Owens Corning shares may become worthless

Shareholders in Owens Corning are facing the prospect of their shares becoming worthless if a judge approves a company plan to cancel existing stock and issue new shares to creditors as part of the fi…

Shareholders in Owens Corning are facing the prospect of their shares becoming worthless if a judge approves a company plan to cancel existing stock and issue new shares to creditors as part of the firm“s emergence from bankruptcy. The stock fell from USD 0.60 before the announcement to as low as USD0.08 in trading on the over-the-counter market between 20 – 26 January 2003. Executives at Owens Corning had hinted at such an outcome ever since the firm filed for Chapter 11 reorganization two years ago to escape multibillion-dollar asbestos liability. Even so, some investors were surprised by the plan for the stock, which was revealed in the company“s proposed plan of reorganization on 17 January 2003. Shareholders expressed outrage but legal experts say they have few options. In bankruptcies in which creditors are not fully repaid shareholders are entitled to nothing. . “We“ve gotten plenty of calls,” acknowledged company spokesman David Dimmer. “Some investors were unclear about bankruptcy laws…. We didn“t decide to cancel the shares. Laws require us to cancel the shares because our debts exceed the … value of the company.” To add to their misfortune, time has apparently run out for of the few opportunities open to shareholders: a lawsuit against individual officers and directors of the company that would attempt to prove they fraudulently misled investors about company“s financial health. Glen Hiner, chairman and chief executive for a decade until his retirement last spring, long declared the asbestos liability “manageable.” Creditors have alleged in bankruptcy court filings that he exaggerated the company“s ability to deal with the problem. Mr. Hiner continued to praise a series of out-of-court settlements reached with asbestos claimants long after the firm recognized that the settlement program didn“t work, a committee representing banks, bond holders, and vendors contends in a motion in U.S. Bankruptcy Court in Wilmington, Delaware. The company denies that. Legal chief Maura Abeln Smith, who is supervising the firm“s financial reorganization and helped draft the settlement program, said: “There is extensive disclosure in our SEC filings about asbestos litigation.” These reports, sometimes in footnotes,describe how the number of claims and size of settlements increased over the decade prior to bankruptcy. “You really have to read the footnotes,” said investment consultant Alan Lancz, whose clients include some of the 1,000 people employed at Owens Corning“s Toledo, Ohio, USA headquarters. “It was a situation at OC that, if you read the chairman“s annual shareholder letter, even in the late “90s, it was incredibly optimistic and grandiose. Lots of investors, unfortunately, will just read the glossy material and don“t go in the back with footnotes talking about liabilities and litigation.” Owens Corning“s shares rose to USD 46 in 1998 and, at one point in the year before Chapter 11, was at nearly USD 44. Institutional investors began to dump the company“s stock in the days before and after the Chapter 11 filing. By March 2000, seven months before bankruptcy, the firm“s 20,000 employees were its largest shareholder, according to statements made by executives at the time. According to the most recent information available, employees owned 2.5 million shares, or 4.5% of the total 55 million outstanding, through company-sponsored savings plans as of 31 December 2002. The company didn“t identify other shareholders because, as none owns more than 5%, it is not required to do so. Complicating Owens Corning“s relationship with shareholders, it has filed a creditor-inspired lawsuit against large shareholders who received USD 100,000 or more in dividends between 1996 and 2000. The action, citing a recent legal opinion, demands the return of the dividend payments on the grounds that the company may have been technically insolvent, and thus prohibited from paying dividends, because of huge, but at the time unknown, asbestos liability. Based on the firm“s most recent estimates, debts will approach USD 20 billion. That is more than three times the USD 5.7 billion in listed assets. Because liabilities outweigh assets, shareholder claims have “no value” under bankruptcy law, said Michael Hammer, a bankruptcy lawyer with Dickinson, Wright, Moon, Van Dusen & Freeman in Detroit. In bankruptcy, shareholders are considered owners, not creditors. “The concept is that if the creditors aren“t getting paid, in the natural order shareholders shouldn“t get anything,” he said. The statute of limitations on securities fraud suits is two years after the wrongdoing is discovered, according to lawyers. Such actions involve “intense legal battles,” said Mr. Hammer. “They are very expensive and time-consuming.” They are most likely when stock is concentrated in a few, well-financed hands. The only action against Owens Corning officers and directors within the two-year allowance was filed by bond holders, who contend that information was withheld about the firm“s other financial obligations at the time of a bond offering in 1998. The suit is pending in a federal court in Massachusetts.