I. Introduction of delisting of shares
The meaning of delisted is that a company’s shares no longer trade publicly on a stock exchange and are therefore removed. It may be voluntary or involuntary, but there are some factors such as non-compliance or strategic decisions that result in this process.
A. Setting the stage
Listing a company’s shares in the stock market is good for companies because it provides ways to raise capital or public capital as the company allows its shares to be sold to investors. It helps companies become more seen, credible, and liquid. In fact, investors can trade these shares on the stock exchange.
B. Importance of delisting of shares
Delisting can be very crucial for the company as well as for the company’s shareholders. There might be motivation to delist a company—voluntarily to restructure, become less regulated, or just focus on long-term goals. Sometimes involuntary delisting may occur because of noncompliance with listing regulations and it may cause loss of liquidity, as well as value for the shareholders.
II. Understanding the delisting of shares
The meaning of delisted refers to the removal of the company’s shares from the stock exchange and thereby taking the company out of public trading. It can happen voluntarily or involuntarily. Delisting reasons include mergers and acquisitions, non-compliance with the listing requirements, financial distress, or strategic intentions.
A. Definition of delisting of shares
The meaning of delisting of shares refers to when a listed security is withdrawn from a stock exchange trading board. Essentially, a company lists the shares with the stock exchange under certain listing criteria, enabling the stock market to trade its shares. So, when that company pulls its shares out from the listing, either voluntarily or involuntarily, traders are unable to do anything with the shares anymore.
B. Types of delisting of shares
The voluntary and involuntary delisting of shares are of two types. Delisting on a voluntary basis means when a company decides to drop the shares from the exchange. Businesses might want to delist shares due to changes in the business, cost cuts, or going private. The stock exchange forces the company to delist its shares involuntarily. That happens when the listing requirements are met, and the company violates the exchange’s rules.
Read More: What are Equity Shares? Capital, Market & More
III. Reasons for delisting of shares
There can be a variety of reasons for the voluntary or involuntary delisting of shares. While we have mentioned a few of these before, in this section we look at some of these reasons closely to understand the meaning of delisting better.
A. Voluntary delisting reasons
The companies are often voluntarily delisted because they do not wish to remain publicly traded. It could be because the company wants to restructure or privatize, or simply to merge or acquire, or maybe just to escape the formalities and costs of listing. In the other case, companies may delist voluntarily if they feel their shares are undervalued or they wish to undertake simplification of management and decision-making by eliminating shareholders’ influence.
B. Involuntary delisting reasons
Stock exchange normally imposes involuntary delisting due to non-compliance with listing requirements. Such consequences result from protracted financial stress, lack of compliance to the requisite market capitalization, share price below the exchange threshold, or failure to submit requisite financial reports within time. Involuntary delisting can also be triggered by corporate governance issues, or caused by a legal breach, for example, fraud or mismanagement.
IV. The delisting process
Delisting is the process of the company’s shares being removed from a stock exchange; on the company’s own initiative, or in response to an exchange requisition.
A. Voluntary delisting process
The voluntary delisting can be said to occur when a company voluntarily chooses to delist its shares from the exchange. It is typically undertaken as a restructuring of ownership, the move to being private, or the merger with another entity. To follow the regulations, the company can offer an exit price to shareholders (through a buyback mechanism) and must obtain shareholder approval.
B. Involuntary delisting process
Regulator-ordered involuntary delisting happens when the company is made off the exchange by regulators. There are dozens of ways in which they can be penalized for not complying with listing requirements; such as not meeting their financial reporting obligations, consistently showing poor performance, or committing a legal violation. They may leave shareholders with illiquid shares that cannot be traded on public markets anymore.
V. Impact of delisting
The effects of the process of delisting are huge on the shareholders and the company. It’s important for those concerned to understand exactly what the meaning of delisted is.
A. Impact on shareholders
For shareholders, this generally means lower liquidity on the stock market. That means after shares leave the exchange, they can’t be traded in the open market, which makes it harder for shareholders to sell. One example is in such markets, trades are usually less frequent and more complicated so shareholders may need to use over-the-counter (OTC) markets.
