While not all publicly traded stocks trade on major stock exchanges like the NYSE and the Nasdaq, most major companies prefer to be listed on one of these exchanges, as they provide the crucial visibility and liquidity required for large-volume trading. In other words, it’s much easier for investors to buy a company’s stock if it’s listed on the NYSE or Nasdaq than if it trades “over the counter.”
To be listed on one of these prestigious exchanges, however, a company’s stock must meet a series of requirements, and the company must pay a listing fee. Additionally, once listed, a company’s stock must continue to meet a series of requirements on an ongoing basis or risk being delisted from its exchange.
What Is Delisting?
Delisting occurs when a stock that is listed and trades on a major exchange like the NYSE or Nasdaq stops being listed and traded on that exchange. In some cases, this occurs because the exchange forces a company to delist, while in other cases, the choice to delist comes from the company itself.
What Is Voluntary Delisting? How Does It Happen?
In some cases, a company may choose to delist from an exchange of its own accord. This can happen for several reasons. For instance, if a company’s management decides the costs of remaining listed on an exchange outweigh the benefits, they may delist to save money.
In other cases, a company that was once public may choose to delist in order to go private, as occurred with Twitter in October of 2022 after Elon Musk’s acquisition of the company.
Often, voluntary delisting can occur as the result of a merger or acquisition. When two companies merge, they sometimes delist and reorganize and may or may not attempt to relist on an exchange once the reorganization is complete. In other cases, a private equity firm may purchase a publicly traded company then delist it so that its stock can be sold to private equity investors instead of the public.
What Is Mandatory Delisting?
In many cases, delisting is mandatory and occurs at the discretion of a stock exchange after a listed stock falls below listing requirements for a certain period of time and fails to become compliant with the exchange’s standards again by the end of a probationary period.
Nasdaq
The Nasdaq, for instance, requires listed companies to maintain a share price of at least $1.00, have a minimum of 400 unique shareholders, and maintain one or more of the following:
- Shareholders’ equity of at least $10 million
- Total assets and revenues of at least $50 million
- Market cap of at least $50 million
NYSE
The New York Stock Exchange also requires listed companies to maintain a share price of at least $1.00 (although a company’s share price must be over $4.00 to be listed initially), a market cap of at least $15 million, and have at least 400 unique shareholders, among other criteria.
How Does Mandatory Delisting Work?
Typically, mandatory delisting occurs because a listed company fails to meet the minimum share price requirement. Often, this can occur if a company’s financial results have been disappointing for some time, and investors think a company may be headed toward bankruptcy. With investors trying to exit their positions, sellers outweigh buyers, causing a stock’s price to fall.
If a stock’s share price drops below $1.00 and remains below that level for 30 days, the exchange may notify the company that it is not in compliance with listing requirements and is at risk of being delisted. The company must respond to this notice and inform the exchange of its intention to regain compliance by the end of a probationary period.
This usually means achieving a share price of over $1.00 for 30+ days in a row within 6 months of the notice. If a company fails to respond to a delisting warning, or if it does respond but is unable to regain compliance by the end of the probationary period, it may be involuntarily delisted by the hosting exchange.
How Do Companies Avoid Being Delisted?
Often, companies that are at risk of being delisted due to a sub-$1.00 stock price perform reverse stock splits. This is an action that reduces the total number of shares outstanding and increases stock price accordingly such that its market cap is unchanged.
For instance, if a company with 100 million outstanding shares valued at $0.60 each performed a 4-for-1 reverse split, it would suddenly have only 25 million outstanding shares, each valued at $2.40. Each shareholder would have ¼ as many shares as they did before the split, and each share would be worth four times what it was before, so the value of each investor’s holdings would be unchanged.
With a share price over $1.00, the company would once again be in compliance with listing requirements and would be able to continue to trade on its host exchange so long as its stock price remained above the threshold.
What Happens to a Stock (& Its Investors) Once It Is Delisted?
When a stock is delisted for failing to meet requirements, it doesn’t just disappear. Instead, it begins to trade on the over-the-counter market, which is a less-centralized network of stock dealers that facilitate transactions of stock that aren’t listed on major exchanges (e.g., penny stocks) trade.
If an investor owns a stock, but that stock gets delisted, they still own the stock, but its value is likely to decline significantly. Mandatory delisting is usually viewed as a sign of financial distress and can sometimes signal a forthcoming bankruptcy, which tends to decimate a stock’s value.
That being said, delisted stocks can continue to trade for years on the OTC market, but investors may have a harder time selling them, as the OTC market is characterized by wide bid-ask spreads and low trading volume. Institutional investors tend to avoid stocks that aren’t on major exchanges, which is part of why trading volume is so low on the OTC market.
For these reasons, most average investors would do better selling a stock before it gets delisted than after.
