Delisting is a financial term describing a phenomenon where alisted securityis removed from the exchange on which it trades.
While it can happen for many reasons, it's usually not a good sign for the stock since it's likely failing to follow the exchange requirements. Most major exchanges have similar delisting rules and compliance processes. In notable cases, such as Elon Musk's $44 billion takeover of Twitter, now X Corp, in October 2022, a public company is taken private. There are many reasons for this, but mainly, it frees management to focus less on quarterly earnings reports than on long-term growth.
Below, we take you through the listing standards companies must meet, plus reasons both usual (financial problems) and unusual (acting as shell companies, being described as a wing of the Chinese military) firms get delisted.
- Delisting describes the process of a company becoming removed from the exchange it trades on.
- A company's stock may be delisted due to failing to meet the exchange's requirements.
- The listing criteria include maintaining trading price thresholds for specific time frames, minimum revenue standards, market capitalization thresholds, and shareholder percentage requirements.
- Companies in breach of an exchange's rules are initially sent noncompliance notifications, giving them some time to address the issues before they're ultimately delisted.
How To Stay Listed
Listing requirements vary from one exchange to the next. For example, the Nasdaq requires a security's price not to close below $1.00 for 30 consecutive trading days, at which point the exchange initiates the delisting process. Furthermore, the major exchanges also impose requirements related to market capitalization, minimum shareholders' equity, and revenue outputs.
From an accounting perspective, public companies must stay current by paying exchanges their annual listing fees due, while dutifully covering the significant legal and compliance costs associated with listing on an exchange.
Common reasons stocks are delisted include the following:
- Falling below minimum share price thresholds (e.g. trading below $1 or $2 per share for 30 consecutive days)
- Market capitalization dropping below required levels and remaining below the threshold
- Failing to meet minimum revenue or assets standards set by exchanges
- Not maintaining enough shareholders, market makers, or publicly traded shares outstanding
- Missing required SEC filings or exchange listing fees
- Violating other regulations or exchange rules
- Bankruptcy
- Mergers or acquisitions that result in a new or combined entity, with the old shares being delisted
Exchange Listing Standards
Exchanges set continued listing standards that must be met for a company to maintain its shares on that exchange. These standards may differ from their initial listing standards for initial public offerings (IPO) and list shares on an exchange for the first time.
A company that fails to maintain the continued standards imposed will initially receive a perfunctory noncompliance notification letter. However, a company's stock is not immediately removed from the exchange. Rather, the letter invites the offending corporation to reply with an action plan toward addressing the delinquencies in question. If the exchange accepts the terms of the remedial plan, it will monitor the company's financial progress to ensure its milestones are met promptly. However, if a company fails to respond to the notification letter, the exchange could quickly begin delisting.
NYSE Continued Listing Standards
The New York Stock Exchange (NYSE) has established various criteria that listed companies must meet.
Companies have an initial six-month "cure" or grace period to file the delinquent report. Depending on the circ*mstances, the NYSE may grant an additional six-month cure period. However, the NYSE will not allow trading to continue past 12 months from the initial delinquency.
Key NYSE continued listing requirements include meeting all of the following:
Distribution Criteria:
- At least 400 total stockholders
- 1,200 total stockholders and an average monthly trading volume of 100,000 shares (most recent 12 months), or
- 600,000 public shares outstanding
Financial Criteria:
- At least $50 million in total market capitalization over a 30 trading-day period
- At least $50 million in stockholders' equity
The NYSE will initiate suspension and delisting procedures if a company falls below a $15 million average 30-day market capitalization, whatever the original listing standard.
Filing Criteria:
- Failure to make timely, adequate, and accurate public disclosures
- Failing to file annual (Forms 10-K, 20-F, 40-F, N-CSR), quarterly (10-Q), or semiannual (for foreign private issuers) reports by the required due date
- Unsatisfactory financial reporting and conditions
- Filing the annual report without a required audit report
- Withdrawal of a required audit report
The NYSE may also initiate delisting procedures once the following occurs:
- Bankruptcy filings or liquidation proceedings commenced
- Failure to solicit proxies for shareholder meetings
- Violations of listing or other agreements with the NYSE
- Complete retirement of a listed class of securities
- Engaging in operations contrary to the public interest
- Failure to maintain an audit committee under NYSE rules
- Specialized securities like warrants falling below prescribed limits
The Nasdaq's Continued Listing Standards
Nasdaq allows companies to continue listing their shares based on meeting the criteria of one of three standards: equity, market value, and net income standards.
