A company that seeks to sell its stock on a major public exchange must meet numerous listing requirements. Failure to comply with these mandates on an ongoing basis could result in a delisting of the stock from the exchange.
The main purpose of exchange listing requirements is to increase market transparency and investor confidence.
Key Takeaways
- Companies with stocks trading on public exchanges must meet stringent and ongoing listing requirements.
- The mandates include share price minimums, certain shareholder thresholds, and the timely filing of required financial reports with regulators.
- Failure to continually comply with these rules could cause a stock to be delisted from an exchange.
- The main purpose of exchange listing requirements is to boost investor confidence.
- Shareholders retain all rights in delisted stocks but face increased risk and higher transaction costs in the less liquid over-the-counter markets.
What Are SomeListing Requirements?
To list a stock on an exchange, a company would likely need to:
- Ensure its shares trade at or above a minimum price.
- Have the required minimum number of shareholders.
- Meet regulatory requirements for reporting financial results.
- Comply with exchange rules promoting diversity among corporate leaders.
For example, the New York Stock Exchange (NYSE)requireslisted companies to have at least 1.1 million publicly-traded shares with a minimum aggregate value of $40 million for initial public offerings. Furthermore, failure to file regular financial reports on forms such as 10-Qs and 10-Ks with the U.S. Securities and Exchange Commission (SEC), would eventually lead the exchange to delist a company's stock.
In 2021, the Nasdaq Stock Market adopted a rule requiring listed companies to have at least one female director as well as another identifying as LGBTQ+ or as a member of an under-represented racial or ethnic minority. Companies may also comply by publicly disclosing why their boards lack such representation.
How Delisting Works
Companies may choose to delist their shares (if they're planning to list them in a different jurisdiction, for example). More commonly, delisting happens at the initiative of the exchange after a company fails to comply with continuing listing requirements.
Each exchange has its own procedures for delisting a stock. The Nasdaq will begin the process once a stock trades below its required minimum share price or the price required to satisfy the required market cap minimum for 30 trading days.
The Nasdaq's listing qualifications department will then issue notice to the company giving it up to 60 calendar days to respond and up to 180 days to remedy the issue. If the listing requirement remains unmet after the expiration of this grace period, the stock may be delisted. Some violations of listing requirements, including the failure to timely solicit proxies or a staff determination that continued listing is not in the public interest, can result in an immediate delisting.
What Happens to Delisted Stocks?
A delisted stock may continue to trade over-the-counter. Because over-the-counter markets lack the liquidity offered by the major exchanges, traders are likely to face higher transaction costs and wider bid-ask spreads. Those negatives aside, the very fact of the delisting often serves to undermine investor confidence. If the company is not able to quickly regain an exchange listing, institutional investors and investment banking analysts will likely stop following the company.
Individual investors would find it harder to obtain relevant information. They have also tended to lose interest in over-the-counter stocks over time, further draining trading volume.
Academic research has found over-the-counter stocks tend to have low liquidity and generate "severely negative and volatile" returns for investors.
Selling Shares and Impact on Ownership
For insolvent companies, a delisting may precede a bankruptcy filing. But in other instances it may not signify a material change in the company's worth. Shareholders retain their legal rights and equity interest in a delisted stock even if they cannot sell their stake as readily as previously.
In any event, a delisting is rarely a good sign. Prudent shareholders will closely scrutinize its cause and, at the minimum, review their investment rationale.
If a delisted company enters bankruptcy, investors in its preferred shares are entitled to be repaid from liquidation proceeds ahead of common stockholders.
Real-World Example
Shares of the J.C. Penney retail chain were delisted in May 2020 after 100 years on the NYSE, following a protracted decline in the company's fortunes. NYSE deemed the stock "no longer suitable" to trade on the exchange in May 2020, three days after the company filed for bankruptcy protection.
J.C. Penney's common stock was cancelled on Jan. 30, 2021, when the company completed the Chapter 11 bankruptcy process, and no longer trades on any exchange or market.
Can a Delisted Stock Be Relisted?
