Delisting: What It Means and How It Works for Stock Shares

What Is Delisting?

Delisting is the removal of a listed security from a stock exchange. The delisting of a security can be voluntary or involuntary and usually results when a company ceases operations, declares bankruptcy, merges, does not meet listing requirements, or seeks to become private.

How Delisting Works

Companies must meet specific guidelines, called listing standards, before they can be listed on an exchange. Each exchange, such as the New York Stock Exchange (NYSE), establishes its own set of rules and regulations for listings. Companies that fail to meet the minimum standards set by an exchange will be involuntarily delisted.

The most common standard is price. For example, a company with a share price under $1 per share for a period of months may find itself at risk of being delisted from the Nasdaq.

Alternatively, a company can voluntarily request to be delisted. Some companies choose to become privately traded when they identify, through a cost-benefit analysis, that the costs of being publicly listed exceed the benefits. Requests to delist often occur when companies are purchased by private equity firms and will be reorganized by new shareholders. These companies can apply for delisting to become privately traded. Also, when listed companies merge and trade as a new entity, the formerly separate companies voluntarily request delisting.

Involuntary Delisting of a Company

The reasons for delisting include violating regulations and failing to meet minimum financial standards. Financial standards include the ability to maintain a minimum share price, financial ratios, and sales levels. When a company does not meet listing requirements, the listing exchange issues a warning of noncompliance. If noncompliance continues, the exchange delists the company’s stock. More reasons for being delisted are discussed below.

To avoid being delisted, some companies will undergo a reverse split of their stock shares. This has the effect of combining several shares into one and multiplying the share price. For example, if a company executes a 1-for-10 reverse split, it could raise its share price from 50 cents per share to five dollars per share, in which case it would no longer be at risk of delisting.

The consequences of delisting can be significant since stock shares not traded on one of the major stock exchanges are more difficult for investors to research and harder to purchase. This means that the company is unable to issue new shares to the market to establish new financial initiatives.

Often, involuntary delistings are indicative of a company’s poor financial health or poor corporate governance. Warnings issued by an exchange should be taken seriously. For example, on April 23, 2023, Bed Bath & Beyond Inc. filed for voluntary Chapter 11 protection. As a result, NASDAQ informed the company that Bed Bath & Beyond's common stock would be suspended at the opening of business on May 3, 2023. As communicated, the stock has been delisted.

In the United States, delisted securities may be traded OTC except when they are delisted to become a private company or because of liquidation.

What Are Common Reasons Companies Get Delisted?

While there is no infallible method to predict stock delistings, there are certain warning indicators that may suggest that a stock is at risk of being removed from trading. These were discussed briefly above; below is a more comprehensive list of indicators that may indicate when a company's stock may be delisted. Be mindful that this list may not be exhaustive.

• Regulatory Compliance: If a company fails to meet the listing standards specified by the stock exchange such as maintaining a minimum share price, a minimum market capitalization, or publishing regular financial reports, the company runs the risk of being delisted.
• Financial Difficulty: Companies that are facing financial difficulties such as dropping sales, mounting debts, or sustained losses may be at a higher risk of having their stock delisted from the market.
• Legal Problems: Serious violations of regulatory standards might result in delisting. Examples of such violations include fraud, accounting issues, or a failure to comply with applicable securities laws.
• Bankruptcy: Delisting of a firm's Stock may result from bankruptcy or considerable reorganization. If a firm declares bankruptcy or goes through considerable reorganization, the stock of that company may be delisted.
• Low Trading Volumes: Stocks that have persistently low trading volumes may be at risk of being delisted, as exchanges frequently have minimum requirements in place to ensure investor interest and sufficient liquidity.
• Governance Standards: A failure to comply to standards for corporate governance, such as having an insufficient number of independent directors or an ineffective audit committee, may both raise concerns and lead to delisting of the company.
• Changes in Listing Requirements: There may be changes to the listing requirements of the exchange where the stock is listed, and these changes might put corporations at danger of delisting if they fail to meet the new criteria within the allotted amount of time.

What Is the Process of Delisting?

When a company fails to comply with listing requirements, it will receive adequate warning. Delisting doesn’t happen overnight. Notifications are made and time is granted to the subject to get its affairs in order. If the noncompliance continues after these warnings are made, the company will then be removed from the exchange. 

Voluntary delisting works differently. If a company decides it no longer wants to operate in the public eye, it must consult with its stakeholders first. A resolution has to be passed in a board meeting and put to shareholders.

Once enough shareholders are on board, the company needs to get the green light from the stock exchange that it wishes to delist from and put out a statement outlining its intent. An investment bank will be in charge of managing the delisting. One of its first jobs is making sure there is enough money to buy back the shares.

In order to delist, the company essentially needs to buy back a certain percentage of shares from the total outstanding. This threshold is decided by the exchange. To buy these shares, a bidding process occurs. A fair price is negotiated and announced to the public, and the company pays up within a specified deadline to see its delisting through. To convince investors, the company will usually have to pay them a premium to the current share price.

What Happens to My Shares After Delisting?

When a company delists voluntarily, shareholders will usually receive cash to buy them out or shares in the new, acquiring company. When it is forced to go, the outcome is usually different. No special offer comes. You either find a buyer on the exchange or are left holding a stake in a company that’s no longer listed.

Holding delisted stocks generally isn’t very desirable. The shares don’t disappear but do become much more difficult to trade. Once off the exchange, they can trade OTC. These markets don’t offer the same accessibility and liquidity as the major exchanges. You’ll be faced with higher transaction costs and wider bid-ask spreads.

Another factor to consider is that there’s less regulation outside of the major exchanges. Requirements are more relaxed, including those relating to communications, leaving investors more in the dark and unaware of what is going on within the company in which they’re invested.

What Should I Do After Delisting? 

If you still hold shares after they’ve been delisted, your next step depends a lot on what you’re invested in, how convinced you are about its prospects, and whether you have the stomach to deal with the murkier, less transparent alternative exchanges.

You can still sell the shares, but the conditions to do so will now be generally less favorable. Volume thins out when you leave a major exchange. With OTC transactions, there are fewer buyers and sellers, meaning wider bid-ask spreads and getting less than the going rate. In some cases, you may only be able to trade the shares by appointment.

The Bottom Line

A company is delisted when it is removed from a stock exchange. No longer selling shares to the public can be voluntary or involuntary. Companies may prefer to go private to avoid having to answer to the public and jump through regulatory hoops. Alternatively, they may be kicked out of the exchange for failing to meet its listing requirements or because they ran out of money and went bankrupt.

Investors holding shares after a delisting will only be able to sell them OTC. That generally means less liquidity, finding it harder to locate buyers at the price you want, and potentially being left in the dark about what the company is up to.