Delisting of common stock: Overview, definition, and example
What is delisting of common stock?
Delisting of common stock refers to the removal of a company's stock from a stock exchange, meaning that the stock is no longer available for trading on that exchange. This can happen for a variety of reasons, such as the company failing to meet the exchange’s listing requirements (e.g., minimum stock price or market capitalization), a voluntary decision by the company to withdraw its shares from the public exchange, or due to regulatory actions. Once delisted, the company's stock may still trade in other markets, such as over-the-counter (OTC) markets, but it will no longer be available on the major stock exchange where it was previously listed.
In simpler terms, delisting of common stock is when a company’s shares are removed from the public stock exchange, so they can no longer be traded there.
Why is delisting of common stock important?
The delisting of common stock is important because it signals a significant change in the company's relationship with public markets. When a stock is delisted, it becomes harder for investors to buy or sell the shares on major exchanges, and it may lose value due to reduced liquidity. Delisting can be a sign of financial distress or failure to meet the stock exchange's requirements, which can affect investor confidence. In some cases, companies voluntarily delist if they want to go private or if they no longer need the benefits of being a publicly traded company.
For SMB owners, understanding the potential for delisting is crucial if their company is publicly traded. Delisting can affect stock value, investor relationships, and overall business operations.
Understanding delisting of common stock through an example
Let’s say your company’s stock has been listed on the New York Stock Exchange (NYSE), but the company is struggling financially and fails to meet the NYSE’s minimum requirements for market capitalization. As a result, the NYSE decides to delist your company’s stock. After delisting, your stock can no longer be traded on the NYSE but may still be available on the over-the-counter (OTC) market, where trading is less liquid.
In this case, the delisting of common stock may signal a loss of market visibility and lower stock value due to reduced trading activity.
Example of a delisting of common stock clause
Here’s an example of what a delisting of common stock clause might look like in a corporate governance document:
“If the Company’s common stock is delisted from the [specific stock exchange], whether due to failure to meet listing requirements, voluntary withdrawal, or regulatory action, the Company agrees to notify shareholders within [X] days of the delisting. The Company will also take reasonable actions to ensure continued trading of its stock, if applicable, on alternative trading platforms, such as the OTC market.”
Conclusion
Delisting of common stock is a significant event that can affect the company's market presence, investor confidence, and share value. For SMB owners whose companies are publicly traded, understanding the reasons for delisting and the potential consequences is essential for making informed business decisions. Whether delisting occurs due to financial difficulties, regulatory issues, or voluntary decisions, it is important to manage the situation effectively and maintain communication with investors.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.