Also, when a company delists, its share value may decline because fewer investors might be ready to buy such a company anymore. However, listed companies may give shareholders less of the protection and transparency that comes with listed companies, such as money for mandatory disclosures.
B. Impact on the company
It is a cheaper delisting, when compliance costs drop for the firm for the company, as it doesn’t have to abide by stringent listing requirements. This helps with flexibility in management and decision-making. Yet delisting could also keep the company from raising equity funds through the capital markets. This could also damage the company’s reputation, which is usually not well accepted by investors.
Read More: What is a Rights Issue of Shares and What Does It Mean?
VI. Post-delisting scenarios
Delisted stocks of a company involve certain post-delisting scenarios of the shareholders. A company’s shares are delisted either voluntarily or involuntarily from the stock market, so the company’s stocks are no longer traded in the public market. They have put together a list of the key options available here.
A. Trading in unlisted market
After a company is delisted the existing market for its shares is the unlisted or OTC market, where its shareholders continue to trade them. Here, however, there is no transparency because it is not regulated, so the process is much less easy to navigate. These markets are less liquid: you are probably going to have more trouble finding buyers, and price discovery may be less efficient. Investors who still hold shares of a delisted company can sell them either for private deals or to other buyers directly.
B. Buyback options
The meaning of delisted is that companies may, in some cases, be offered buyback options. It could form a part of a voluntary delisting process, where the company gives the opportunity to its shareholders to sell their shares at a determined price. And the buyback normally gets done at a price premium over market price, refunding investors for potentially less liquidity and the loss of market participation. This exit route allows shareholders who do not want to own unlisted shares.
VII. Case studies
In this section, we seek to understand the reasons for delisting and the burden on shareholders of delisting through case studies. We will also look at the other implications for corporations and financial markets.
A. Examples of voluntary delisting
Voluntary delisting occurs when a publicly traded company decides to remove its shares from a stock exchange, often to go private, avoid regulatory costs, or restructure. Examples include Dell, which was delisted in 2013 for privatization, and Dunkin’ Brands in 2020, following its acquisition by Inspire Brands.
The results of these choices are mostly determined by the institutional shareholders’ and promoters’ business acumen. On moral and financial grounds, shareholders are likely to oppose the delisting plan if they believe that promoters are attempting to take advantage of the target entity’s low market price.
B. Examples of involuntary delisting
A 2010 government regulation as an investment strategy has actually resulted in more delisting by promoters who have more than 75% of securities. Investors were attracted by this, which is when promoters buy back shares at a premium in companies where promoters hold 80–90% of securities.
VIII. Conclusion
Share delisting is a very important event to both the company and the investor. It takes place when the stock of a company is eradicated from a stock exchange, thus limiting the scope of a company’s market and investor reach.
A. Recap of key points
The delisting can be voluntary or involuntary, such as when a merger results, fails financially or has a compliance problem. It’s delisted, meaning it can severely impact liquidity very frequently, and can cause share value to go down. There are also two things that investors should know, what they are entitled to and what the probability of trading outside the main stock exchange after delisting.
B. Final thoughts on the delisting of shares
Delisting may bring with it challenges of a flip side but there are opportunities for strategic restructuring as well. Investors need to take your position very carefully and examine the long-term results of their portfolios.
FAQs
1. What will happen if stock is delisted?
Once a stock is delisted it gets deleted from the stock exchange. Investors may not enjoy the same liquidity, or see value diminished, and must hold the shares in the less liquid over-the-counter markets.
2. What does delisting a stock do?
Often to failure to meet financial requirements delisting a stock removes it from an exchange. Trading options are limited, resulting in the stock value, or how much someone is willing to pay to acquire shares of a company, going up or down, and thus making the investor both able and unable to see, and also feel, the company’s ability to turn a profit.
3. What is the procedure for delisting shares?
The delisting procedure includes notifying the stock exchange, securing board and regulatory approvals, and notifying shareholders. Some companies delist voluntarily or are forced to do so based on their noncompliance with regulations.
4. What happens to options when a stock is delisted?
If a stock is delisted, options may become worthless because the stock is no longer traded. They could, alternatively, migrate to over-the-counter markets, which would affect exercise and trading conditions.
