A recapitalization agreement is made by a company in order to modify the company’s capital structure by which the structure becomes more secure and the stock price of the company also gets a shot in the arm. This agreement is made by companies when there is a danger of them being taken over by other hostile companies and through this agreement they go through a recapitalization process by taking a large debt, issuing new shares or dividends to shareholders or to rejig the entire management.
In short, it is an agreement which exchanges one form of financing with another in order to make a company more stable and profitable. Such agreements also help a company to minimize taxes, create an exit plan for venture capitalists or to improve liquidity by diversifying its debt-to-equity ratio. One example of this exchange of financing process is do away with a company’s preferred shares and substitute that with bonds, thereby modifying the capital structure.
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