What is Delisting
Delisting is the removal of a listed security from a stock exchange. The delisting of a security can be voluntary or involuntary and usually results when a company ceases operations, declares bankruptcy, merges, does not meet listing requirements, or seeks to become private.
BREAKING DOWN Delisting
Companies must meet specific guidelines, called "listing standards," before it can be listed on an exchange. Each exchange, such as the New York Stock Exchange (NYSE), establishes its own set of rules and regulations for listings. Companies that fail to meet the minimum standards set by an exchange will be involuntarily delisted. Alternatively, a company can voluntarily request to be delisted.
Some companies choose to become privately traded when they identify, using a cost-benefit analysis, that the costs of being publicly listed exceed the benefits. Requests to delist often occur when companies are purchased by private equity firms and will be reorganized by new shareholders. These companies can apply for delisting to become privately traded. Also, when listed companies merge and trade as a new entity, the formerly separate companies voluntarily request delisting.
Involuntary Delisting of a Company
The reasons for delisting include violating regulations and failing to meet minimum financial standards. Financial standards include the ability to maintain a minimum share price, financial ratios, and sales levels. When a company does not meet listing requirements, the listing exchange issues a warning of noncompliance. If noncompliance continues, the exchange delists the company's stock.
Often, involuntary delistings are indicative of a company's poor financial health or poor corporate governance. Warnings issued by an exchange should be taken seriously. For example, in April 2016, five months after receiving a notice from the NYSE, the clothing retailer Aéropostale Inc. was delisted for noncompliance. In May 2016, the company filed for bankruptcy and began trading over-the-counter (OTC). In the United States, delisted securities may be traded over-the-counter except when delisted to become a private company or because of liquidation.