What happens when a company delists?
When a company ‘lists’ on an exchange—like the Australian Securities Exchange (ASX)—its shares can be bought and sold by investors. Here we learn about why a company might delist, what to expect if one of your investments delists, and what the over-the-counter market is.
Why companies delist
Sometimes a company chooses to delist, other times it’s forced to. Here are some reasons why either case might happen.
It doesn’t meet the exchange’s requirements
Exchanges have requirements that listed companies must meet. These control things like company structure, market capitalisation (value), share price, reporting obligations, and listing fees.
Typically, if a company becomes non-compliant while it’s listed on an exchange, it’s given some time to address the issue. If the company can't become compliant in time, it’s delisted from the exchange.
It has gone through a merger or acquisition
If a company goes through a merger (where two companies combine), it’s likely to be delisted as the original company doesn’t technically exist anymore.
If a company is acquired (bought by another company), the acquiring company buys the majority (or all) of the existing shares and might choose to delist the acquired company.
See our article on corporate actions for more on mergers and acquisitions.
It’s struggling financially
In Australia, when a company can’t pay its creditors (the people it owes money to), it’s put into liquidation, receivership, or administration.
Liquidation—the company stops trading and its remaining assets (like property and inventory) are sold to pay creditors and shareholders.
Receivership—a person outside of the company is appointed as a ‘receiver’ to collect and sell the company’s assets. The receiver is usually appointed by a creditor who knows the company won’t be able to pay its debts without legal action.
Administration—a person outside of the company is appointed as an ‘administrator’ to take control of the company’s operations and finances. Sometimes the company can continue to operate, other times it ends up in liquidation. The company can voluntarily put itself into administration, or it can happen involuntarily by a creditor.
Generally, if a company goes through liquidation, receivership, or administration, it will breach an exchange rule and be delisted (at least temporarily).
For US companies, you’ll often see reference to Chapter 11 bankruptcy (reorganisation) or Chapter 7 bankruptcy (liquidation). If a US bankruptcy court grants Chapter 11 bankruptcy, the company gets time to make changes and sort out its debts. Sometimes this works, but if it doesn’t, the company goes into Chapter 7 bankruptcy—liquidation.
Experiencing a delisting as an investor
It’s common for a company to go into a trading halt before delisting. In a trading halt, you can’t sell your shares—you can only wait and see what happens.
If a company you invest in delists, there are generally three possible outcomes.
1. You continue to own your shares
In some cases, a company could delist but continue trading on the over-the-counter (OTC) market (an informal marketplace for financial products). Many platforms don’t support OTC trading so it may be harder to buy and sell your shares.
It’s also possible that the company relists on an exchange after a period of reorganisation—allowing you to trade your shares like before.
2. You get compensation for your shares
Other times, your shares could be cancelled, but you’re offered something in return.
In a merger or acquisition, companies generally acquire other companies using cash, shares, or both. So, you could be paid out for your shares, or have your existing shares converted into new shares in the acquiring (or newly made) company.
3. You don’t get compensation for your shares
Unfortunately, there are also instances where your shares are cancelled, and you don’t receive anything in return.
This is most likely to happen when a company goes into liquidation. Shareholders are usually last in line to receive compensation after customers, creditors, and debtholders.
The over-the-counter (OTC) market
The OTC market is a financial marketplace where trading happens directly between buyers and sellers, rather than through an exchange. It’s like buying a piece of art from the artist, instead of through a gallery.
Buying and selling shares on the OTC market is generally riskier than on an exchange. Trading is less regulated, and prices aren’t publicly disclosed until a trade is complete. This means prices can be volatile (unpredictable), and sell orders might take longer to complete.
Currently, you can’t buy shares on the OTC market through the Sharesies platform. But you can sell your shares if a US company you invest in delists and starts trading on the OTC market.
Wrapping up 🌯
There are lots of reasons a company might delist from an exchange, and there’s not a lot you can do if it happens to one you’re invested in.
So, it’s worth keeping tabs on your investments so you can give yourself time to respond if things start to change.
Watching an investment go through the delisting process can be confusing, and it’s normal to feel uncertain. If you ever have questions, reach out to help@sharesies.com.au!
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.
Sharesies does not provide taxation advice on delistings.
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