What Happens to a Stock When It Is Delisted?

When a company’s stock is traded on a major exchange, it benefits from broad visibility and an established trading environment. However, a company’s shares can be removed from such an exchange, a process known as delisting. This means the stock is no longer available for trading on that particular marketplace. The reasons for delisting vary, ranging from strategic company decisions to failures in meeting exchange requirements. This change carries implications for both the company and its shareholders, altering how the stock can be traded and impacting its perceived value.

What Delisting Means

Stock delisting refers to the removal of a company’s shares from a stock exchange, making them no longer tradeable on that platform. This action can be either voluntary, initiated by the company, or involuntary, imposed by the exchange. Voluntary delisting often occurs when a company seeks to go private, merges with another entity, or is acquired, aiming to reduce regulatory burdens or streamline operations.

Involuntary delisting happens when a company fails to adhere to listing requirements set by exchanges like the New York Stock Exchange (NYSE) or Nasdaq. Common reasons include failing to maintain a minimum share price, such as $1.00 per share. Companies may also face delisting if their market capitalization or shareholder equity falls below the exchange’s thresholds, indicating a decline in financial health.

Non-compliance with reporting requirements, such as failing to file financial statements on time, can also lead to removal. Bankruptcy or liquidation proceedings are also triggers for involuntary delisting, as these events signify severe financial distress. Exchanges issue warnings of non-compliance, providing a grace period for companies to rectify issues before a final delisting decision.

How Delisted Stocks are Traded

Once a stock is delisted from a major exchange, it transitions to over-the-counter (OTC) markets, where trading can still occur. These markets operate through a decentralized network of dealers rather than a centralized exchange floor. The OTC Link ATS is an electronic quotation system that facilitates trading for many delisted stocks.

The OTC Markets Group organizes these securities into different tiers based on the level of financial reporting and transparency provided by the companies. The OTCQX Best Market represents the highest tier, requiring companies to meet financial standards and undergo audited reporting. The OTCQB Venture Market is the next tier, suitable for early-stage and developing U.S. and international companies that report their financials to a U.S. regulator. The lowest tier, often referred to as the Pink Sheets or OTCPK, has minimal or no public reporting requirements, leading to significantly less transparency for investors.

Trading on OTC markets differs from major exchanges as it occurs directly between brokers via a dealer network, where market makers facilitate transactions by quoting bid and ask prices. This structure results in significantly reduced liquidity compared to major exchanges. While delisted shares can still be bought and sold, the trading process often involves wider bid-ask spreads and potentially higher transaction costs.

Impact on Shareholders

Delisting impacts shareholders by reducing the liquidity of their investments. With shares no longer trading on major exchanges, the pool of potential buyers and sellers shrinks, making it challenging to execute trades quickly or at desired prices. This reduced liquidity often leads to price depreciation, as demand for the stock declines, and its value becomes speculative. Delisting can result in losses in firm value.

Valuing delisted shares becomes more difficult due to reduced transparency and less strict reporting requirements on OTC markets. Companies on lower OTC tiers, such as the Pink Sheets, may provide minimal or no public financial information, making it challenging for shareholders to assess the company’s financial health and the value of their holdings. This lack of updated information can increase investment risk.

Some brokerage firms may impose restrictions or charge higher fees for trading in certain OTC securities, further complicating the selling process for shareholders. While shareholders retain ownership of their shares after delisting, the avenues for selling them become restricted. Institutional investors may be prohibited from holding securities not listed on a major exchange, forcing them to sell, potentially at a loss. This situation can lead to forced selling pressure, further depressing the stock price.

Company Actions After Delisting

Following delisting, a company may pursue several strategic paths, depending on the reasons for its removal from the exchange. One common action is to “go private,” where the company buys back its outstanding shares from public shareholders, removing itself from public market scrutiny. This move can reduce compliance costs associated with public reporting requirements and allow management to focus on long-term goals without quarterly earnings pressure. In a voluntary delisting due to a buyout, shareholders may receive cash or shares in the acquiring company.

Delisting can also precede or coincide with financial distress, leading to bankruptcy or liquidation. In Chapter 7 bankruptcy, a company ceases operations, and its assets are sold to repay creditors, leaving nothing for common shareholders. Under Chapter 11, a company attempts to reorganize its finances to continue operating, but existing shares are canceled, making them worthless, as creditors take precedence.

Some companies may attempt to re-list their shares on a major exchange after addressing the issues that led to delisting. This involves improving financial health, meeting minimum share price requirements, or resolving reporting deficiencies. Re-listing is a difficult and lengthy process, and many companies do not succeed.

Many delisted companies continue to operate with their shares trading on the OTC markets, focusing on their core business without the pressures of a major exchange listing. A delisted company may also become an acquisition target for another entity, leading to a merger or acquisition where shareholders receive compensation or shares in the acquiring company.