Delisting is generally used in a negative way, for when companies no longer meet the requirements to be listed on an exchange, and are removed either voluntarily or involuntarily. However, delisting technically just means the removal of a listed stock from its exchange, and there are a few reasons that can happen.
Failure to Meet Exchange Requirements
As we mentioned, the term "delisting" is typically used in reference to a stock that no longer meets its exchange's requirements and is subsequently removed. When listed on a major exchange, such as the NASDAQ or NYSE, companies and their stocks need to meet certain requirements. For example, among the NASDAQ’s continued listing requirements for the NASDAQ Global Market are:
- Share price of at least $1
- At least 400 total shareholders
- $10 million in stockholders' equity or $50 million market value or $50 million of total assets and total revenue
In addition, companies are required to disclose material news promptly, file forms such as 10-Qs and 10-Ks in a timely manner, and meet several ongoing corporate governance requirements. Failure to meet any of the requirements can potentially cause the company's stock to be delisted from the exchange.
Once delisted, the company can still trade on the Over-the-Counter Bulletin Board (OTCBB), which has more relaxed regulations when compared with the major exchanges, or on the Pink Sheets, which have almost no regulation or listing requirements. Once the listing requirements are met again, it's possible for a company to be relisted on the exchange.
If a company is delisted, technically there is no change in the shares. They still represent the same ownership stake in the company, and nothing officially changes in terms of the company's ability to conduct business.
However, the market generally sees a delisting as a major negative sign that can damage investor confidence in the company. In addition, moving off one of the major exchanges can result in less interest from institutional investors, which can in turn result in lower volume and reduced liquidity for shares.
Company Bankruptcy or Dissolution
Another reason for delisting is because of company bankruptcy or dissolution.
When a company is involved in bankruptcy proceedings, it can be easily identified because the letter "Q" will be added to the end of the company's stock symbol. Generally, when the company emerges from bankruptcy, the shares will be delisted and will cease to exist entirely. Even if new stock is issued after bankruptcy, shares that existed before bankruptcy will be worthless.
It's also worth noting that when a company goes bankrupt, it will generally have violated one or more of the exchange's requirements (often the $1 share-price requirement) and could be delisted before the bankruptcy officially begins.
Or, sometimes companies choose to dissolve entirely. In these cases, the company will sell all of its assets, pay all of its debts, and distribute the proceeds to shareholders. Once the dissolution is complete, the shares will be delisted and will cease to exist.
Not all delistings are necessarily bad—a company's stock can be delisted in the event of a buyout or merger. If a company is bought out by another public company, stockholders might receive cash for their shares or could get shares of the acquiring company. If the company is taken private, shareholders will generally receive a cash payment for their stock at the time the shares are delisted.