What Happens When My Stock Gets Delisted?
Each year, hundreds of companies are delisted from U.S. stock exchanges. With companies delisting at such a rate, it is likely that every investor will be impacted by a company delisting at least once in their career. Therefore, you should be prepared for the probability and understand what happens when a stock is delisted.
A company must comply with specific rules to list on a stock exchange. While you are likely familiar with the larger U.S. exchanges, such as the New York Stock Exchange (NYSE) or the Nasdaq, there are close to 30 stock exchanges registered in the U.S. and each has its own listing standards. A company must stay in compliance with certain rules to remain in good standing and maintain its listing. When a company fails to meet the requirements, it is delisted, or removed from the exchange.
Several events can put a company at risk of being delisted. These include, failing to meet a minimum closing bid price of at least $1.00 for 30 consecutive trading days, failing to maintain a specific market cap, or failing to meet myriad requirements related to trading volume, shareholders’ equity, or revenue outputs.
Companies that fail to meet these threshold requirements will receive a non-compliance notification letter. The letter will provide deadlines with which the company must comply. The company has an opportunity to provide the exchange with its plans to address the delinquencies. If the exchange accepts the terms proposed by the company, it will monitor the company’s progress towards those goals to ensure the milestones are timely met.
If the exchange does not accept the terms, or if the company cannot meet its milestones, the exchange will delist the company. The main impetus for delisting is to protect investors from failing companies and is often a sign of trouble for the company. The exchange will send the company a delisting notice and inform the public why it is delisting the company.
Companies can also delist themselves. This may happen if a company decides to go private or is bought by another company in a merger.
Trading After Delisting
After a stock is delisted, it can trade over-the-counter (“OTC”) on one of three different exchanges. There are some advantages to trading OTC, such as getting access to early stage companies not large enough to trade on the NYSE or Nasdaq (such as Walmart back in the day) or getting access to foreign companies that trade on non-U.S. exchanges (such as Nestle, which trades on the SIX Swiss Exchange). However, the lower barriers to entry on the OTC means higher risks of fraud and less transparency into a company’s operations. It is rare that a delisted stock will get itself back on to the more traditional exchanges. To do so, it would have to avoid bankruptcy, solve the issue that forced the delisting, and again become compliant with the exchange’s standards.
The Impact of Delisting on Investors
Once a stock is delisted, stockholders still own the stock. However, a delisted stock often experiences significant or total devaluation. Therefore, even though a stockholder may still technically own the stock, they will likely experience a significant reduction in ownership. In some cases, stockholders can lose everything.
Where a company continues to operate successfully after being delisted, it still may experience a trust issue, having lost the aura of reliability and accuracy in reporting. Delisted companies often lose their reputation and gain a stigma for being unable to meet the requirements of the major exchanges.
When a company delists voluntarily, stockholders will receive a cash buyout or shares in the new, acquiring company.
Managing Your Delisted Stock
When you find out that a company you are invested in is being delisted, you’ll have a lot of questions. Why? What happens now? Will I lose my investment?
The exchange will notify the public of the delisting and the reasons why. Evaluate your position and determine if it makes sense for you to keep or sell your shares. What is the company’s plan? Is the company moving to an over-the-counter market? While this doesn’t instill much confidence in the long-term viability of a company, it beats hearing that the company is filing for bankruptcy. Bankruptcy usually wipes out a company’s original shares and shareholders typically are not entitled to newly issued stock when the company emerges from bankruptcy, rendering their investment worthless.
Do not make any rash decisions. Evaluate your options. Contact your financial advisor if you have one. And know, you can always reach out to the attorneys at Robbins LLP if you have questions or concerns about any of your investments.