Delisting share: what is it?
A stock exchange delisting is the removal of a listed security ( share ) from a stock exchange . Delisting can be voluntary or involuntary and is usually the result of a company ceasing operations, bankruptcy, merger, failure to meet listing requirements or an attempt to become private. What are all the reasons for a stock exchange delisting? And what is the consequence of a delisting for your shares? In this blog you can read all about a stock exchange delisting.
Why do companies want a stock exchange listing?
To understand what delisting of shares entails, it is important to understand what a listing is. A listing is a stock exchange listing, it is the entry of a company on the stock exchange. The number 1 reason why companies want this is capital. If you are listed as a company, it is easier to raise money by selling shares.
Reasons for a stock ‘delisting’
However, a listing also brings with it responsibilities for companies. For example, 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 listing rules and regulations.
Companies that do not meet the minimum standards of a stock exchange are involuntarily delisted. The most common standard for this is price. For example, a company with a stock price below $1 per share for a period of months is at risk of being delisted. Alternatively, a company may voluntarily request to be delisted.
Why would a company voluntarily request a delisting? Some companies choose to delist when they determine that the costs of a listing exceed the benefits. Requests for voluntary delisting often occur in the following cases:
- When companies are acquired by private equity firms and will be reorganized by new shareholders.
- When listed companies merge and trade as a new entity, the previously separate companies voluntarily request delisting.
Reason for delisting a share: Involuntary delisting of a company
However, a company may wish to remain listed on the stock exchange, but be delisted. This is then called an involuntary delisting. The reasons for delisting a company include:
- Violating regulations
- Failure to meet minimum financial standards.
Financial standards include the ability to maintain minimum share prices, financial ratios, and revenue levels. When a company fails to meet the listing requirements of an exchange, the exchange issues a warning of non-compliance. If non-compliance continues, the exchange delists the company’s stock.
To avoid delisting, some companies reverse split their shares, also known as a ‘reverse stock split’. This results in several shares being merged into one and the share price being multiplied. A reverse stock split is the opposite of a traditional stock split .
For example, if a company does a 1-for-10 reverse split, its stock price might rise from 50 cents per share to $5 per share, in which case it is no longer at risk of being delisted based on a stock price norm.
The consequences of a delisting could be significant, as shares that are not traded on one of the major stock exchanges are harder for investors to research and buy. This means that the company is unable to market new shares to set up new financial initiatives.
Involuntary delisting is often an indication of a company’s poor financial health or poor corporate governance. Warnings issued by an exchange should therefore be taken seriously by investors.
What happens to my share?
A share can therefore lose its stock exchange listing for various reasons. But what if you own a share that is or has been delisted? The moment of delisting is very important to pay attention to. If a share has not yet been delisted, you as an investor often still have a few days to sell. Once a delisting has taken place, you can no longer trade in this share on the relevant stock exchange. You can then no longer increase or decrease your share position, buying and selling is then no longer possible. You do remain the economic owner of delisted shares, which means that you are still entitled to any dividends. You can also wait for a relisting.
It is possible that a share is also traded on other exchanges. Your broker must also provide access to this. After a delisting, you can also trade OTC. OTC stands for Over-the-Counter, which means that you trade directly with a counterparty and you then speak of a transaction outside your broker. This is therefore not a normal transaction and for most people not an option.
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