What Happens When a Company Gets Delisted?
Delisting is a financial term describing a process where shares of a public company are actively removed from the exchange on which they had been trading.
Sometimes the stocks disappear completely, but other times they don’t.
Depending on the reason for the delisting, shares may continue to trade.
However, trading delisted shares can carry substantially more risk than trading those still traded on an exchange.
Overview of Public Companies
A public company (sometimes called a publicly traded company or a publicly held company) is usually a corporation that issues shares of stock to the general investing public.
The shares are made available to the public and traded on the open market through a stock exchange/market.
Most public companies were once privately held companies that chose to become public in order to raise capital after meeting all regulatory requirements.
Examples of public companies include Facebook (NASDAQ: FB), Walmart (NYSE: WMT), Apple (NASDAQ: AAPL), Johnson & Johnson (NYSE: JNJ), Amazon.com (NASDAQ: AMZN), Netflix (NASDAQ: NFLX),and Tesla (NASDAQ: TSLA).
Shares of public companies are publicly traded within the open market, and a variety of traders (individuals, pension funds, and large investing organizations) trade the shares.
Shares, often called stocks, represent ownership equity in a public company, which gives shareholders voting rights and residual claim on corporate earnings in the form of dividends or capital gains.
Shares of these type of companies belong to the general investing public,
Reasons for being Delisted
Companies may get delisted for a number of reasons that can be either positive or negative for investors. These reasons include:
- Failure of the company to meet or continue to meet certain listing requirements
- Delisting following a merger/takeover
- Need to protect the public interest and shareholders
Stock exchanges such as the New York Stock Exchange (NYSE) and the Nasdaq Global Market have minimum requirements for a company’s shares to remain listed.
A company that fails to abide by those requirements may be forced to delist itself. Causes for delisting may include insufficient market capitalization, lower-than-required stock price, or failure to file timely financial reports.
Each stock exchange has its own rules about various things that could cause a company to be delisted and its own procedures for notification and appeal of a possible delisting.
On the Nasdaq, if a stock falls below the trading minimum, the exchange sends a warning that the company has 90 days to get the stock trading at an acceptable level.
If the company is fails to so, Nasdaq then notifies it of its imminent delisting. A company then has a seven-day period to publish a press release informing its shareholders and the public of the bad news.
Failure to publish the press release forces Nasdaq to suspend trading in a stock. Within that period, the company can also request a hearing to appeal the delisting decision.
If it fails in its appeal to Nasdaq, the company can move its case to the U.S. Securities and Exchange Commission (SEC) and then on to the federal courts.
On Nasdaq the delisting procedure for various violations of the exchange’s standards can take anywhere from 30 days to seven months.
The process of delisting of securities for any company is governed by the SEC. The SEC can also delist a sock when it believes such a move is necessary to protect the public interest and shareholders.
The regulator carries outs its investigations confidentially to maintain the effectiveness of any probe and to protect a firm and its shareholders if it eventually decides not to delist the shares.
Different Types of Delisting
Delisting occurs in one of two ways:
- Voluntary Delisting
- Involuntary Delisting
Voluntary Delisting: This occurs when a company decides that it would like to buy back all of its shares or move to an over-the-counter (OTC) market while in full compliance with the exchanges.
When a firm voluntarily delists, it may not be for a bad reason. This can happen as a result of a financial restructuring or a merger.
In these cases, shares might have moved to a different stock exchange, or they may trade under a different ticker symbol.
During mergers, a company may exchange its shares for shares in the company that acquired it, and any stockholders will have their shares converted, as well.
It is also possible for a company to be delisted from an exchange when the company goes private, meaning its shares have been bought out, possibly by an equity firm, and it could be an indication of better things to come for the company.
Usually, this is the type of delisting that traders ought to watch carefully.
Involuntary Delisting: This occurs when a company is forced to delist itself from an exchange because it is not in compliance with the listing requirements mandated by the exchange.
Typically, companies are notified 30 days before being delisted. Share prices may plummet as a result.
The practice of delisting stocks that fail to meet certain requirements is curious for several reasons: it removes shares from the stock market that traders wish to trade, often hurts the companies being delisted, and harms the traders holding those shares.
As far as the shares you hold, nothing much changes when a company voluntarily delist itself from a stock exchange.
All else being equal, a newly delisted stock gives shareholders the same level of ownership in the underlying company, and the security can be traded just the same.
Shareholders can either retain their share in the resultant private firm or sell them before the delisting date.
One area of concern is the company will not be required to adhere to strict guidelines that exchanges require like financial transparency.
Bottom Line
When a company is delisted, its stock are no longer eligible for buying or selling on the stock market. Involuntary delisting is often linked to either managerial or financial struggles.
However, there are good opportunities that can be found in public companies that voluntarily delist to go private and cash out their investors.
Typically, this is because executives are confident that the firm is undervalued or could save huge sums of money by running its operations as a private company.
These attempts to cash out shareholders can often generate substantial returns to traders willing to do a little homework.
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