Financial Trading Terms – Delisting

Delisting is the process whereby a security is removed from the stock exchange. There are a number of reasons, both optional or forced, why this occurs. Companies may cease existing, become private, become insolvent, go through a merger, or simply fail to meet the listing requirements. 

Delisting Explained 

In order for a company to be listed in a stock exchange, it must meet listing requirements set forth by the exchange in question. For example, the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE) have different requirements. One of the main requirements which tend to crop up across exchanges is the price of a stock. If the stock falls below $1 for an extended period of time, a company will be notified and potentially delisted if the issue persists. 

Requesting to be delisted 

Of course, it is also possible for companies to request their own removal from an exchange. This might stem from the companies’ desire to make the move and become private. In these instances, companies do the necessary financial assessments which sometimes conclude that the costs involved with being a listed company outweigh the benefits. 

If a company is bought by another entity, then the former publicly-traded company will also request to be delisted. Furthermore, a sale of a listed company to an equity firm can also result in voluntary delisting as new shareholders take over. These are all examples of optional or voluntary delisting. In stark contrast, there is also the chance that certain companies undergo involuntary delisting due to one of several aspects. 

Obligatory delisting 

Here, companies do not have a say in the delisting process. In contrast to voluntary delisting, companies that do not meet listing requirements or have sparked unwanted attention due to financial inadequacies and failing to maintain certain financial standards will face obligatory/voluntary delisting. 

Financial standards that need to be met include a minimum share price, predetermined sales levels, and other financial ratios set out in the exchange’s requirements. If these aforementioned requirements are not met, then the exchange will issue a warning. However, continual underperformance and noncompliance will lead to the company being delisted.

Naturally, companies will want to avoid this as there are far-reaching consequences which stem from delistment. If a company is not listed on a major stock exchange, it becomes far more difficult to raise capital to pursue further ventures. Delisted companies don’t have the same exposure as those that are listed. 

Any warning issued by a relevant stock exchange should be taken up in the most serious of lights by the respective company. Many companies that have been issued warnings, and haven’t made any attempt to improve the financial outlook of the entity, have been delisted in quick fashion. Companies that are delisted for reasons other than bankruptcy or going private are still able to trade over-the-counter (OTC).

Although OTC trading offers a lifeline, companies should and – for the most part – do rectify issues to avoid being delisted. One way to do so is to combine a number of shares into one which increases the price of a single stock and thus steers clear of being at risk of delistment.