When a company first sells its stock to investors, its shares are listed on a stock exchange to facilitate trading. Every exchange has minimum listing requirements that the listed companies must maintain. If a company fails to comply with the continuous listing requirements, its stock will be delisted and will no longer trade on the exchange.
The delisted shares still represent ownership in the company and may have value; it is just harder for investors to determine that value if they are no longer traded on a major exchange.
Trading In Delisted Shares
Stocks delisted from an exchange can still trade on the Over The Counter Bulletin Board (OTCBB), an electronic trading service with very little regulation, or through Pink Sheets, a quotation service with virtually no regulations or requirements. OTCBB and Pink Sheet stocks are very speculative; many are called penny stocks because their prices are below $1.
Total Loss for Investors
If investors can no longer trade shares or establish their fair market value, the shares represent a total loss for them. Investors should consult a tax expert on how to write off the loss on their taxes.
Company Bankruptcy or Dissolution
Many companies whose shares are delisted are on the way to bankruptcy, which will wipe out shareholder stakes and make the shares officially worthless. The shareholders may also vote to dissolve the company and its stock will cease to exist. Any residual assets will be sold and the proceeds distributed to the shareholders on a per-share basis, representing the final value they will receive for their shares.
A failing company is not likely to have many interested buyers, but one may occasionally be sold. What happens to the shares will depend on the terms of the buyout offer.
Profit Instrument for Insiders
Insiders sometimes decide that they cannot prevent a delisting but can still turn the company around. They buy up the shares for pennies on the dollar from regular investors prior to delisting to take control of the company. The investors’ loss becomes the insiders’ gain if the insiders manage to turn the company around and their share holdings increase in value. What they do with the shares will depend on the venues open to them. If the company becomes profitable, the insider stakes could simply entitle them to nice profits, or they could sell their shares for a higher price to a private buyer. In rare instances, companies regain their listing compliance status and are relisted, which usually boosts their stock price.
- Stock Market Crash image by Paul Heasman from Fotolia.com