What Is Delisting?

UTC by Beatrice Mastropietro · 8 min read
What Is Delisting?
Photo: Unsplash

Delisting of shares can be voluntary or involuntary and usually comes when a company ceases operations, declares bankruptcy, merges, does not meet listing requirements, or seeks to become private. Here, we will discuss why a stock might be delisted and what happens once it is removed from an exchange.

We often hear about companies wanting to get listed on exchanges to receive more exposure, but what happens when a company wants to go through the delisting process? There are various reasons why a company might want to be delisted from an exchange, but typically it is because the company is no longer meeting the exchange’s listing requirements. This can be due to various reasons, such as financial distress or poor governance.

Delisting Definition

Delisting refers to a company voluntarily or involuntarily removing its securities from listing on a stock exchange. A company may be delisted for failing to meet certain standards set by the exchange, such as minimum shares outstanding, minimum share price, or maintaining required financial ratios. A company may also choose to delist its shares if it no longer wishes to be subject to the public reporting requirements of a listed company.

When a company is delisted, its shares are no longer traded, and investors can no longer buy or sell the shares through that exchange. However, delisted shares may still be traded on other over-the-counter (OTC) markets or in the pink sheets.

The company’s shares will also likely be delisted from any index funds that track the exchange on which it was initially listed.

Delisting can have a significant impact on a company and its shareholders. Firstly, delisting usually results in a decrease in the liquidity of the company’s shares as they are no longer traded on a major exchange. This can make it more difficult for shareholders to buy or sell shares of the company.

Secondly, delisting usually results in a decrease in the price of the company’s shares as there is less demand for them. This can have a negative impact on the value of shareholders’ investments.

Finally, delisting may also harm the company’s ability to raise capital, as investors may be less likely to invest in a company that is not listed on a major exchange.

Why Does a Company Get Delisted?

There are a few reasons why a company may get delisted from an exchange, but the most common reason is that the company fails to meet the exchange’s listing requirements.

For instance, exchanges typically have minimum requirements for a company’s share price, market capitalization, and number of shareholders. If a company’s stock falls below these thresholds, the exchange may delist the stock.

The company may also be delisted if another company acquires it.

In some cases, a company may be delisted because it can not produce financial reports or comply with other regulatory requirements.

What Happens When a Company Is Delisted?

When a company is delisted, its shares are no longer traded on the exchange. This can have a number of effects on the company and its shareholders.

Firstly, the company’s share price may drop sharply, since there will be fewer buyers for the shares.

Secondly, the company may have a more challenging time raising capital since it will no longer have access to the exchange’s listing requirements.

Further, shareholders may have a more challenging time selling their shares.

If you own shares of a delisted company, you may want to speak to a financial advisor to discuss your options.

Types of Delistings

Delistings can be either involuntary or voluntary. Involuntary delistings occur when a company cannot meet the listing requirements of the exchange on which it is traded. This can happen for a variety of reasons, including financial difficulties, failure to comply with regulatory requirements, or fraud. On the other hand, voluntary delistings occur when a company decides to delist itself from an exchange for strategic reasons.

Voluntary Delisting

Voluntary delistings are relatively rare and usually occur when a company is acquired by another company or taken private. In these cases, the new owner may decide that it no longer makes sense to list the company on an exchange and will delist it instead. Delisting can also happen when a company decides to stop being public for other reasons, such as reducing costs or increasing privacy.

Some companies may also choose to delist from one exchange and list on another. For example, a company may delist from Nasdaq and list on the New York Stock Exchange (NYSE). This is often done to save money on listing fees or increase exposure to a different group of investors.

Involuntary delisting

Involuntary delistings are much more common than voluntary delistings and usually happen when a company is in financial distress. If a company cannot meet the listing requirements of exchange, it may be delisted. This can happen if the company fails to maintain a minimum share price, market capitalization, or a number of shareholders. It can also occur if the company is involved in fraud or other illegal activities.

Once a company is delisted, its shares are no longer traded on the exchange. Instead, they trade over-the-counter (OTC), which means they are not subject to the same regulations as listed securities. As a result, investing in a delisted stock can be riskier than investing in a listed stock.

