What Happens When a Stock is Delisted From The Exchange?

Public companies enjoy the prestige and benefits of being listed on an exchange, allowing them to raise capital by selling shares to the public. However, exchanges have specific listing requirements that companies must adhere to maintain their presence. 

When a company's stock is removed from major stock exchanges, it's called "delisting." This can happen due to a range of factors, from failing to meet listing requirements to voluntary decisions by the company. 

This article explains what happens when a stock is delisted, how it works, and what investors can do to protect their investments in delisting situations.

Delisting, in simpler terms, signifies the removal of a company's stock from a major stock exchange like the New York Stock Exchange (NYSE) or the Nasdaq. This process can be voluntary, initiated by the company itself, or involuntary due to the company failing to meet the exchange's listing requirements. Each scenario carries different implications for investors and the company itself.

In this case, the company decides to remove its shares from the exchange. Reasons might include a decision to go private, merge with another entity, or restructure to escape the regulatory demands and disclosure requirements of a public listing. 

When a company delists voluntarily, shareholders may receive a buyout or tender offer to acquire shares. This can allow founders, private equity investors, or other stakeholders to obtain full ownership of the company, leading to private restructuring.

This occurs when a company fails to comply with the exchange's listing standards, often due to poor financial health or regulatory issues. When companies experience prolonged low stock prices, insufficient trading volumes, or fail to file periodic reports, exchanges may initiate delisting procedures.

Delisting has its advantages and disadvantages for companies.

To sum up, stock delisting is a significant transition that can alter a company's ownership dynamics and impact shareholder value. Whether voluntary or involuntary, the consequences for both companies and investors are substantial, as delisting restricts trading options and can signal financial distress. 

This shift allows management to streamline operations with fewer regulatory obligations for companies. However, for shareholders, delisting may increase risk exposure, reduce liquidity, and limit access to company information.

Below, we'll look into the most common reasons for causing a company to delist its stock.

The process of delisting a company's stock from a public exchange varies depending on whether the delisting is voluntary or involuntary. Below, we outline the steps involved in both scenarios, from initial considerations to final procedures.

Voluntary delisting, as mentioned above, occurs when a company decides to remove its shares from stock exchanges. Here's how the process typically unfolds:

Involuntary delisting is initiated by the stock exchange, usually when a company fails to comply with listing standards. The process follows these steps:

After delisting, shares may continue trading on Over-the-Counter (OTC) markets, such as the OTC Bulletin Board or the Pink Sheets. This transition is common for delisted companies willing to retain a degree of public access and liquidity. However, OTC trading is less regulated and typically has reduced liquidity and transparency.

Each exchange has specific criteria a company must meet to maintain its listing status. The Nasdaq delisting rules and NYSE delisting rules outline minimum requirements in areas such as stock price, market capitalisation, and financial reporting.

Nasdaq requires stocks to maintain a minimum bid price of $1 per share. The exchange issues a warning if a stock's price falls below this level and remains there for 30 consecutive business days. A grace period - typically 180 days - is granted to allow the company to regain compliance.

Both exchanges require companies to maintain a minimum market capitalisation. If a company's total market value drops below this threshold, it risks delisting.

Nasdaq and NYSE also mandate strict financial reporting guidelines. Companies must file regular financial statements. Failure to do so may result in suspension and, eventually, delisting.

Understanding these rules is essential for companies and investors, especially those holding stocks at risk of breaching any of these criteria.

While delisting doesn't necessarily mean a company is doomed, it can be a red flag for potential investors. Here are some ways to stay informed and potentially avoid holding stocks at risk of delisting.

Imagine you hold shares in a company, and one day, you hear the news: it's been delisted. This can be a confusing and potentially concerning situation for investors. 

When a stock is delisted, investors may feel an immediate impact. Common concerns include:

A delisted stock does not necessarily mean a loss of money, but it does imply reduced access and possibly lower stock value. Many delisted stocks suffer value drops due to the stigma of being removed from a major exchange. 

However, companies may sometimes successfully recover and relist on exchanges, which can restore value to the stock. If a company goes bankrupt post-delisting, shareholders may lose most or all of their investment.

When a company is delisted, shareholders face reduced liquidity and limited options for buying or selling their shares. However, delisting doesn't mean the shares are worthless, and shareholders still have several options. Let's explore the main options:

After a delisting, company shares may move to an OTC market, where they can continue trading but with less regulation and liquidity. Shareholders can still buy or sell shares, though typically at lower trading volumes and with wider bid-ask spreads than on major exchanges.

Share prices are often lower on OTC markets due to reduced demand so that shareholders may experience price declines.

If the delisting is part of a privatisation or merger, the company or a major investor may offer to buy out shares at a fixed price, often higher than the current market price. Shareholders can choose to sell their shares at this provided price.

For voluntary delistings, some companies may offer shareholders a tender offer, where they set a price at which they are willing to purchase shares from the public. Shareholders can decide whether to sell at this price or hold their shares.

Buyouts and tender offers provide shareholders with a way to exit their investment with some liquidity, often at a premium. However, shareholders should consider whether the offer price reflects the fair value of their shares.

In some cases, shareholders may choose to hold onto their shares in the hope that the company will restructure, improve its financial health, and potentially relist on a major exchange.

Some companies that delist voluntarily for restructuring purposes may eventually meet listing requirements again and return to a major exchange. If the company succeeds in relisting, shareholders could benefit from increased liquidity and potentially higher share prices. However, holding shares after delisting is risky, as there's no guarantee the company will recover or relist. Shareholders may face a long period with limited trading options and reduced share value.

Shareholders may be able to sell their shares privately to interested buyers. This can be done through private transactions, especially if the shares are in high demand or the company has a loyal investor base.

Some platforms facilitate the sale of private or unlisted shares, allowing shareholders to connect with interested buyers. This option enables liquidating shares outside traditional markets, though transaction fees may apply.

If a company is delisted due to severe financial distress, such as bankruptcy, shareholders may have limited legal rights to receive compensation during asset liquidation. Shareholders are last to receive payment, behind creditors and bondholders, in liquidation cases.

In cases of fraud, misconduct, or misrepresentation leading to delisting, shareholders may be eligible to join a class-action lawsuit to recover losses. These lawsuits are common when delisting results from regulatory violations or fraud.

While exercising legal rights may offer some compensation, legal processes can be lengthy and may involve costs. Shareholders should carefully evaluate the potential benefits versus legal expenses.

The impact of delisting on stock price depends largely on the reasons for delisting. Voluntary delisting, especially in privatisation cases, may offer some price stability due to buyout offers, while involuntary delisting generally leads to sharp price declines. 

Over the long term, delisted stocks usually see lower prices and limited liquidity in OTC markets, though a successful restructuring can sometimes reverse these effects. 

Stock delisting is a significant event that requires careful attention from investors. While not always catastrophic, delisting often signals serious issues and requires prompt action. Understanding the process, monitoring investments, and having a clear action plan can help investors navigate delisting events successfully.

Remember that prevention is better than cure - regularly reviewing your portfolio and staying informed about company performance can help you avoid the worst impacts of stock delisting.