Key Takeaways

• Delisting means the removal of a listed stock from a stock exchange, which can be voluntary or involuntary.

• Reasons for voluntary delisting may be mergers, takeovers, or companies wanting to go private. Apart from political factors, involuntary delisting usually means that the company failed to meet listing requirements set by an exchange, which include regulatory, financial, and trading standards.

• Delisting does not affect your ownership. In most cases, you can sell your shares in the over-the-counter market, but it may be more difficult and riskier. In some cases, you can sell your shares back to the company at a premium. And if the company gets listed on another market first, you can also convert your shares.

Understanding a delisting

A company can be listed and can also be delisted. Delisting means the removal of listed security from a stock exchange. Once delisted, the stock can no longer be traded on that exchange unless it is listed there again.

Delisting can be voluntary or involuntary. Voluntary delisting means that the company chooses to do so on its own. In contrast, involuntary delisting usually happens as a punishment when the company can not meet the requirements set by the exchange where it is listed.

Involuntary delisting often shows poor financial health or poor corporate governance. On the contrary, voluntary delisting may occur for good purposes.

In America, delisting frequently occurs,  with a large part being voluntary.

When a company fails to meet the exchange's listing requirements, it will receive a warning from the exchange where it is listed. The warning usually comes with a deadline, which gives the company some time for adjustments. If non-compliance remains by the deadline, the exchange will delist the company's stock.

Reasons and examples

A stock can be delisted for various reasons.

In voluntary delisting, reasons can be mergers, takeovers, and financial restructurings. The company may also delist to go private or reduce expenses and temporal costs for decision-making.

For example, Burger King has been delisted twice, voluntarily both times, from the New York Stock Exchange(NYSE). In 2010, it went private after being bought by 3G Capital. It was relisted two years later but merged with Tim Hortons in 2014 and got delisted again.

Involuntary delisting happens when companies cannot comply with certain standards, including regulation violations like financial fraud and not filing reports on time. Noncompliance also involves failure to meet financial standards like pre-tax earnings, revenues, total assets, and cash flows or trading standards like market cap and stock price.

For example, Luckin Coffee was heatedly discussed in 2020 because of financial fraud and ended with delisting from Nasdaq.

In particular, a price trading below $1 per share for a specified length of time is the most common reason.

Pets.com, which sells pet food and accessories on the Internet, was established in 1998. It was popular earlier, but its stock price fell below $1 later due to high transportation costs and marketing expenses, which eventually caused its delisting.

In addition, some political factors may also play a role in involuntary delistings. Delistings of China Mobile, China Unicom, and China Telecom from the New York Stock Exchange are a few examples.

Effects to investors

What effects will delisting have on investors? Let's take the US market as an example.

Firstly, delisting does not affect your ownership, and you still own your shares.

If a company delists voluntarily for reasons like mergers or going private, the company generally will offer a buyback of its shares at a premium price. You can sell your shares back to the company within the given time. The repurchase can be in the form of cash or new shares.

If you prefer not to do so or the delisted company doesn't offer a buyback,  you can often sell your shares in the over-the-counter market. However, it is more difficult for you to find the right buyer in this market. And it gets riskier, too.

Another situation is that some delisted companies will choose to go public in another market.

If the new listing precedes the delisting, investors can convert their shares into the new market's shares in a particular proportion so they won't be impacted much. If its delisting happens ahead of the new listing, it is similar to going private for investors.

The information contained herein is for educational purposes only. Nothing discussed should be considered investment advice.