If you’re considering investing in a delisted stock, it’s important to do your research and understand the risks involved. You should also consult with a financial advisor to ensure that the investment is suitable for your portfolio.

Whatever the reason for delisting is, it’s important to note that its shares can no longer be traded on the exchange once a company is delisted. This means that investors will only be able to buy or sell the stock through other means, such as the OTC market.

Delisting Process

Below is a step-by-step process of delisting a stock from an exchange.

  1. The company notifies OTC Markets Group of its intent to delist.
  2. The company files Form 25 with the SEC.
  3. Trading on Pink sheets is suspended after 20 days.
  4. The company provides OTC Markets Group with proof of compliance with Nasdaq, NYSE, or Amex requirements.
  5. The company’s common stock is quoted on the Nasdaq, NYSE, or Amex.
  6. The exchange holds a hearing to determine if the company has violated any listing requirements.
  7. If it is determined that the company has indeed violated listing requirements, the exchange will give the company a specific timeframe to correct the issue.
  8. If the company does not correct the issue within the specified timeframe, the exchange will file a delisting notice with the SEC.
  9. Once the SEC approves the delisting, the company’s stock will be removed from the exchange and will no longer trade on that exchange.

Examples of Delisted Stocks

Delisted stocks are no longer traded on an exchange. The reasons for delisting can vary, but often include a company’s financial difficulties, failure to meet listing requirements, or fraud.

Some examples of delisted stocks include Enron Corporation. Enron was an energy company founded in 1985. In 2001, the company was involved in a major accounting scandal and subsequently delisted from the New York Stock Exchange.

Lehman Brothers Holdings Inc. is another example of delisted stock. Lehman Brothers was a global financial services firm that filed for bankruptcy in 2008. The company was delisted from the New York Stock Exchange following its bankruptcy filing.

Bernard L. Madoff Investment Securities LLC was a well-known company as well. Its financial advisor ran a Ponzi scheme. As a result, the company, Bernard L. Madoff Investment Securities LLC, was delisted from the NASDAQ in 2009.

Some companies choose to delist voluntarily. For example, in 2018, GoPro Inc. (GPRO) was delisted from Nasdaq and began trading on the OTC market. The company cited the high costs of being listed on a major exchange as a reason for delisting.

What Does It Mean For Investors?

While delisting can signify that a company is in trouble, it doesn’t necessarily mean that the company is going out of business. Sometimes, delisting can simply be a way for a company to save money on listing fees or other expenses associated with being traded on an exchange. For example, a company that is only traded on one exchange may delist from that exchange and begin trading on a less expensive exchange.

For investors, delisting can have both positive and negative consequences. On the one hand, it may be difficult to sell shares of a company that is no longer traded on an exchange. On the other hand, delisting can sometimes signify that a company is about to be acquired, which could lead to a substantial payout for investors.

Conclusion

Delisting is the process of a company removing its shares from a stock exchange. A company may delist for various reasons, including financial difficulties, poor performance, or corporate restructuring. When a company delists, its shares are no longer traded on the stock exchange, and investors can no longer buy or sell the stock.

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FAQ

What is delisting?

In short, delisting is the process of removing security from an exchange. A company may voluntarily delist its security or involuntarily delist due to stock price, financial viability, or other reasons.

What are the reasons for delisting?

There are a number of factors that might lead to delisting: failing to satisfy the exchange’s listing criteria, such as a minimum share price or average daily trading volume; bankruptcy filing; merger or acquisition; voluntarily delisting; violation of exchange rules; poor financial performance; lack of liquidity; etc.

What are the types of delisting?

There are two types of delisting: voluntary and involuntary. Voluntary delisting happens when a company decides to remove its stock from an exchange. Involuntary delisting occurs when a company is forced to delist by the exchange due to a failure to meet listing requirements.

What happens to shareholders when a stock is delisted?

When a stock is delisted, it is no longer traded on the major exchanges. This can happen for various reasons, including failure to meet listing requirements, bankruptcy, or fraud.

Can stock be relisted?

Yes, stock can be relisted on an exchange if it meets the listing requirements of that exchange. For example, a company may delist its stock from one exchange and then list it on another exchange.

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