| Nasdaq National Market Continued Listing Standards | |||
|---|---|---|---|
| Requirements | Equity Standard | Market Value Standard | Total Assets/Total Revenue Standard |
| Stockholders' Equity | $10 million | - | - |
| Market Value of Listed Securities | - | $50 million | - |
| Total Assets and Total Revenue | - | - | $50 million each |
| Publicly Held Shares | 750,000 | 1.1 million | 1.1 million |
| Market Value of Publicly Held Shares | $5 million | $15 million | $15 million |
| Share Price | $1 | $1 | $1 |
| Total Shareholders | 400 | 400 | 400 |
| Market Makers | 2 | 4 | 4 |
Nasdaq-listed companies are also subject to corporate governance requirements related to independent directors, audit committees, shareholder meetings, shareholder approval, voting rights, and other requirements.
Failure to meet continued listing standards could lead to delisting proceedings. The Nasdaq Listing Qualifications Department monitors companies' compliance on an ongoing basis. Companies that fall out of compliance are notified and typically provided a grace period to regain compliance. Let's put these requirements alongside the NYSE's exchanges:
What Happens When Shares Are Delisted?
When a company is delisted from a major stock exchange like the NYSE or Nasdaq, its shares can still trade publicly, but they will have to move to an alternative exchange or over-the-counter (OTC) market. OTC markets typically have more relaxed listing requirements but are less liquid and transparent than major exchanges. The shares may, for example, trade on either the OTC Bulletin Board (OTCBB) or OTC Pink.
Delistings are disruptive for investors. Some institutional investors are prohibited from holding securities not listed on a major exchange, so they may be forced to sell their shares, potentially at a loss. Retail investors can continue to hold and trade the stock but may face wider bid-ask spreads, less liquidity, and less access to company information.
Investors can track delisted stocks on major financial websites by searching for the new OTC ticker symbol. OTC stock symbols are typically five letters long, unlike the three or four-letter symbols used on the NYSE and Nasdaq. If a stock is delisted due to bankruptcy proceedings, the ticker symbol will end with "Q" if the company is in bankruptcy proceedings.
For example, when General Motors filed for Chapter 11 bankruptcy in 2009, its stock moved from the NYSE to the Pink Sheets, and its ticker changed from "GM" to "GMGMQ." The "Q" at the end signified bankruptcy. Once the company emerged from bankruptcy, it re-listed on the NYSE under the original GM ticker in late 2010.
In certain instances, if a company declares bankruptcy and then is forced to proceed to liquidation, shareholders can be wiped out, as creditors have priority over equity holders in claiming assets. The shares would also be delisted from OTC markets and essentially become worthless.
Companies often issue a news release about the delisting and new ticker through their normal distribution channels. Major exchanges will also issue reports listing recently delisted companies.
Sometimes, a company may "go dark" and stop filing reports with the SEC after delisting. This significantly reduces transparency for investors. The stock may continue trading on OTC markets with even less liquidity and disclosure.
Recent Delisting Examples
Delisting Due to Being a Shell Company
Companies can be delisted from stock exchanges for various reasons, including failure to meet listing requirements, voluntarily choosing to go private—or being a shell company. On July 12, 2024, NexImmune, Inc. was delisted from the Nasdaq Exchange.
NexImmune, a self-declared "rapidly growing leader in the emerging field of antigen-directed immunotherapies" that claimed to be developing a way to get the body's immune system to target cancer cells, appeared on the Nasdaq just months earlier, raising $3.67 million in its IPO, priced at $12.05 a share.
A shell company is a business entity that exists on paper but has no significant assets, operations, or employees. These companies may have once been real but have since ceased most business activities, often with only minimal assets.
Delisted Due to Executive Order
Another rarer reason for delisting led to the 2021 NYSE delisting of China Mobile, one of the world's largest telecommunications companies, alongside China Telecom and China Unicom, following an executive order by the U.S. government. This decision was part of a broader move to restrict investments in companies deemed to have ties with the Chinese military.
The delisting of China Mobile was significant not only due to the company's size and market influence but also because of the geopolitical tensions it highlighted. The NYSE's action was a direct response to national security concerns.
Delisting Due to Financial Troubles
In August 2020, Tailored Brands, the parent company of Men's Wearhouse and Jos. A. Bank, was delisted from the NYSE due to its stock price falling below the minimum $1 per share over a 30-day trading period. This came after the company struggled with declining sales and debt, exacerbated by the COVID-19 pandemic and the shift to remote work. Tailored Brands had been trying to turn around its business by closing underperforming stores, reducing inventory, and focusing on ecommerce. However, the pandemic dealt a severe blow to the company's retail operations, leading to a significant drop in revenue.
