How can a company get delisted?

Highlights 

• Companies need to stay in compliance with certain rules set by a stock exchange and if they don’t, they get delisted.
• Delisting can be voluntary and involuntary, but when investors generally talk about delisting, they refer to involuntary delisting.
• Delisting is normally a sign of bankruptcy, or near bankruptcy.

Irish airline Ryanair (LON: RYA) has been in news as it is considering an end to its stock listing on London Stock Exchange. According to a recent statement issued by the company, the volume of its stock trading in London has witnessed a fall after Brexit. As per the new rules post Brexit, airlines operating in European Union are controlled and owned by EU citizens. By this clause, UK nationals are not included in the company post Brexit.

Companies listed on any major stock exchange such as London Stock Exchange need to stay in compliance with certain rules set by the exchange and if they don’t, they get delisted or removed from the exchange. Although, delisting can be voluntary and involuntary, but when investors generally talk about delisting, they refer to involuntary delisting.

How are Investors Impacted by Company Delisting?

The company first receives warning from an exchange for not staying in compliance with a deadline and if the company does not solve the issue by then, it is removed from the exchange and instead trades over-the-counter market through a dealer network. However, the procedure of trading and business’s fundamental remains the same.

Investor generally doesn’t lose their money because of delisting but it carries stigma, and it is normally a sign of bankruptcy, near bankruptcy, or can’t meet the minimum financial requirements for other reasons.   

Voluntary and Involuntary Delisting

Voluntary Delisting

Some businesses voluntarily choose to get delisted from the stock exchange and this decision may be taken weighing in the cost benefit ratio or they want to go private. In such case, its shares have been bought out maybe by a private equity firm and the business may consider it too unviable to have their stocks listed, as legal and compliance costs related with listing may exceed the benefits arising out of a listing. The stock may also get delisted because of financial restructuring or merger and it may trade under a new ticker symbol or move to another exchange.

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Image description: Delisting is normally a sign of bankruptcy, or near bankruptcy

Involuntary delisting

Involuntary delisting is when the exchange takes action to remove as it failed to comply with listing standards laid down by the exchange. The exchange does this to protect investors from secretive businesses or that do not follow the rules. However, a company goes out of business, delisting is a natural corollary.

Also read: BHP getting delisted from LSE: What’s in store for the mining giant

Can a delisted stock be relisted?

Theoretically, a delisted stock can be relisted on the same stock exchange. However, it’s rare as they have to solve the issue that forced the delisting, avoid bankruptcy and again become compliant with the exchange’s standards.

Normally, delisted companies go bankrupt, and it may be forced to liquidate or may be acquired by a private owner. The company may also go public through an initial public offering (IPO) by restructuring and issuing new shares to new shareholders. However, the original shareholders generally have their investment wiped out in the bankruptcy.  

How to sell a delisted stock

Selling your stock is probably a wise move if an investor is aware of the possibility of a company’s delisting as there is good chance of losing your entire investment. When a company gets delisted as part of a merger and acquisition or if it is planning to go private, investors gets less time to sell shares before liquidity of the company or exchanged for acquiring its stock at a predetermined conversion rate.

Investor may sell shares on the over the counter market, but the bid/ask spreads may be relatively wide, as buyers willing to pay desired price are rare. A delisted stock may continue to trade over the counter for years, although some brokers restrict such OTC transactions. Delisted companies are generally in the severely financially challenged or in the process of bankruptcy and tend to trade like penny stocks.

Also read: IPO listings: How to start trading on LSE?

How are investors impacted by delisting?

In reality, the ownership rights of the involuntary delisted company’s shares become worthless and it may become illiquid. Once a stock is delisted from a main exchange it will be lowered to trade in the Over-the-Counter Bulletin Board (OTCBB) or the Pink Sheets, and these loosely regulated exchanges do not offer easy access to everyone to trade. However, investors mat get at least some amount on their investment, as companies buy out existing shareholders. But, these shares are can become worthless on emergence from bankruptcy, if new shares are issues as part of its reorganization plan.

In case, the company gets out of bankruptcy there may be two types of common stocks that include new common stock and old stock that it has issued as part of its reorganization plan.  

For the new stock the ticker will not end in “Q”, but with “V”, which will not appear if the stock is issued. Sometimes the stock may have been authorised and are yet to be issued and in such cases the stock is said to be trading “When issued” which is shorthand for “When, as, and if issued”.

Also read: What's the new proposed open-ended investment fund?

Examples of delisted stocks

Recently, Ryanair Holding Plc is poised to drop its London Stock Exchange listing due to compliance issue caused by the UK’s exit from the European Union, becoming the first major company to blame its departure on Brexit.   

Alliance Boots Plc was the largest buyout in Europe of its time. The company was bought by Kohlberg Kravis Roberts & Co, along with Italian billionaire Stefano Pessina and its overall value was worth US $22.2 billion.

Burger King went public in 2006 in New York Stock Exchange but it was then taken private in 2010 by 3G Capital. Then again the restaurant chain went public in 2012.

Aggreko Plc’s listing got cancelled by the Financial Conduct Authority on the London Stock Exchange. The company was cash acquired by Albion Acquisitions Limited for the entire issued and to be issued ordinary share capital of the company.