Delisting: Overview, definition, and example
What is delisting?
Delisting refers to the removal of a company’s stock from a public stock exchange, meaning it can no longer be traded on that exchange. This can happen voluntarily, when a company chooses to go private, or involuntarily, if the company fails to meet the exchange’s requirements.
For example, a company listed on the New York Stock Exchange (NYSE) may be delisted if it fails to maintain the minimum required share price or financial reporting standards.
Why is delisting important?
Delisting is important because it affects a company’s ability to raise capital and impacts shareholders who own the company’s stock. Once delisted, a company’s shares may become harder to trade, typically moving to over-the-counter (OTC) markets with lower liquidity.
For companies, voluntary delisting can be a strategic decision to reduce regulatory costs and reporting obligations. Involuntary delisting, however, often signals financial distress or governance issues, which can damage investor confidence.
Understanding delisting through an example
Imagine a technology startup listed on the Nasdaq exchange. Over time, its stock price falls below the exchange’s $1 minimum requirement for several months. After failing to regain compliance, the Nasdaq removes the company from its listing, meaning its stock is no longer publicly traded on that exchange.
In another case, a private equity firm acquires a publicly traded retail company and decides to take it private. The company voluntarily delists from the stock exchange to avoid the costs of public reporting and gain more control over its operations.
An example of a delisting clause
Here’s how a clause related to delisting might appear in an agreement:
“In the event that the Company’s securities are delisted from any national stock exchange, the Company shall notify Shareholders within [X] days and provide alternative arrangements for trading or repurchase of shares, as applicable.”
Conclusion
Delisting removes a company’s stock from a public exchange, impacting its ability to attract investors and affecting existing shareholders. While voluntary delisting can be a strategic choice, involuntary delisting often signals financial difficulties.
Understanding delisting is essential for investors and businesses, as it influences investment decisions, corporate strategy, and shareholder value. By including clear delisting provisions in agreements, companies can manage the transition effectively and minimize disruptions.
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.