It may be surprising to hear, but delistings are not a rare occurrence in the stock market. Between 2020 and 2021, exchanges such as the NYSE and NASDAQ witnessed over 170 stocks delist for a variety of reasons. Such reasons include the inability to meet exchange guidelines and regulations, listing on new exchanges overseas, or even buyouts.
Why Is A Stock Delisted?
Before we can understand how a stock is delisted, it's better to first understand why. As mentioned in the introduction, the reasons can vary.
The failure to meet regulatory guidelines set by the stock exchange is one of the most common of them all. A failure occurs when the listed security fails to meet the financial standards set by the exchange. This includes everything from financial information regarding the company’s balance sheet, income statements, and even the share price. A fraudulent company, for instance, will be delisted soon after allegations are proven.
However, what if a company isn’t dishonest? If a public company began to deteriorate and governance from the board began to vanish over a prolonged period, that’s also a valid reason to be involuntarily delisted. However, if these factors are still up to standards, but the share price is not, there may be a need to conduct a reverse stock split. Most exchanges won’t consider listing a company whose shares are worth less than $1 per share, nor will they want to keep them. This is because it looks unprofessional to the exchange and potential investors. A low stock price is viewed as "cheap" and "low-quality", similar to how a high stock price is viewed as "expensive"—but all far from true.
If a company has shares valued at $0.50 each, and they were once above $1, the company can issue a 1-for-2 reverse split. This divides the outstanding shares in half, whilst boosting the stock back up to $1. It is essentially the opposite of stock dilution. However, this is not the same as share buybacks, which are bought by the company itself. Instead, the company works in collaboration with the exchange to merge outstanding shares. Using our example, if an investor held 1,000 shares, they would now own 500, yet the total present value remains constant.
The Process of Delisting
Delisting a stock can be done in a few ways. First, a company can be involuntarily delisted due to failures in providing disclosures, quarterly documents, or annual reports. Secondly, due to bankruptcy, where shareholders rarely receive any compensation since all assets are sold off to creditors. Lastly, a company can also be bought-out or merged with a private or publicly listed entity.
In both instances of becoming a private company, shares will need to be bought up by the company itself, or the company that wishes to merge. This can be done by using existing cash, borrowing capital, or selling shares—in the case of the acquirer. The greater confidence of the executives on the board, the more they’ll want to pay for each share. Existing shareholders will be forced to sell in the event of the underlying company being acquired. After the acquisition or merger agreement date, the stock will no longer be listed on the exchange, making it impossible to invest in again. Although, there are some cases where companies have gone public once again.
Many companies actively repurchase their shares to have more voting power over their shareholders. This is similar to an acquisition, in the sense they are actively buying-out investors. The world’s largest publicly-traded company Apple repurchased $85.5 billion worth of stock in fiscal 2021 and over $460 billion in the last ten years. That’s the equivalent of 20% of the market capitalization today. Apple is unlikely to be delisted, but the shares outstanding of the company continue to shrink.
Stocks Which Were Once Listed
After being publicly traded for years, some even decades, many companies were acquired, exposed, or involuntarily forced to exit.
Energy trading company Enron was one of the largest companies in the United States in the early 2000s. Enron was exposed in 2001 when it actively used shell companies to disguise high debt. This made everyone, including professional analysts, believe that the company was more fundamentally stable than it was. The shell companies also inflated revenues by documenting each dollar numerous times. As a result, the company was perceived to be generating remarkable earnings. After the fraudulent activity was revealed, Enron’s share price fell from over $90 per share to less than $0.30.
A recently delisted company is Twitter, though for different reasons. Twitter traded under the ticker symbol TWTR. After multiple rounds of discussion between lawyers, board members, and fellow investors, Elon Musk acquired Twitter. The company was taken private at $54.20 per share for a combined $44 billion.
Despite the attempts to limit external factors from creating trouble from within the company, Twitter faced some issues regarding its heavily-anticipated ‘blue checkmark’ feature. This caused a rush of advertisers to abandon the advertising platform entirely. While we are unable to determine the valuation of Twitter now that it is private, the fundamentals have seemed to deteriorate. Twitter remains a great reminder that not all companies are more efficient when taken private. Shareholders possess a substantial role in business decision-making.
Our financial industry is heavily regulated for the reasons highlighted. If companies cannot maintain the minimum requirements set by major exchanges and their shareholders, that’s not an investment that should be publicly accessible. There are some small exchanges where companies can list afterward if they choose. The volume on such exchanges is extremely low and is susceptible to volatility, with the quality of these assets being unsuitable for most investing methods.
Unfortunately, delistings are quite unpredictable and can happen to any company, given certain factors are at play. Results can vary from investors being misled to bought-out, or even just pure unwillingness from management to ensure minimum requirements. A stock delisting for reasons other than a buyout is heavily frowned upon.
History has shown major companies like Enron can remain undetected for years. Recent examples, such as Twitter, illustrate that shareholders play a significant role in maintaining the company's fundamentals. There are likely to be more delistings for various reasons in the coming decades, which will provide investors with invaluable lessons.
Start Trading With The moomoo App
With moomoo, you are able to get free 24/7 global news to catch up with the latest financial news and trends, including the latest information about delistings.
You can sign up and download the moomoo app to get the real-time information you need to make better investment decisions.