What Happens When a Stock Is Delisted?

Companies will list themselves on a publicly-traded stock exchange so that potential investors can buy or sell their shares.

In some circumstances, after having listed with an exchange, a company may subsequently undergo a delisting, either voluntarily or involuntarily.
When this happens, the stock is no longer traded on that particular exchange.
There are various reasons why a stock may be delisted, with certain consequences for both shareholders and the company in question.

Why Do Stocks Get Delisted?

A very common reason for a stock to delist is that it can’t maintain a minimum price point. The NYSE, for example, sets a $1 minimum for its stocks. If a stock closes below a certain price for 30 or more trading days, it may be removed from the exchange altogether. This $1 minimum is a common standard also used by the NASDAQ.

Stocks can also be delisted due to reporting failures. Publicly traded companies are required to file regular financial reports in order to keep investors appraised of their performance. Failure to file these reports on time can result in delisting.

Bankruptcy proceedings are another common catalyst for delisting. While there’s no legal restriction on trading in bankrupt companies, the bankruptcy process itself often causes stocks to fall below the minimum price required by exchanges. As bankruptcy can cause stocks to fall to near-zero prices, it’s often difficult for companies to keep their shares trading publicly as they attempt to restructure.

In some cases, stocks delist in order to become privately owned again. Generally, this involves a tender offer from an outside group of investors. When a company is taken private, current shareholders are paid a premium for their shares. After the privatization, the stock is removed from the exchange it traded on and shares can no longer be bought or sold in public markets.

A final cause of delisting is a voluntary decision on the part of the company to no longer trade publicly. This is very similar to the case of a company being bought out privately, except that it involves no direct changes in ownership. Companies may choose to voluntarily delist for strategic reasons or to avoid the costs and regulatory burdens that come with trading publicly.

Who Decides If A Stock Is Delisted Or Not?

Delisting can be initiated in one of two main ways.
First, an issuing company may voluntarily delist itself from an exchange. This could be because the firm is about to merge with another business, or, in some instances, because the stock is moving from one jurisdiction to another.
There may be other good reasons for a company to voluntarily delist as well.
For instance, it’s often expensive to remain listed on one of the major stock exchanges. The costs associated with regulatory compliance are not trivial, and exchanges also charge both one-off and annual listing fees to the companies that they host.
Furthermore, going private can give companies a strategic edge. A delisted business is less beholden to shareholder input, meaning it can be more agile when it comes to making crucial decisions.
Second, a stock may be delisted involuntarily if it fails to meet the minimum listing criteria for the exchange it’s being traded on.
This is the case because, when companies join an exchange, they agree to maintain full accordance with the requirements that the stock exchange sets out.
While the precise listing criteria differ between exchanges, they usually have a few things in common. These can include requirements that the stock must trade above a minimum price, as well as ensuring that the stock is sufficiently liquid, exemplified either through shareholder equity or a minimum market value.
Another unique way a stock can be delisted is through an executive order. This is what happened to a number of Chinese companies in 2020, when President Trump signed into effect legislation that resulted in them being forced off the New York Stock Exchange. The action was spurred by the suspicion that the businesses were owned and operated by the Chinese military.

What Happens To A Stock When It’s Delisted?

Shares don’t just disappear when a company is delisted. In fact, when a firm’s shares are delisted, they may still continue to trade over-the-counter for many years afterward.
However, the market for such stock is almost always less liquid than it would have been on a public exchange, with bid/ask spreads also wider than normal. This can result in investors getting a worse price for their holdings had the stock not been removed.
In some scenarios, if the company is merged with another entity, shareholders will be given a limited time in which to sell their existing stock. If they fail to sell their stock in the allotted window, their shares will either be exchanged for the purchasing company’s stock, or simply converted into cash.

What Happens to Shareholders When Stocks Are Delisted?

The status of shareholders after a delisting takes place depends largely on the reason the stock was delisted. The best-case scenario for shareholders is a privatization, as this results in a premium price being paid for their shares.

When X (formerly Twitter) went private, for example, Elon Musk paid $54.20 per share. This was 64 percent higher than where the stock was trading before the tender offer, giving investors a large premium on their existing holdings.

Shareholders who own companies that are delisted for financial problems or reporting failures typically aren’t as fortunate. Although delisting doesn’t change shareholders’ ownership, the value of stocks that have been pulled from public exchanges tends to fall rapidly.

As such, it’s often best to sell shares in a company when a delisting appears imminent to avoid further losses.

What Does the Delisting Process Look Like?

While there are many ways for a stock to become delisted, all of them involve a fairly lengthy process. As such, stock delistings are typically slow, drawn-out affairs that won’t take investors by surprise.

In the case of stocks being delisted due to not meeting exchange requirements, the first step of this process is a notice from the exchange itself. This notice will inform the company of its failure to comply with listing requirements and act as a warning. From here, the company must respond to the notice and lay out its plan or intention to regain compliance.

