All About Stock Delisting

Oct 20, 2021 04:19 PM ET
All About Stock Delisting

In stock exchanges, investors get the chance to trade the shares of companies. However, two circumstances can lead to the delisting of a stock. The reasons can be either a voluntary decision by a company to delist or failure by the issuer to meet certain requirements in the stock exchange. Once the process is completed, the affected company will have to undergo a fresh clearance procedure when it is ready to be re-listed.

An overview of the primary reasons for delisting

  • Lack of trading or where trading has become negligible.

  • When listing guidelines are not being followed.

  • Bankruptcy.

  • When in the issuing company's opinion, the costs of listing outweigh the advantages of listing.

  • The private investor takes over the business.

Types of delisting

As highlighted above, delisting can either be voluntary when a company wishes to get off the market for strategic reasons or involuntary when it fails to meet certain listing requirements. For that reason, involuntary delisting is also known as exchange-initiated delisting.

Involuntary delisting

This is a form of exchange-initiated delisting. It is usually a result of the failure by a company to meet certain prerequisites for listing in a particular exchange. Such a failure can be due to financial incapacitation or violation of good conduct, certain standards, and procedures. The decision to involuntarily delist companies is usually a measure to protect investors from harmful business practices and safeguard their funds from failing businesses. 

Such action is often taken following previous warnings by the exchange to the concerned company. Following the failure to adhere to the set conditions after successive second chances, what usually follows is the delisting of the stock. An involuntary delisting is often a trigger for a massive drop in stock prices.

Voluntary delisting

Voluntary delisting is an action taken by the stock issuer, asking a stock exchange to remove its shares from its list of tradable assets. Such an action is usually for strategic reasons and does not signal that the concerned company is in the red. A voluntary delisting by a firm is not always a bad thing.

Delisting may be desirable for the reasons below.

  • To save money: Public trading is costly. Because of the high costs of complying with authorities and rules, smaller companies may decide that going public isn't worth it.

  • To make a profit in the short term: To make a profit in the near term before delisting, companies that have stocks that are trading at or below their true value may repurchase those shares to raise money. Current stockholders may reap the benefits of this, as well, receiving substantial profits.

  • To facilitate a takeover: In the event that a firm is acquired, the new owners may wish to take it private.

  • To enhance efficiency in decision making: Because listed companies are publicly traded, the decision-making process can take longer periods significantly and often ends up in paralysis that hinders growth. This is because several shareholders and the company board of directors must have a say on critical decisions. Therefore, some companies may opt to delist as a strategic move to enhance decision-making and speed up their growth processes. 

Impact on investors

  • Delisting a stock causes its total removal from a stock exchange. Investors can, in theory, still sell their stock to potential buyers afterward. 

  • In practical terms, however, ownership of security loses all value when you no longer have the right to use it. When news fizzles out that a company is about to be delisted, it usually sends the share price down, effectively wiping out whatever investment you may have made, especially if the delisting is involuntary.

  • It's possible that such a stock will go out of circulation and become difficult to trade. When a stock is taken off the main exchange list, it is relegated to over-the-counter (OTC) trading. Because of the lax regulations, these exchanges do not allow everyone to trade.

  • However, when a listed company goes private, investors get some of their money back because the company buys out the existing owners.

  • It is possible for a business to become bankrupt and still trade on OTC. However, these shares may lose all of their value if fresh shares are issued as part of the company's recovery plan after it emerges from bankruptcy.

  • Even after a corporation emerges from bankruptcy, there may be two distinct classes of common stock: the old shares and those issued as part of the restructuring plan:

    1. Stocks that have been involved in bankruptcy proceedings are listed on the Over The Counter Bulletin Board. To spot them, look for a 5-letter ticker with the letter "Q" at the end.

    2. The "Q" will not appear at the end of the new stock's ticker symbol. However, in certain cases, the new stock may just have been authorized but never actually released into circulation. Such a stock's ticker symbol will include a "V," which will be removed after the stock is issued.

What course of action should you take?

If you think a company will be delisted, it's probably a good idea to sell your stock. A firm's value is reduced as a result of involuntary delisting, depending on and the circumstances leading up to it. If the company goes bankrupt, you risk all your investment. It's probable that your shares will be delisted, and you'll have limited time to sell them before they're converted into cash or exchanged at a predetermined conversion rate for stock in the newly-merged entity.

In summary

Even though learning about the delisting process can help investors better understand stock market mechanics, it is better that you keep off delisted stocks because of the risks they carry. You should also be keen on any news or signs of delisting of a stock you are holding and sell them when the time is still favorable.


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