Document Type

Research Memorandum

Publication Date




Although the entitlement to receive dividends is not explicitly addressed in the United States Bankruptcy Code (the “Bankruptcy Code”), it is likely this right will be categorized as a security interest and thus be subordinated to creditors’ interests in a bankruptcy proceeding.

Creditors are entitled to be paid ahead of shareholders in the distribution of corporate assets. Furthermore, securities are subordinated to claims by creditors of the debtors. Presently, all interests not captured by the Bankruptcy Code are analyzed under the residual clause. This clause provides that unless the interest in dispute is explicitly excluded from the definition of a “security”, it will be considered a security if it bears the hallmarks commonly found in securities. The primary inquiry is: Does the interest make this claimant more like an investor or a creditor?

Part I of this memorandum will explain what constitutes a security and the role of the residual clause in bankruptcy cases. Part II will assess when a court is likely to declare an interest a “security” despite parties’ attempts to evade the term. The goal is to ensure fair treatment of both shareholders and creditors during Bankruptcy proceedings, in accordance with bargained-for interests.


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