Delisting is a significant event that occurs in the stock market, affecting both companies and investors. Investors need to have a clear understanding of delisting, its meaning, types and options available to them. In this comprehensive guide, highlight its importance and explain the different types of delistings and the options investors have in such situations.
What is delisting?
Delisting means removing the shares of a listed company from a stock exchange, so that they cannot be traded on that particular exchange. This can happen for various reasons, such as mergers, acquisitions, bankruptcy, regulatory non-compliance or voluntary decisions by the company itself. Delistings has a significant impact on shareholders, as it may affect their ability to trade their shares and potentially alter the value of their investment.
Types of delisting
1. Voluntary Delisting
Voluntary delisting occurs when a company voluntarily decides to remove its shares from a stock exchange. This decision is usually driven by factors such as restructuring, mergers or acquisitions. Companies can choose to go private or list their shares on a separate exchange or over-the-counter market. Voluntary delistings requires stock exchange approval and compliance with regulatory requirements.
2. Involuntary Delisting
Involuntary delisting occurs when a company’s shares are forcibly removed from a stock exchange due to non-compliance with the listing rules and regulations of the exchange. This may be the result of a company’s failure to meet financial reporting requirements, corporate governance standards or other regulatory obligations. In such cases, exchanges take steps to protect investors’ interests and maintain market integrity.
3. Delistings by merger and acquisition
Delisting by merger and acquisition occurs when a company is acquired by another entity, leading to the delistings of its shares from the stock exchange. In such cases, the acquiring company may offer a buyout or exchange of shares to the shareholders of the delisted company. The delistings process usually follows the completion of a merger or acquisition transaction.
4. Bankruptcy-Induced Delisting
Bankruptcy-induced delistings occurs when a company undergoes bankruptcy proceedings, resulting in the delistings of its shares. In situations where a company’s financial condition deteriorates significantly, it may file for bankruptcy protection or undergo bankruptcy proceedings. As part of the bankruptcy process, a company’s shares may be delisted and shareholders may face significant losses or limited recovery of their investments.
Options for investors in a delisting situation
When faced with a delistings situation, investors have several options to consider:
1. Sell shares before delisting
In case of voluntary delisting announcements, investors can choose to sell their shares before the delistings takes effect. This allows them to exit their positions and realize the value of their investment.
2. Tender Offer
In case a company is undergoing delisting due to merger or acquisition, the acquiring company can make a tender offer to the shareholders of the delisted company. Tender offers provide shareholders with an opportunity to sell their shares at a specified price, allowing them to exit their investment.
3. Relisting on another exchange
If a company voluntarily delists from one exchange, it can choose to relist its shares on another exchange or over-the-counter market. In such cases, investors have the option of continuing to hold their shares and trading on the newly listed exchange.
4. Legal recourse
In certain cases, where shareholders believe that the delisting decision was unfair or violated regulatory norms, they may seek legal recourse. This option includes seeking legal advice and taking possible legal action against the company or relevant authorities involved in the delistings process.