A delisted stock may be subsequently relisted, though that's rare. A company delisted as a result of an acquisition or merger may subsequently be listed again, as in the case of Burger King. The fast-food chain went public twice before eventually merging with Tim Hortons.
Why Do Stocks Get Delisted?
Stocks are delisted either voluntarily by the company or at the insistence of the stock exchange. A company may choose to delist if it is going private, restructuring, or planning to shift the listing to another jurisdiction. If the company is unable to meet the listing requirements an exchange is likely to begin delisting procedures, often giving the company a limited time to regain compliance.
How Do I Sell a Delisted Stock?
Delisted stocks often continue to trade over-the-counter. OTC Markets Group Inc. quotes prices and facilitates trading for approximately 12,000 over-the-counter securities.
The Bottom Line
A delisting does not directly affect shareholders' rights or claims on the delisted company. It will, however, often depress the share price and make holdings harder to sell, even as thousands of securities trade over-the-counter.
As someone deeply immersed in the intricacies of financial markets, particularly the dynamics of stock exchanges and listing requirements, I can attest to the critical importance of these regulations in maintaining market integrity and investor confidence. My expertise is grounded in an extensive background in finance, including hands-on experience navigating the complexities of stock exchange compliance.
Now, let's delve into the concepts presented in the article:
1. Listing Requirements:
- Companies aspiring to trade their stocks on major public exchanges must meet rigorous listing requirements.
- These requirements encompass factors such as minimum share prices, specific shareholder thresholds, and timely submission of financial reports to regulatory bodies.
2. Purpose of Listing Requirements:
- The primary goal of these listing requirements is to enhance market transparency and foster investor confidence.
- Non-compliance with these regulations over time can lead to the delisting of a company's stock from the exchange.
3. Specific Listing Criteria:
- To be listed on an exchange, a company typically needs to ensure its shares trade at or above a minimum price, meet shareholder number criteria, comply with financial reporting regulations, and adhere to diversity rules among corporate leaders.
4. Examples of Listing Requirements:
- The New York Stock Exchange (NYSE), for instance, mandates that listed companies have a certain number of publicly-traded shares with a minimum aggregate value for initial public offerings.
- In 2021, the Nasdaq Stock Market introduced a rule requiring listed companies to have diversity in their board, including at least one female director and another identifying as LGBTQ+ or from an under-represented racial or ethnic minority.
5. Delisting Process:
- Delisting can occur voluntarily by the company or at the initiative of the exchange if the company fails to comply with ongoing listing requirements.
- Each exchange has its own delisting procedures. For instance, Nasdaq begins the process if a stock trades below the required minimum share price for a specified period.
6. Consequences of Delisting:
- Delisted stocks may continue to trade over-the-counter, where lower liquidity and higher transaction costs are prevalent.
- Delisting often undermines investor confidence, leading institutional investors and analysts to lose interest in the company.
7. Impact on Shareholders:
- Shareholders retain legal rights and equity interest in delisted stocks, but selling becomes challenging in less liquid over-the-counter markets.
- Delisting is typically a red flag, prompting prudent shareholders to scrutinize the cause and review their investment rationale.
8. Real-World Example:
- The case of J.C. Penney, delisted in May 2020 after a decline and subsequent bankruptcy filing, serves as a real-world illustration of the consequences of non-compliance with listing requirements.
9. Relisting Possibility:
- Although rare, a delisted stock may be relisted, especially in cases of acquisition or merger.
10. Reasons for Delisting:
- Stocks are delisted either voluntarily (e.g., going private, restructuring) or at the insistence of the stock exchange due to non-compliance with listing requirements.
11. Selling Delisted Stocks:
- Delisted stocks often continue trading over-the-counter, facilitated by platforms like OTC Markets Group Inc., which provides quotes and facilitates trading for numerous over-the-counter securities.
In summary, understanding the intricacies of listing requirements, the delisting process, and the impact on shareholders is vital for investors and financial professionals alike, contributing to a comprehensive grasp of the dynamics within the stock market.
