Delisting is the removal of a listed security from a stock exchange. The delisting of a security can be voluntary or involuntary and usually results when a company ceases operations, declares bankruptcy, merges, does not meet listing requirements, or seeks to become private.
Key Takeaways
- Delisting occurs when a stock is removed from a stock exchange.
- It can be either mandatory or voluntary.
- Some companies opt to go private or get taken over by companies that want them out of the public eye.
- Stocks that fail to meet the exchange’s requirements risk being kicked out and delisted.
- The consequences of delisting are significant, and some companies strenuously avoid being delisted.
How Delisting Works
Companies must meet specific guidelines, called listing standards, to be listed on an exchange. Each exchange establishes its own set of rules and regulations for listings. Companies that fail to meet these minimum standards will be involuntarily delisted.
The most common standard is price. For example, a company with a share price under $1 per share for a period of months may find itself at risk of being delisted.
Alternatively, a company can voluntarily request to be delisted. Some companies choose to become privately traded when they identify, through a cost-benefit analysis, that the costs of being publicly listed exceed the benefits. Requests to delist often occur when companies are purchased by private equity firms and will be reorganized by new shareholders. These companies can apply for delisting to become privately traded. Also, when listed companies merge and trade as a new entity, the formerly separate companies voluntarily request delisting.
Companies usually delist because they want to go private, are taken over by private equity firms, or fail to meet the minimum standards set by their exchange.
Involuntary Delisting of a Company
The reasons for delisting include violating regulations and failing to meet minimum financial standards. Financial standards include maintaining a minimum share price, financial ratios, and sales levels. When a company does not meet listing requirements, the listing exchange issues a warning of noncompliance. If noncompliance continues, the exchange delists the company’s stock. More reasons for being delisted are discussed below.
To avoid being delisted, some companies will undergo a reverse split of their stock shares. This has the effect of combining several shares into one and multiplying the share price. For example, if a company executes a 1-for-10 reverse split, it could raise its share price from 50 cents per share to five dollars per share, in which case it would no longer be at risk of delisting.
The consequences of delisting can be significant since stock shares not traded on one of the major stock exchanges are more difficult for investors to research and harder to purchase. This means that the company is unable to issue new shares to the market to establish new financial initiatives.
Often, involuntary delistings are indicative of a company’s poor financial health or poor corporate governance. Warnings issued by an exchange should be taken seriously. For example, on April 23, 2023, Bed Bath & Beyond Inc. filed for voluntary Chapter 11 protection. As a result, NASDAQ informed the company that their common stock would be suspended at the opening of business on May 3, 2023. As communicated, the stock has been delisted.
In the United States, delisted securities may be traded OTC except when they are delisted to become a private company or because of liquidation.
Common Reasons Companies Get Delisted
While there is no infallible method to predict stock delistings, there are certain warning indicators that may suggest that a stock is at risk of being removed from trading. Here is a more comprehensive list of indicators that may indicate when a company’s stock may be delisted:
- Regulatory Compliance: Failing to meet the listing standards specified by the stock exchange.
- Financial Difficulty: Financial struggles, including dropping sales, mounting debts, or sustained losses.
- Legal Problems: Serious violations such as fraud, accounting issues, or failure to comply with securities laws might result in delisting.
- Bankruptcy: Declaring bankruptcy or going through considerable reorganization.
- Low Trading Volumes: Persistently low trading volumes may trigger delisting.
- Governance Standards: Failure to adhere to corporate governance standards.
- Changes in Listing Requirements: Failure to meet new criteria following changes in the exchange’s listing requirements.
The Process of Delisting
When a company fails to comply with listing requirements, it will receive adequate warning. Delisting doesn’t happen overnight. Notifications are made, and time is granted to the subject to get its affairs in order. If the noncompliance continues after these warnings, the company will then be removed from the exchange.
