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What Is Delisting?
Delisting removes a security from a stock exchange. It can be voluntary or involuntary, often occurring when a company ceases operations, goes bankrupt, merges, fails to meet listing requirements, or wants to go private.
Key Takeaways
- Delisting can happen involuntarily due to failing to meet stock exchange requirements or voluntarily when a company chooses to go private.
- Companies must adhere to financial standards, such as maintaining a minimum share price, to avoid involuntary delisting. Warnings of non-compliance can lead to eventual removal from exchanges.
- Once delisted, shares often become harder to trade and less liquid, posing risks to investors who may struggle to sell shares at favorable prices.
- Some companies perform reverse stock splits as a strategy to comply with share price requirements and avoid delisting.
- Post-delisting, stocks can still be traded over-the-counter (OTC), but they lack the liquidity and regulatory oversight of major exchanges, leading to increased trading difficulties.
Understanding the Delisting Process
Delisting refers to the removal of a listed security from a stock exchange, a process that can be either voluntary or involuntary. A company may face delisting when it ceases operations, declares bankruptcy, merges with another entity, or fails to meet the minimum requirements set by the exchange for listing.
Alternatively, a company may choose to delist as a strategic move to become privately held, often spurred by a cost-benefit analysis that identifies greater advantages in operating away from public market scrutiny. Understanding how delisting works reveals the critical factors and subsequent impacts on shareholders and the company’s financial health.
Important
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.
What Triggers Involuntary Delisting?
The reasons for delisting include violating regulations and failing to meet minimum financial standards. Financial standards include the ability to maintain 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.
Fast Fact
One way for companies to get around minimum share price rules is by engaging in a reverse split.
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 Bed Bath & Beyond’s 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 Factors Leading to Stock Delisting
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. These were discussed briefly above; below is a more comprehensive list of indicators that may indicate when a company’s stock may be delisted. Be mindful that this list may not be exhaustive.
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- Regulatory Compliance: If a company fails to meet the listing standards specified by the stock exchange such as maintaining a minimum share price, a minimum market capitalization, or publishing regular financial reports, the company runs the risk of being delisted.
- Financial Difficulty: Companies that are facing financial difficulties such as dropping sales, mounting debts, or sustained losses may be at a higher risk of having their stock delisted from the market.
- Legal Problems: Serious violations of regulatory standards might result in delisting. Examples of such violations include fraud, accounting issues, or a failure to comply with applicable securities laws.
- Bankruptcy: Delisting of a firm’s Stock may result from bankruptcy or considerable reorganization. If a firm declares bankruptcy or goes through considerable reorganization, the stock of that company may be delisted.
- Low Trading Volumes: Stocks that have persistently low trading volumes may be at risk of being delisted, as exchanges frequently have minimum requirements in place to ensure investor interest and sufficient liquidity.
- Governance Standards: A failure to comply to standards for corporate governance, such as having an insufficient number of independent directors or an ineffective audit committee, may both raise concerns and lead to delisting of the company.
- Changes in Listing Requirements: There may be changes to the listing requirements of the exchange where the stock is listed, and these changes might put corporations at danger of delisting if they fail to meet the new criteria within the allotted amount of time.
Delisting Steps and Procedures
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 are made, 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. One of its first jobs is making sure there is enough money to buy back the shares.
Fast Fact
Investment banks don’t just assist companies to list their shares. They are also recruited to help with the delisting process.
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. It negotiates a fair price, announces it to the public, and the company pays by a set deadline to complete the delisting. To convince investors, the company will usually have to pay them a premium to the current share price.
Your Shares Post-Delisting: What to Expect
When a company voluntarily delists, shareholders typically receive cash or shares in the 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. After leaving the exchange, they trade OTC, where accessibility and liquidity are lower than on major exchanges. You will encounter higher transaction costs and wider bid-ask spreads.
Another factor to consider is that there’s less regulation outside of the major exchanges. Requirements, including communication standards, are more relaxed, leaving investors less informed about company activities.
Navigating Your Investment 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 are 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.
Tip
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.
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