When a stock is delisted, it means that it is no longer traded on a public exchange. This can happen for a variety of reasons, such as bankruptcy, a sale to take it private, or failure to meet the requirements of the exchange.
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If a stock is delisted, it can still be traded over the counter, but it may be more difficult to find buyers and sellers, and the stock may be considered riskier.
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Reasons for Delisting
Companies can be delisted from a stock exchange if they file for bankruptcy. This is because bankruptcy is a sign that the company is in financial distress and may not be a good investment.
Delisting the stock can help protect investors from buying into a potentially risky or failing company.
These requirements are in place to ensure that the companies listed on the exchange are financially healthy and have a certain level of stability, measures taken to protect both the investor and the integrity of the exchange.
2. Private sale
It’s possible for an investor or company owner to acquire all of the outstanding shares of a publicly traded company and then delist the company from the stock exchange. This is known as going private.
To do this, the investor or owner would need to make an offer to buy all of the outstanding shares at a price that is fair and attractive to the shareholders. If a shareholder majority accept the offer and sell their shares, the investor or owner would then own a controlling stake in the company.
3. Failure to meet the exchange requirements
An exchange may delist a stock if the company fails to meet certain requirements, such as minimum stock price or market capitalisation. Similar to bankruptcy proceedings, these requirements are in place to ensure that the companies listed on the exchange are financially healthy and have a certain stability.
Other reasons might include failure to appropriately disclose all financial records and uphold the commitment to jurisprudence, transparency and accountability to the exchange.
Regular and timely disclosure of financials, appropriate governance structure, and required regulatory reporting will all fall under this mandate. Any material decline in the quality and quantity of reporting and the exchange might take steps to delist the company in order to protect investors and the reputation of the exchange.
Another reason why a company’s stock may be delisted is if it merges with another company or if it is acquired by another company. In these cases, the combined company or the acquiring company may choose to delist the stock. This is to simplify its operations and reduce the number of stocks it has listed on the exchange, thereby simplifying its capital structure, lowering costs, and amplifying investor sentiment where required.
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Delisting through bankruptcy examples
Of the more notorious bankruptcies to have befallen large, listed companies, Enron and WorldCom come to the fore. Both publicly traded companies orchestrated accounting frauds and misled the public over their true earnings.
The subsequent unveiling of the fraud and stock valuation collapse sent reverberations through the stock market and instigated a complete overhaul of the regulatory measures in place.
Hertz wasn’t guilty of any fraudulent activity but fell afoul of a high debt burden and squeezed margins as Uber quickly grabbed wallet share. After filing for bankruptcy, the NYSE delisted its shares and it now trades in the riskier over-the-counter (OTC) market. Typically, bilateral transactions with limited liquidity outside of large financial institutions will take a large slice of the capital for any underwriting and risk taking.
OTC is a less-than-ideal way for a company to raise capital. With equity funding typically more expensive than debt, OTC in its dark liquidity pools adds additional complexity and cost to the capital-raising exercise.
Investors in OTC markets are also presented with additional risk, as any exit sought under unfavourable business conditions becomes more complicated due to the lack of a centralised exchange.
Delisting through private sale examples
Recently, we witnessed Elon Musk take Twitter private through a nominal offer for all of the shares listed on the exchange. Once majority ownership was secured and a price agreed upon, some holdouts were offered the opportunity to roll into the new private ownership holding structure.
In the case of Twitter and in some other private transactions, holdouts can be offered to roll into the new OTC structure. However, once a majority of the voting shares is secured and a price agreed, there is little that holdouts can do to prevent a sale outside of very expensive and lengthy litigation.
There are several reasons why an investor might take a company private – for example, a company may be performing poorly and its stock price may be low, making it an attractive target for a takeover.
Going private can allow the investor to restructure the company and make changes without being subject to the scrutiny of public shareholders. In some cases, an investor may also take a company private in order to simplify its operations or to avoid the costs and regulations associated with being a publicly traded company.
Regulations for listing a stock are quite onerous and expensive. The regular quarterly and annual reporting deadlines, on top of some more frequent disclosures for more sensitive companies, can eat into the profit of a company that might genuinely not need the ready access to capital that a listing provides.
A listing is a cost-benefit, and if the company is generating enough cash on a longer business cycle that doesn’t require the regular steadying hand of a large corporate control function, delisting may make perfect sense.
Dell is another example of a company that was better suited to going private. Dell’s original owner sought to remove the company from the centre stage of a stock market listing in order to reorganise and improve its operations.
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Delisting for failure to meet the exchange requirements examples
Minimum bid and capital requirements are in place to protect the integrity of the exchange. Too small a liquidity pool and the door is open to price manipulation or other illegal trading activity that could incur liability on the listing exchange.
The major exchanges would prefer that type of activity to be guarded against so require listed companies to maintain a price above a certain level for a number of days and a total capital pool above a predetermined figure. Failure to do so for a number of preset consecutive days and the exchange will take steps to delist the company.
The company will then be forced into OTC pools, which come with their own hazards and costs. This does not mean that as a stockholder, your position is forfeit – you’ll just find it that much harder to exit your position and achieve a fair price.
Management that is considered to be inadequate, poor or poorly executed corporate controls, and failure to meet the reporting requirements are all examples of actions that may pre-empt a delisting from a stock exchange.
The stock market carries a certain cachet. It is where a company receives its honours and is recognised among its peers. Stock market exchange operators act as the guardians and stewards of this incredibly valuable access to capital and will only tolerate the best behaviour – otherwise, it’s the exit.
When two companies merge, the resulting company may choose to delist one or both of the original companies’ stocks from the exchange. This is because the combined company may want to simplify its operations and reduce the number of stocks it has listed on the exchange.
For example, if Company A and Company B merge to form Company C, then Company C may choose to delist the stocks of both Company A and Company B. This would mean that the stocks of those companies would no longer be traded on the exchange, and investors would need to sell their shares in order to realise any value from them.
There is a multitude of reasons why a company may decide to delist or be forced to do so. At times, it may be the most appropriate course of action, and in other cases, it may be the work of darker forces. Ownership and the valuation of the holdings can be materially affected, so if anything is unclear, you should always seek out the best advice.
Always do your own due diligence and consult with the experts where you can. Asktraders.com has provided a wealth of data and information for you. Ensure that you do your research and understand what you’re getting into before you make any investment decisions.