What Happens When a Stock Is Delisted?

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.

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.