Chrysler is filing for Chapter 11 bankruptcy protection, President Barack Obama has confirmed.
The decision has been made at the behest of the US president, after Chrysler failed to meet his administration's deadline for turning itself into a viable business.
Announcing the decision, Obama, who famously owned a HEMI-powered V8 Chrysler 300C before taking office, said: "The necessary steps have been taken to give one of America’s most-storied companies a new lease on life."
Obama also announced that the US government will give additional aid to GMAC so that it can take over lending to Chrysler's customers and dealers from Chrysler Financial, which the government has said is no longer viable. The Canadian government will also provide financial aid in return for a two per cent stake in the restructured company.
The president said there were no immediate job cuts planned until the restructuring is complete, although the company is expected to close all its US production factories until the Fiat deal is complete. Factories outside the US are expected to remain open. Chrysler also confirmed it will cut the number of dealerships it had, but did not say how many or when.
Read a short history of Chrysler
Chrysler will use the bankruptcy protection to restructure, and to this end is expected to announce a tie-in with Fiat imminently. During Obama's speech, he said terms had now been agreed in principle with Fiat for the deal to go ahead.
The decision to enter Chapter 11 bankruptcy protection is expected to cost the US government an additional $3.5 billion (£2.4 billion) to keep the company running while its affairs are sorted out. The government has also pledged to provide up to $4.7 billion (£3.2 billion) in aid for the restructured company.
Chrysler’s best assets are expected to be sold to a new entity that will have an ownership structure agreed with Fiat, while its debtors will be given US treasury compensation. The company is expected to remain in Chapter 11 bankruptcy protection for 30-60 days.
Inside sources say Fiat will now become a 20 per cent owner of Chrysler, a union retiree health-care trust fund will hold 55 per cent, and the rest of the company will stay in the government's hands. Fiat's share holding will increase in five per cent increments up to 35 per cent as it hits certain targets. These are creating a US-built 40mpg vehicle platform, providing a US-built fuel-efficient engine family and giving Chrysler access to its global distribution network. Obama also insisted that Fiat will not take a majority share of the company "until every dime of tax payers' money is repaid."
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