Corporations list their stocks to make them marketable and to gain access to capital markets. Stocks must meet listing requirements such as price, capitalization, trading volume, quarterly financial reporting and disclosure of material information. If a corporation fails to meet these requirements, its stock may be delisted and stops trading on an exchange. Delisted stocks still entitle their shareholders to all the rights, such as ownership, voting and ownership transferability, but become virtually impossible to trade as there is no more orderly market for them.
If a stock does not trade, there is no mechanism to establish its fair market price. Besides, if it’s illiquid, investors cannot dispose of it (the issuer is under no obligation to buy it back). An illiquid stock with no established market price is as good as worthless — unless you own the entire company.
Delisting does not happen overnight. A corporation gets a warning of non-compliance and a deadline to fix the problem. In many instances it can take steps to bring the stock back into compliance; in other instances, it may fail to comply and its stock will be delisted and stop trading.
Investors generally get ample warning that a stock may be delisted as the company must disclose listing non-compliance and exchange warnings. The stock usually begins to decline way ahead of the actual delisting as worried investors bail out to avoid trouble.
There are always speculators who bet that a stock won’t be delisted and will come back, scooping up bargains for pennies on the dollar. Insiders may take advantage of the situation and buy enough to gain control of the corporation.
Some small companies decide to delist voluntarily if they find that the cost of compliance is too high. Investors have a choice: sell their shares in the open market before the delisting date, or remain shareholders in what will become a privately owned company for all intents and purposes, provided the company does not offer to buy back their shares.
Some large corporations whose stock does not trade much on a particular exchange may choose to delist from that particular exchange while maintaining listing elsewhere. For example, on June 5, 2010 Germany’s Daimler (maker of Mercedes Benz) delisted its stock in the United States, but it is still traded on European exchanges.
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