Old GM Shares: More Than Meets the Eye

Updated with news that GM will trade again on Wednesday.

Shares in old General Motors do have value, sort of, to somebody.

If you are a shareholder in old General Motors -- whose symbol was GM before becoming GMGMQ in bankruptcy -- which is now called Motors Liquidation Co., don't get your hopes up. The shares are still essentially worthless.

In fact, Finra, the financial industry regulatory authority, says it will allow trading in the shares to restart on Wednesday, after halting trading on Friday, but the agency restated General Motors' warning that the shares have no value. They will trade under a new symbol, MTLQQ.

The activity in the shares is masking an unusual bankruptcy court maneuver involving the shares' relationship to GM's effort to ensure that new GM obtains the $16 billion net operating loss associated with old GM.

GM Through the Years

Last week, GM indicated it had convinced the bankruptcy court to require that holders of 4.5% or more of the outstanding shares must notify the company of their ownership and take certain steps before making trades. GM attorneys don't want such sales to occur because that could hinder their delicately balanced transfer of the tax-loss carry forwards.

"Trading of large amounts of GM stock and options can negatively impact the ability to take advantage of these tax assets," the company said, in a prepared statement. "Associated with its Chapter 11 filing and efforts to preserve the value of its assets, General Motors Corp. must also preserve the ability to take advantage of certain tax assets, including net operating loss carry forwards."

GM's interest in the shares reflects the complexity of the tax consequences in the case, says Jeffrey Coyne, senior lecturing fellow at the Duke University School of Law, a management consultant who specializes in reorganizing troubled companies.

Two problems exist, Coyne says. First, under Section 368 G of the tax code, tax losses can be transferred only in connection with a bankruptcy reorganization plan. But under Section 363 of the bankruptcy code, which GM is pursuing, there is no reorganization plan; rather, there is a sale of assets to another entity. And because it involves a sale of assets, the 363 sale bankruptcy process does not normally allow for tax loss transfers.

Secondly, under tax law, tax losses can pass only to companies whose owners controlled at least 50% of the predecessor company -- not the case in the GM bankruptcy. Normally, in a Chapter 11 bankruptcy, "some or all of the (tax-loss carry forwards) can disappear if the shareholders with 5% or more ownership in either the holding company or any subsidiary make major changes in their holdings," Coyne says.

"The purpose of the law is to keep the benefit of the tax-loss carry forward for the people who had actual ownership of the company and lost the money."

In the GM case, "everybody had to agree that it's a sale, not a plan, because under a plan, protections for the creditors would kick in," Coyne said. "So, to conform to 363 law and get past the creditors' objections, the judge made a ruling that the transfer of assets to new GM is not a plan (but a sale)."

Meanwhile, Coyne says, the GM master asset sale agreement "seeks to sweep the tax benefits into the sale, which is a narrow bridge on which to transfer such a large and complex asset."

In a sense, Coyne notes, the discussion is immaterial because the only party that would object to a transaction that unreasonably minimizes tax liability is the U.S. Treasury. And in this case, the U.S. Treasury is the new majority owner of GM.

Among other automakers' shares Tuesday afternoon Ford ( F) closed Tuesday at $5.84, up 15 cents; Toyota ( TM) finished at $75.45, up 86 cents; and Nissan ( NSANY) was at $11.91, up 61 cents.