UPDATE 2-Smurfit Stone reaches deal to end bankruptcy

* Shareholders would recover some of their investment

* Agreement ends objections to reorganization (Adds comment by attorneys for unsecured creditors and preferred shareholders, adds background)

By Tom Hals

WILMINGTON, Del., May 24 (Reuters) - Smurfit Stone Container Corp SSCCQ.PK has reached an agreement that would allow shareholders to recover some of their investment and clear the way for the packaging maker to exit bankruptcy.

The company said on Monday that it would distribute 2.25 percent of the stock in the reorganized company to holders of prebankruptcy preferred shares, and 2.25 percent to holders of its old common stock.

The agreement comes just days before a Delaware Bankruptcy Court judge was expected to rule on the company's proposed reorganization, which shareholders had battled for months.

The deal gives certainty to a company enjoying a rebound in demand for its cardboard packaging and removes the risk that the judge might reset the plan process just as jitters are beginning to return to credit markets.

Smurfut Stone originally proposed giving its stock to unsecured creditors, with nothing for shareholders. The deal will dilute the recovery for bondholders.

"We felt it was an appropriate way to proceed to get the company out of bankruptcy as soon as possible," said Thomas Moers Mayer of the law firm Kramer Levin Naftalis & Frankel, which represents the unsecured creditors committee.

He said it made sense for each party to accept what may be less than they wanted for the certainty of bringing the company out of Chapter 11.

During the bankruptcy, management accused shareholders of standing in the way of the company's reorganization to "extract whatever they can from the debtors as a toll to be paid in order to exit bankruptcy," according to court documents.

Shareholders began agitating for a voice in the bankruptcy in August, before a plan had been proposed. Shareholders focused on what they said was management's lack of experience for making long-term projections.

"As a result of their (shareholders') efforts, the debtors were compelled to update their projections and recognize the value that belongs to shareholders," said Rachel Strickland, an attorney with Willkie Farr & Gallagher, which represented holders of preferred stock.

The company will ask the Bankruptcy Court for the District of Delaware to approve the deal.

Smurfit Stone had argued it was worth as little as $3.4 billion, below $4.4 billion in claims that Smurfit said took priority over shareholders.

Shareholders hired experts who established a value of up to $5.8 billion, according to court documents.

The company's statement did not provide an enterprise value that was used in the agreement announced Monday.

The company filed for Chapter 11 bankruptcy in January 2009 after a rise in raw materials costs coincided with a drop in demand and tight credit markets.

Shares of Smurfit Stone were up 28 percent at 21.5 cents in early trade.

The company and an attorney for holders of common stock did not immediately return calls seeking comment.

The case is In re: Smurfit Stone Container Corp, U.S. Bankruptcy Court, District of Delaware, No. 09-10235. (Reporting by Tom Hals)