What is Delisting?
Delisting is the process by which a company’s shares are removed from listing on an organized stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ. This can happen voluntarily, prompted by the company’s own decision, or involuntarily, typically due to failure to meet the exchange’s listing requirements.
Types of Delisting
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Voluntary Delisting: A company’s management may decide to delist its shares for several reasons:
- Merger or acquisition.
- Low trading volumes.
- To go private and restructure.
- Regulatory and compliance cost savings.
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Involuntary Delisting: When a company fails to adhere to the listing standards set by the exchange, it might face delisting. Reasons include:
- Declining market capitalization below the required threshold.
- Financial instability, such as insolvency or bankruptcy.
- Not filing periodic reports or failing to maintain adequate levels of operation.
Examples of Delisting
- Enron Corporation: Enron was delisted from the NYSE in 2001 following a major accounting scandal and subsequent bankruptcy.
- Kodak: Eastman Kodak voluntarily delisted from the NYSE in 2020 as part of restructuring plans during financial struggles.
- Luckin Coffee: In 2020, this Chinese chain was involuntarily delisted from NASDAQ after admitting to fabricating sales figures.
Frequently Asked Questions (FAQ)
Q: What happens to shares after delisting?
A: After delisting, shares might continue to trade over-the-counter (OTC) in the less regulated market, though this usually results in diminished liquidity and lower trading volumes.
Q: Can a delisted company relist?
A: Yes, a company can relist once it meets all necessary requirements and undergoes the application process of the exchange.
Q: How does delisting impact shareholders?
A: Shareholders can face reduced liquidity, potential loss of investment, and difficulties in trading their shares at fair market value.
Q: What are OTC markets?
A: OTC markets are decentralized markets where securities not listed on formal exchanges can be traded. They are typically used by smaller or financially distressed companies.
Q: Is delisting always negative?
A: Not necessarily; voluntary delisting might be a strategic move to cut costs or manage finances better, ultimately benefiting long-term shareholders.
- Stock Exchange: A marketplace where securities, commodities, derivatives, and other financial instruments are traded.
- Securities: Financial assets that can be traded, such as stocks, bonds, and options.
- Market Capitalization: The total market value of a company’s outstanding shares.
- Over-The-Counter (OTC): A decentralized market where trading of securities is done directly between two parties without a central exchange or broker.
Online References
Suggested Books for Further Studies
- “The Securities and Exchange Commission: A Coursebook for the SEC Processes” by Marc I. Steinberg.
- “Takeover: Contesting the New Market Economy in America” by Stephen Amberg.
- “Understanding Stock Market Trades: A Guide to Rules and Practice” by Richard Harris.
Fundamentals of Delisting: Corporate Governance Basics Quiz
### Which of the following is NOT a reason for involuntary delisting?
- [ ] Failing to meet financial requirements.
- [ ] Declining market capitalization.
- [ ] Insolvency or bankruptcy.
- [x] High trading volume.
> **Explanation:** High trading volume is not a reason for involuntary delisting. However, failing to meet financial requirements, declining market capitalization, and insolvency or bankruptcy are common causes.
### After a company is delisted from an organized stock exchange, where may its shares continue to trade?
- [ ] They cannot be traded anymore.
- [x] Over-The-Counter (OTC) markets.
- [ ] Centralized markets.
- [ ] Foreign exchanges.
> **Explanation:** After delisting, shares may continue to trade over-the-counter (OTC), which is a decentralized market.
### What must a delisted company do if it wants to relist on an exchange?
- [ ] It cannot relist once delisted.
- [ ] It must choose a different exchange.
- [x] It must meet all listing requirements and reapply.
- [ ] It needs to change its company name.
> **Explanation:** To relist, a company must meet all required standards again and undergo the exchange's application process.
### What impact does delisting usually have on stock liquidity?
- [x] It often decreases the liquidity.
- [ ] It increases the liquidity.
- [ ] It has no impact on the liquidity.
- [ ] It makes liquidity unlimited.
> **Explanation:** Delisting usually results in decreased liquidity as the shares are no longer traded on a major, organized exchange.
### Is voluntary delisting considered a strategic move for a company?
- [x] Yes, sometimes to save regulatory costs or restructure.
- [ ] No, it is always a negative consequence.
- [ ] Only if forced by shareholders.
- [ ] Only during economic downturns.
> **Explanation:** Voluntary delisting can be strategic to save costs, restructure or due to other long-term benefits intended by the management.
### How can a delisted company benefit shareholders in the long run?
- [ ] Through increased market value.
- [x] By reducing compliance costs and focusing on restructuring.
- [ ] By suspending operations.
- [ ] By diluting shareholder equity.
> **Explanation:** By reducing costs associated with compliance and focusing on restructuring, a company might stabilize and grow, eventually benefiting shareholders.
### What regulatory body oversees the delisting process in the United States?
- [ ] Federal Reserve
- [ ] Treasury Department
- [x] Securities and Exchange Commission (SEC)
- [ ] Consumer Financial Protection Bureau (CFPB)
> **Explanation:** The Securities and Exchange Commission (SEC) oversees the delisting process, setting and enforcing regulations.
### Why might a company voluntarily delist from an exchange?
- [ ] To avoid paying dividends.
- [x] To save costs related to regulatory compliance.
- [ ] To reduce workforce.
- [ ] To expand operations.
> **Explanation:** Voluntarily delisting can help a company cut down on regulatory compliance costs and focus its resources on core operations or new restructuring strategies.
### Before delisting, what must a company typically provide to shareholders?
- [ ] A one-day notice.
- [ ] No notice is required.
- [ ] Approval from its competitors.
- [x] Adequate notice and explanation.
> **Explanation:** Companies need to provide adequate notice and explanation to shareholders to reason their decision to delist.
### What happens to the listing status of a company that is delisted due to bankruptcy?
- [ ] It can automatically relist in five years.
- [x] The listing is terminated until requisites are fulfilled.
- [ ] The listing is transferred to a different exchange.
- [ ] The shares become non-transferable.
> **Explanation:** The listing is terminated and remains so until the company meets listing requirements again and re-applies.
Thank you for exploring delisting with us. Your knowledge in corporate governance and stock market regulations is commendable. Keep striving to learn more about the intricate financial markets!