After being delisted, Tailored Brands' stock began trading on the OTC Pink market under the symbol TLRDQ after filing for Chapter 11 bankruptcy protection shortly after its delisting.
Under Chapter 11, Tailored Brands continued operating while restructuring its debt and closing underperforming stores. The company emerged from bankruptcy in December 2020, having eliminated $686 million in debt. It remains a private company.
Delisting Due to Foul Play
A recent high-profile example of a company delisting from a major exchange is Luckin Coffee Inc. The Chinese coffee chain was delisted from the Nasdaq in June 2020 after the company failed to file its annual report and disclosed that its chief operating officer fabricated 2019 sales by about 2.2 billion yuan ($310 million).
The Nasdaq cited "public interest concerns" for the decision, as well as the company's "past failure to publicly disclose material information." After an internal investigation confirmed the fraud, the Nasdaq officially delisted Luckin in June.
Following the delisting, Luckin's stock began trading on the OTC Pink market under the symbol "LKNCY". The stock price plunged from a high of over $50 per share in January 2020 to under $2 after the fraud was revealed and the stock was delisted. The scandal also led to a shake-up in Luckin's management, with the CEO and COO being fired, and several other executives resigning. The company faced multiple lawsuits from investors and increased scrutiny from regulators in both the U.S. and China.
Luckin's story illustrates the severe consequences a company can face for perpetuating financial misconduct, including delisting from a major exchange, a significant drop in stock price, leadership changes, legal issues, and reputational damage. It also highlights the risks investors face, particularly with foreign companies that may have inadequate financial controls and oversight.
Can a Delisted Stock Be Relisted?
Yes, a delisted stock can be re-listed on a major exchange like the NYSE or Nasdaq if the company subsequently meets all of the exchange's listing requirements. This typically involves getting the stock price above the minimum threshold, meeting financial benchmarks, and filing up-to-date financial reports. A company may re-list its existing shares, or opt for a new IPO. However, re-listing is often a difficult and lengthy process, and many companies don't end up doing it.
What Is Voluntary Delisting Vs. Mandatory Delisting?
Voluntary delisting occurs when a company chooses to remove its stock from a major exchange, often because it is going private, merging with another company, or feels the costs of being publicly listed outweigh the benefits. Mandatory delisting, meanwhile, is when an exchange forcibly removes a company's stock for failing to meet listing requirements, such as minimum share price, financial benchmarks, or regulatory compliance.
How Does a Delisting Impact Shareholders?
Delisting can negatively impact shareholders in several ways. Institutional investors may be forced to sell their holdings as they often can't own stocks not listed on a major exchange. For all shareholders, delisting often leads to decreased liquidity, lower stock prices, and difficulty selling shares. If the company is bankrupt or liquidated, shareholders may lose their entire investment as creditors are paid first.
What Are the Risks of Trading Delisted Stocks?
When a stock is delisted, they may still trade OTC. Trading delisted stocks comes with several risks. Shares are often less liquid, meaning there are fewer buyers and sellers, leading to wider bid-ask spreads and more difficulty executing trades at desired prices. Delisted companies also face less regulatory oversight and reporting requirements, resulting in less transparency for investors. These factors can make it harder to accurately value the stock and increase the risk of fraud or misconduct.
Can a Company Appeal a Potential Delisting?
Yes, companies facing delisting usually have a grace period as well as the right to appeal the decision. The NYSE and Nasdaq rules provide a process for companies to submit a plan to regain compliance with listing standards. If the plan is accepted, the company typically gets an extension to meet the requirements. The delisting will proceed if the appeal is denied or the company fails to meet the standards during the extension. However, appealing a delisting is not always successful, and the process can be costly and time-consuming for the company.
The Bottom Line
A company may see its shares delisted from a major stock exchange for failing to meet certain listing criteria, such as financial health & profitability, liquidity concerns, low share price, or regulatory misconduct. In such cases, shareholders will typically see a sudden cut in the value of the stock, resulting in significant losses. Once delisted, these shares may continue trading OTC at reduced prices, with less regulatory oversight, liquidity, and transparency--making delisted shares more risky. If a delisted company can return to stability and meet the listing criteria, it may re-list later.
A company may also voluntarily delist shares due to a merger or acquisition, going private, or if it feels that the costs outweigh the benefits to remain listed. In these cases, shareholders may not suffer the same negative consequences as above.