In the case of mandatory delisting, exchanges are generally willing to move slowly. Often, if a company can become compliant within six months of the notice, the exchange will cease the delisting.

This slower process provides businesses a chance to put themselves in good standing with the exchange again while also protecting shareholders from sudden changes to their ability to liquidate their shares.

The process for taking a company private is a similarly extended one. After a tender offer is made, management and shareholders must approve the deal and submit it for regulatory approval.

After that, a date is set for payment to be made to shareholders, after which the company will no longer trade publicly. Depending on the regulatory hurdles involved, this process can take several months to complete.

Can Investors Buy and Sell Delisted Stocks?

An investor who owns shares in a public company doesn’t lose those shares simply because the stock no longer trades on a major exchange.

Once delisted, stocks move to the over-the-counter (OTC) market, where they may still be bought and sold. OTC markets are also home to smaller companies and international firms that can’t meet the requirements of the major exchanges.

It’s important to understand, however, that buying and selling stocks on an OTC basis presents significant risks to investors.

In addition to the fact that OTC stocks are typically very small or financially embattled companies, there are direct risks associated with the OTC market itself. Unlike public stock exchanges, the OTC market is decentralized, opaque and subject to looser regulatory standards.

The other major problem with OTC trading is a comparative lack of liquidity. Whereas major exchanges facilitate transactions between massive numbers of buyers and sellers, OTC marketplaces serve much smaller pools of investors. As such, it may be difficult for shareholders to find buyers for their shares, reducing their ability to quickly liquidate if and when they decide to.

It’s also worth mentioning that not all stocks that are delisted from major exchanges ultimately make it onto the OTC market. Companies that are taken private, for instance, no longer trade on any market because they have been purchased by private investors.

Should You Own Delisted Stocks?

It’s generally too risky for most investors to hold delisted shares. These stocks are usually very high-risk, and finding buyers for the shares you own in the over-the-counter market can be difficult. There are, of course, always exceptions, and some risk-tolerant investors can find decent buys among delisted companies.

Even when good bargains are present, companies that still trade OTC after being delisted from major exchanges are generally what Warren Buffett has historically referred to as “cigar butts.” In other words, there may be one good puff left in a stock, but investors are unlikely to find quality businesses to buy and hold for the long term among delisted companies.

Can Stocks Be Relisted?

Although it’s rare for a stock to be relisted, there’s no reason it shouldn’t be in theory.
That said, for a stock to be relisted, it would first have to avoid being wound up in the intervening period, as well as solve all the issues that resulted in its delisting in the first place.
What’s more likely to happen, however, is that when a company’s threatened with delisting, it takes action to remedy the situation. This could entail going ahead with a reverse split to raise its minimum share price, or sorting out any SEC reporting oversights it may have fallen victim to.
Some brand names do reappear after delisting, but the shares in these companies are not the same as those that were originally traded. One example of this would be American Airlines, whose parent company was delisted at the beginning of 2012.

Although delisting can seem very final, there are examples of companies that have traded publicly, delisted and then returned to public markets later on. In most cases, these are companies that have been bought out and taken private, rather than those that delisted due to financial or reporting issues.

Businesses delisted for other reasons can, however, also make their way back onto public exchanges. A company that is delisted for failed financial reporting may be relisted once it returns to good standing. These instances are fairly rare, but they take place often enough to be worth noting.

One prominent company to have gone through this cycle is American doughnut chain Krispy Kreme. The company initially went public in 2000 but was bought out by a private entity after bankruptcy proceedings in 2016. In 2021, the company once again returned to the stock market and has remained public ever since.

How Are Traders Impacted When A Stock Is Delisted?

Share prices won’t automatically rise or fall when a stock is delisted.
The fundamentals of a business are not altered when a stock is removed from an exchange – although the grounds for delisting will likely already have informed its price movement up until that point.
For example, if a stock is voluntarily delisted for positive reasons, investor sentiment in the company should also be positive too. This will have a salutary effect on the stock’s performance, and its price could very well go up.
Alternatively, if a stock is involuntarily delisted, there will usually be aspects of its governance that are operating below par. Investors will see this as an unfavorable development, and it’s probable that the share price will subsequently go down.

What Happens When a Stock Is Delisted?

When a stock is delisted, the share price of the stock typically falls sharply and shareholders lose a lot of value but still own their holdings.

Delisting happens when a stock is removed from an exchange. The process is usually initiated by the exchange itself, but the company can decide to do so if it believes it will benefit in some way.
The company’s shares can still trade over-the-counter, but liquidity will be reduced. Some businesses are able to restructure after delisting and can continue to operate. For some other firms, however, delisting is a precursor to more onerous times, with many ultimately going bankrupt further down the line.

When investors buy shares in public markets, they typically assume that they will be able to continue buying or selling those shares at any time. In some cases, however, stocks can be removed from public exchanges, making it difficult or impossible for investors to buy and sell. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.