have ethical objections to a company's behavior, I'd argue that investing in it and using the proxy votes to influence the company's decisions might be even more ethical than not investing.