Meaning of Delisting

When a publicly listed company is delisted from the stock exchange, it becomes a private entity. As a result, shares cannot be traded in the open market. However, if a firm is unlisted on one stock exchange, shares might still be available on other stock markets.

Key Takeaways

  • Delisting of stocks is the voluntary or involuntary removal of a company’s security from the respective stock exchange. It thus leads to the privatization of a public company.Private firms cannot raise funds from the public. However, existing shareholders retain their stake in the business.Withdrawl from the stock market can lead to devaluation of stocks, tarnished reputation, and loss of market share.These firms are not required to publish annual reports—directors gain control over decision-making. These firms are less prone to hostile takeovers.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Delisting (wallstreetmojo.com)

What Happens when Stock Delist?

After delisting, the company’s shares cannot be traded on the stock exchange. This is usually caused by mergers, bankruptcy, or when a company voluntarily goes private. Alternatively, companies are removed from the stock marketStock MarketAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company’s financial statements.read more for not meeting mandatory conditions.

Let us take a closer look at the process. NASDAQ mandates compliance with certain requirements. When a company’s share trades below $1.00 for 30 consecutive days, the shares get delisted from the stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more. On the 31st day, the stock exchange sends a non-compliance notice to the company. The notice instructs the company to delist its shares. 

If the stock trades below the stated amount 180 days post notification, the exchange will delist the issue. The exchange suspends trading, notifies the issuer, notifies the Securities and Exchange Commission (SEC) in writing, and formulates a press release.

Types

Following are the routes for going private:

#1 – Voluntary Delisting

The company’s directors willingly take off the shares from the stock exchange listing, this is referred to as ‘voluntary.’ Companies often wish to go private. It is also brought out by mergersMergersMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more, acquisitionsAcquisitionsAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more, and liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more.

Sometimes, companies that go private struggle with business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company’s goals like profit generation.read more. Such an action could trigger speculations—the company does not want to disclose its financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more anymore.

source: startribune.com

#2 – Involuntary Delisting

Involuntary delisting is done forcefully—caused by adverse circumstances. It is a scenario where the company does not want to go private, but laws and regulations require it to do so.  

This happens when a company fails to meet minimum financial standards—incurring losses for three straight years. Not meeting minimum share price, financial ratiosFinancial RatiosFinancial ratios are indications of a company’s financial performance. There are several forms of financial ratios that indicate the company’s results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more, or sales can also get a company delisted.

List of Delisted Stocks

Let us look at some examples to understand the practical application of this concept.

On March 8, 2022, the New York Stock Exchange (NYSE) announced the delisting of SCVX Corp’s Class A ordinary shares—due to non-fulfillment of listing standards. SCVX Corp. failed to maintain a minimum market cap of $40 million—over a period of 30 consecutive days.

Similarly, on March 11, 2022, shares worth $1.1 trillion were delisted by SEC. These shares belonged to Chinese corporations—Yum China, ACM Research, HutchMed, Zai Lab, and BeiGene. The companies could not furnish detailed audit reportsAudit ReportsAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company’s financial statements.read more that certified their financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. Therefore, based on the Holding Foreign Companies Accountable Act, the shares were removed.

Advantages

Following are the advantages.

  • Delisted firms do not have to publish its annual reportsAnnual ReportsAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company’s performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more or shareholding patterns anymore.Private companies are not subject to a minimum listing limit anymore.Business cut expenses—listing fee and annual trading costs. Private firms are less prone to hostile takeovers.Private firms are exempt from market speculation.Directors retain decision-making ability.

Disadvantages

Following are the disadvantages.

  • A private company cannot raise funds from public markets.When a company delists, it can lose public trust—market share can shrink.It can also negatively affect the book valueBook ValueThe book value of equity reflects the fund that belongs to the equity shareholders and is available for distribution to the shareholders. It is computed as the net amount remaining after deducting all of the company’s liabilities from its total assets.read more of the company.Delisted stocks undergo considerable devaluation. Shareholders end up losing investment value.

This article has been a guide to what is Delisting and its Meaning. We explain the delisting of shares, securities & companies from Nasdaq, NYSE, & stock exchanges. You can learn more about accounting from the following articles –

When companies are removed forcefully, stakeholders have an option called stock buyouts. If the security is relisted, shareholders can sell their equity on over-the-counter markets or on the new exchange platform.

Even when a company is removed, shareholders don’t lose their equity. But shareholders cannot sell the securities in the open market any longer. Instead, stocks belonging to private firms lose value to a certain extent. With voluntary withdrawal (acquisitions and mergers), shareholders often receive shares of the new business entity. If a company is removed forcefully, stakeholders get a stock buyout offer.

Sometimes, companies do get relisted on a stock exchange.

  • Paid in CapitalShares VestingStock Splits DefinitionCapital Market Types