Sometimes, stocks are either voluntarily or involuntarily removed from major exchanges. But why does this happen and how does it affect shareholders? In this guide, we share what to know about delisted stocks, including why stocks are delisted, the delisting process, what happens to investors when a stock is delisted, and how to sell delisted stocks. FOREX.com, however, does not offer either listed or delisted stock trading. We offer FX trading and 80 different currency pairs. The information below is provided for general educational purposes only.
Definition of a delisted stock
Delisted stocks are company shares that have been removed from a major stock exchange like the New York Stock Exchange (NYSE) or Nasdaq. Once a stock is delisted, it can no longer be bought or sold through the exchange where it was originally listed.
Stocks can be delisted voluntarily or involuntarily:
- Voluntary delisting: Happens when a company chooses to remove itself from an exchange to either go private, merge with another firm, or cut costs associated with listing.
- Involuntary delisting: Happens when the exchange removes a company because it no longer meets listing standards, such as minimum share price, market capitalization, or financial reporting requirements. This sometimes happens after a company declares bankruptcy or closes operations.
If you hold shares in a delisted company, you can still trade them, but only in the over-the-counter (OTC) market. This can lead to reduced liquidity and less transparency, making it harder to sell at a fair price.
How delisting works
Stock exchanges have strict listing requirements. For example, a company might be required to meet financial reporting deadlines or have a minimum share price. When a company fails to meet these standards, the exchange begins a formal process that can ultimately lead to delisting.
Involuntary delisting process
Here’s a look at how the involuntary delisting process works:
- Compliance notice issued: The exchange notifies the company that it’s out of compliance with listing rules (e.g. the stock has traded below $1 for too long). This serves as a warning.
- Grace period for correction: The company is usually granted several months to fix the problem (e.g. regaining a higher share price).
- Failure to comply: If the company doesn’t resolve the issue within the given time frame, the exchange proceeds with delisting. The stock is removed from the exchange and may begin trading on the OTC market.
- Relisting opportunity: If the company regains compliance, they can reapply for listing.
Voluntary delisting process
In some cases, a company will choose to delist. This usually happens when the company is:
- Going private
- Merging with another firm
- Wanting to reduce regulatory costs or obligations.
The voluntary delisting process usually involves:
- Gaining board and shareholder approval: A resolution must be passed in a board meeting and put to a shareholder vote
- Notifying the exchange: The company formally applies for delisting with its exchange and issues a public statement of intent
- Involving an investment bank: Investment banks are typically hired to manage the delisting process, including buying back shares from investors
- Share buyback: The company must repurchase a required percentage of outstanding shares, often at a premium to the market price, to secure shareholder support.
Reasons a stock gets delisted
Stocks can be involuntary delisted for several reasons, including:
- Failure to meet financial requirements: Companies are required to meet certain financial requirements, such as minimum levels of shareholder equity, net income, or market capitalization, in order to be listed. Falling below these thresholds for an extended period can lead to delisting.
- Failure to file financial reports: Companies must file quarterly and annual reports on time with the Securities and Exchange Commission (SEC). Missing certain financial reporting deadlines or failing to provide transparent disclosures can be a reason for delisting.
- Bankruptcy or insolvency: When a company files for bankruptcy, its stock is often removed from major exchanges and may continue to be traded OTC.
- Fraud or legal violations: Companies with legal issues or evidence of accounting or financial fraud might be forcibly removed from an exchange.
- Failure to meet trading requirements: Exchanges require certain trading standards and stocks that fall below these minimums are at risk of delisting. For example, Nasdaq requires a share price of at least $1 and a minimum of 400 shareholders.
- Changes in listing rules: If an exchange updates its requirements, companies that can’t adapt to the new standards might eventually face removal.
- Poor corporate governance: Listed companies need to comply with governance standards, such as maintaining an independent board and adequate audit committee. Failing to do so can lead to delisting.
Again, voluntary delistings are a different case. These might happen because a company is being acquired or merging with another business, wants to go private, or is moving their shares to another exchange.
What happens to investors after delisting
Holding delisted shares
If you own stock in a company that gets delisted, you still hold the same number of shares and maintain your stake in the business. However, trading conditions will change.
In cases of voluntary delisting, you might be offered cash or new shares (in cases where a company merged or was acquired). But when it comes to involuntary delisting, no special offers are made. You simply remain a shareholder but your stock now trades outside the exchange on OTC markets.
Trading on OTC markets
Most delisted shares migrate to the over-the-counter (OTC) market. These markets are less liquid than exchanges like the NYSE or Nasdaq, which means fewer buyers and sellers, wider bid-ask spreads, and higher transaction costs. In some cases, you might only be able to trade by appointment through brokers.
Impact on stock value
Once a company’s stock has been delisted, its value may experience declines due to widespread sell-offs. Institutional investors, like mutual funds or ETFs, might be required to sell delisted stocks because their mandates limit holdings to exchange-listed securities. If the stock was part of a major index like the S&P 500, it will be dropped and there’ll be more sell-offs from index-tracking funds.
Risks of owning delisted stocks
Some risks to be aware of when it comes to owning a delisted stock include:
- Liquidity risk: It might take longer to sell your shares and you may not get the price you want
- Price volatility: Prices can swing sharply due to low trading volume
- Lack of transparency: Delisted companies have fewer reporting obligations, meaning you’ll be less informed about company performance or risks
- Potential total loss: If a company ultimately goes bankrupt, there’s a risk of losing your entire investment since shareholders are typically last in line for repayment.
How to sell or manage delisted stocks
You can still sell delisted stocks on OTC markets through a broker, but it can be harder to get a fair price due to reduced liquidity and wider bid-ask spreads. Some brokerages restrict this type of trading, so be sure to check whether it’s possible.
If your stock is being listed due to a merger or privatization, you’re often given a set time frame to sell your shares before they’re converted into cash or exchanged for shares in the acquiring company.
Can a delisted stock be relisted?
Yes, delisted stocks can be relisted, although it depends on why the company was removed in the first place and whether it can correct those issues.
To regain a spot on a major exchange, companies must:
- Resolve the problem that led to the delisting
- Avoid bankruptcy or emerge from financial distress with a viable business model
- Reapply and meet all listing standards.
That said, it’s relatively rare for delisted stocks to be relisted. In most cases, companies will either go bankrupt, be acquired by another company or private owner, or re-enter the market through a new IPO.
Examples of notable delisted stocks
Sears Holdings (OTC: SHLDQ)
Sears was delisted from Nasdaq in October 2018 after filing for bankruptcy. The stock now trades over-the-counter under the ticker SHLDQ, even though the company’s retail presence has all but disappeared.
J.C. Penney (OTC: JCPN.Q)
J.C. Penney filed for Chapter 11 bankruptcy in May 2020. The NYSE quickly delisted the company and declared its shares ‘no longer suitable’ for trading on a major exchange.
Eastman Kodak (KODK)
Kodak was delisted when its traditional film business collapsed and went bankrupt in 2012. The company later restructured and re-entered the market, however new shares were issued, wiping out earlier investors.
Luckin Coffee (OTC: LKNCY)
Luckin Coffee was delisted from Nasdaq in 2020 after revelations of accounting fraud involving inflated sales numbers. The company has since restructured and continues to operate in China, with shares trading over the counter.
