By Ee Hsin Kok. Edited by Arjun Chandrasekar.
You might have heard talk in recent years about the threat of certain Chinese companies like Alibaba and Baidu being delisted from the US stock exchange. In this article, we go over what a delisting is, the circumstances under which it can occur, and what delisting means for shareholders of the company.
What is Delisting?
When a company or security is removed from an exchange, it is called a delisting. A notable example would be in 2013 when Dell Computers was delisted from NASDAQ and became a private company.
Voluntary and Involuntary Delistings
Companies can be delisted voluntarily and involuntarily. In the example given on Dell Computers, Michael Dell (Founder and CEO of Dell Computers), as well as private equity firm Silver Lake, delisted the company voluntarily from the Nasdaq stock exchange. The company was struggling at the time, and they believed that going private was the best thing for them.
On the other hand, companies can also be delisted involuntarily if they fail to meet requirements set by the exchange they are listed on, or the laws of the country the exchange is in. Most notably, just a few months ago, China Mobile Ltd was delisted from US Stock Exchanges because US legislators passed a law banning US investment in companies the US government believed to support China’s military and intelligence agencies.
What happens to Shareholders of Delisted Companies?
If you own shares in a company when it is delisted, you still technically own the shares in the company. However, since the shares are no longer tradeable on an exchange, you have to trade them over the counter. This is not ideal, as trading stocks over the counter is not allowed by many brokers and has huge bid/ask spreads. In the case of voluntary delistings, most of the time a company is voluntarily delisting to go private or due to a merger. In this case, they may offer to buy back your shares at a certain price, or offer you stock in the acquiring company. In unique situations such as the delisting of China Mobile Ltd, since it was also trading on the Hong Kong Stock Exchange, investors were able to swap their American depositary shares for their Hong Kong counterparts.