Voluntary delisting works differently. If a company decides it no longer wants to operate in the public eye, it must consult with its stakeholders first. A resolution has to be passed in a board meeting and put to shareholders.
Once enough shareholders are on board, the company needs to get the green light from the stock exchange that it wishes to delist from and put out a statement outlining its intent. An investment bank will be in charge of managing the delisting, ensuring there is enough money to buy back the shares.
In order to delist, the company essentially needs to buy back a certain percentage of shares from the total outstanding. This threshold is decided by the exchange. To buy these shares, a bidding process occurs. A fair price is negotiated and announced to the public, and the company pays up within a specified deadline to see its delisting through. To convince investors, the company will usually have to pay them a premium to the current share price.
What Happens to My Shares After Delisting?
When a company delists voluntarily, shareholders will usually receive cash to buy them out or shares in the new, acquiring company. When it is forced to go, the outcome is usually different. No special offer comes. You either find a buyer on the exchange or are left holding a stake in a company that’s no longer listed.
Holding delisted stocks generally isn’t very desirable. The shares don’t disappear but do become much more difficult to trade. Once off the exchange, they can trade OTC. These markets don’t offer the same accessibility and liquidity as the major exchanges. You’ll be faced with higher transaction costs and wider bid-ask spreads.
Another factor to consider is that there’s less regulation outside of the major exchanges. Requirements are more relaxed, including those relating to communications, leaving investors more in the dark and unaware of what is going on within the company in which they’re invested.
What Should I Do After Delisting?
If you still hold shares after they’ve been delisted, your next step depends a lot on what you’re invested in, how convinced you are about its prospects, and whether you have the stomach to deal with the murkier, less transparent alternative exchanges.
You can still sell the shares, but the conditions to do so will now be generally less favorable. Volume thins out when you leave a major exchange. With OTC transactions, there are fewer buyers and sellers, meaning wider bid-ask spreads and getting less than the going rate. In some cases, you may only be able to trade the shares by appointment.
In most cases, it’s best to sell stock before it delists.
Can I Sell My Shares After a Delisting?
If you still hold shares after they are delisted, you can sell them—just not on the exchange on which they traded before. Stock exchanges are very advantageous for buying and selling shares. When they delist and trade over the counter (OTC), selling shares and getting a reasonable price for them becomes much harder.
Can a Delisted Company Get Re-Listed?
Yes, it is possible for a delisted company to get re-listed. A lot depends on the circumstances of being delisted. Those forced to leave often find it difficult to get their affairs back in order and bounce back, especially without the funding opportunities that the stock market provides. There are a few success stories, though.
Can a Delisting Be Good for a Company?
Delisting isn’t always as bad as people make it out to be. Many household names have chosen to delist their shares and go private for good reason. And some, such as Dell, prospered from the benefits of being private.
The Bottom Line
A company is delisted when it is removed from a stock exchange. No longer selling shares to the public can be voluntary or involuntary. Companies may prefer to go private to avoid having to answer to the public and jump through regulatory hoops. Alternatively, they may be kicked out of the exchange for failing to meet its listing requirements or because they ran out of money and went bankrupt.
Investors holding shares after a delisting will only be able to sell them OTC. That generally means less liquidity, finding it harder to locate buyers at the price you want, and potentially being left in the dark about what the company is up to.
Related Terms: stock exchange, bankruptcy, private equity, reverse split, liquidation, shareholder, stakeholder.
References
- Nasdaq. “Listing Center”.
- New York Stock Exchange. “NYSE MKT Continued Listing Standards”.
- Nasdaq. “Continued Listing Guide”.
- Bed Bath & Beyond. “Bed Bath & Beyond Inc. Receives NASDAQ Delisting Notice”.
- Management Study Guide. “Investment Banking and Delisting”.
- Robbins LLP. “My Stock Was Delisted—Now What?”
- CenterPoint Securities. “How Stock Delisting Works”.
- Dell. “Going Private Is Paying Off for Dell”.
