Stock exchange delisting: Overview, definition, and example
What is stock exchange delisting?
Stock exchange delisting occurs when a company's shares are removed from a stock exchange’s list of publicly traded securities. This can happen voluntarily, where the company chooses to delist itself, or involuntarily, due to failure to meet the exchange’s listing requirements. After delisting, the company’s shares are no longer available for trading on that specific exchange.
For example, a company might be delisted from the New York Stock Exchange (NYSE) if it fails to maintain a minimum stock price or fails to meet other compliance standards required by the exchange.
Why is stock exchange delisting important?
Stock exchange delisting is important because it marks a significant change in a company's status in the financial markets. For investors, delisting often means that it becomes more difficult to buy or sell shares of the company, and it may lead to a loss of liquidity. For businesses, delisting can signal financial troubles or a shift in strategy, such as moving to a smaller exchange or going private.
Delisting can also affect a company's access to capital markets, which may hinder its ability to raise funds through equity offerings. It can also have a negative impact on the company's reputation and the value of its shares.
Understanding stock exchange delisting through an example
Imagine a company, XYZ Corp, listed on the NASDAQ exchange. The company fails to meet the NASDAQ’s minimum requirements for share price and market capitalization. As a result, NASDAQ sends a notice to XYZ Corp that it will be delisted if the company does not correct these issues within a set time frame. Despite efforts to improve, the company does not meet the requirements, and its shares are eventually delisted from NASDAQ.
In another scenario, a company might decide to voluntarily delist its shares. This could happen if the company decides to go private or wants to move to an exchange with lower listing requirements. For example, ABC Inc. may choose to delist from the London Stock Exchange (LSE) and transfer its shares to the smaller AIM market, where it can operate with fewer regulatory obligations.
An example of a stock exchange delisting clause
Here’s how a clause about stock exchange delisting might appear in a contract:
“In the event that any of the Parties' shares are delisted from the Stock Exchange for any reason, the Parties shall promptly notify the other Party, and the Agreement shall be subject to renegotiation based on the change in the Parties' ability to raise capital.”
Conclusion
Stock exchange delisting has significant implications for a company, its investors, and its market reputation. Whether it's voluntary or involuntary, delisting affects the company's ability to trade shares, raise capital, and maintain investor confidence. For businesses, understanding the potential for delisting and including appropriate clauses in contracts can help mitigate risks related to changes in their stock exchange status.
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.