Example of a Delisted Stock Along with Its Definition
It is possible for equities to be removed from the list of tradeable stocks maintained by an exchange. “Delisting” refers to the process of removing a stock from circulation on an exchange. The operation is carried out when a stock fails to satisfy the standards of the exchange, or when a firm decides that it no longer wishes to be publicly listed.
If the issuing firm were to fail to achieve the minimal requirements established by the exchange that the stock was listed on, the shares would be delisted from the exchange. For instance, if a firm like ABC Company had been listed on the NASDAQ Global Select Market for three years but had failed to achieve the income standards for the previous two years, the NASDAQ might remove that company from the market.
What Are the Steps Involved in Delisting a Stock?
Companies must comply with the regulations and requirements of the stock market in order to be listed there. These criteria are referred to as listing standards. 1 Some stock exchanges have “initial listing requirements” that must be met by newly listed stocks, while other exchanges have “continued listing criteria” that must be met by equities in order for them to be listed on the exchange. The criteria for continued listing might be more stringent or less stringent than the original requirements. Some may demand nothing more than that the same standard be adhered to throughout the duration of a stock’s listing.
Delisting happens when an exchange determines that a particular stock and the issuing firm no longer satisfy the requirements necessary to maintain their listing on that exchange. For example, in order for a firm to be eligible for listing on the NASDAQ Global Select Market, it must satisfy at least one of the four criteria that have been established for that market. A minimum stock bid price of $4 is required to comply with each of the four requirements. In addition to these requirements for the first standard, a corporation must additionally have:
- Earnings before taxes must be at least $11 million cumulatively over a three-year period, have been larger than zero in each of the three years before, and have been greater than $2.2 million in each of the two years prior.
In order to conform to standard two, it would need to:
- Cash flows: a total of at least $27.5 million over the last three years combined, with no negative cash flows during the past three years.
- Cash flow contributed to a market cap of $550 million year over year.
- More than 110 million dollars in sales.
Regarding the third standard:
- Over the course of the previous year, the market value was more than $550 million.
- Over $110 million in revenue was recorded for the most recent accounting period.
Regarding the fourth standard:
- Total market capitalization of $160 million
- Total assets: $80 million
- $55 million in equity held by shareholders
A corporation must fulfill the numerous liquidity criteria that are relevant to its position in order to satisfy any of the four standards, regardless of whether it is an initial public offering (IPO), a spin-off, an established company, or a company that is linked with another.
If the ABC firm was listed on the Global Select Market in accordance with standard four, but its market value declined to less than 160 million dollars, NASDAQ would send the company a notice stating that it was not compliant and that it had been removed from the Global Select Market. However, the exchange most likely would provide the corporation with a grace period during which it might once again become compliant.
If the ABC firm was unable to once again meet the requirements for listing on the Global Select Market, the company would be delisted.
Form 25 must to be submitted by the exchange within a reasonable amount of time if a stock is scheduled to be delisted.
The delisting date that is chosen by the exchange must be at least ten business days after the day that Form 25 is submitted to the Securities and Exchange Commission. Additionally, the exchange is obligated to publish a notice for the general public on its website at least ten days before the date of delisting.
Delisting Requested by the Issuer
A corporation has the option of requesting that the exchange on which its stock is traded delist its shares of stock. There is no guarantee that a company’s decision to voluntarily delist was motivated by negative factors. One possible explanation is that they wish to take it private. If this is the case, then the company’s shares have been purchased, most likely by a private equity firm. It’s possible that this bodes well for the company in the years to come.
If a company merges with another or reorganizes its finances, the resulting stock may be delisted from the market. In certain circumstances, the stock may switch to trading on a different exchange or begin doing so under a new ticker symbol.
Exchange-Initiated Delisting (also known as XID)
Exchange-initiated delisting happens when a stock exchange takes action to remove a non-compliant firm from the list of tradeable equities. This kind of delisting occurs when a stock is listed on an exchange. Because not all firms are as transparent as others or adhere to the standards to the same degree as others do, the exchanges do this to safeguard investors from the possibility of failing companies.
A stock will normally be delisted from an exchange after the exchange has provided the firm with many opportunities to once again satisfy the listing criteria.
Different kinds of delistings
There are two distinct kinds of delistings: those that are launched by the exchange, which are often referred to as “involuntary delistings,” and those that are initiated by the issuer, which are sometimes referred to as “voluntary delistings.”
What It Implies for Those Who Invest on Their Own
When a stock is delisted, it is withdrawn from the exchanges it was formerly traded on. After then, transactions for them take place “over the counter” (OTC). OTC equities are traded with the assistance of a third party that is referred to as a “market maker.” The Over-the-Counter Bulletin Board (OTCBB) or Over-the-Counter Link LLC6 is the organization that supplies the specifics of the pricing structure.
In the event that the price of the stock has fallen to a level that is lower than that which is required by listing rules, the firm may choose to do reverse splits in order to address the pricing issue. Your investment’s value will not be affected in any way by this, but you will get a lower number of shares in the firm.
Your broker is less likely to deal with an over-the-counter stock, which is the primary difference between an OTC stock and a company that is traded on a major exchange. Although this does not always mean that they will not, some brokers do not provide access to OTC stocks. You’ll need to engage with a broker that facilitates over-the-counter (OTC) trading if you wish to hold on to a stock that has been delisted.
Even if the brokerage firm you use does not trade in over-the-counter (OTC) equities, it is possible that you will have the opportunity to sell or convert your shares when the business is delisted from the market. In addition, the date when the stock may be sold or converted using the services provided by your broker may be specified by your broker.
If the firm is delisting because it is going private, the issuer will most likely make a buyout offer to you before the process is complete. If you don’t take advantage of the offer, the value of your share will plummet when the firm is delisted from the market.