A company that seeks to sell its stock on a major public exchange must meet numerous listing requirements. Failure to comply with these mandates on an ongoing basis could result in a delisting of the stock from the exchange.

The main purpose of exchange listing requirements is to increase market transparency and investor confidence.

What Are Some Listing Requirements?

To list a stock on an exchange, a company would likely need to:

• Ensure its shares trade at or above a minimum price.
• Have the required minimum number of shareholders.
• Meet regulatory requirements for reporting financial results.
• Comply with exchange rules promoting diversity among corporate leaders.

For example, the New York Stock Exchange (NYSE) requires listed companies to have at least 1.1 million publicly-traded shares with a minimum aggregate value of $40 million for initial public offerings. Furthermore, failure to file regular financial reports on forms such as 10-Qs and 10-Ks with the U.S. Securities and Exchange Commission (SEC), would eventually lead the exchange to delist a company's stock.

In 2021, the Nasdaq Stock Market adopted a rule requiring listed companies to have at least one female director as well as another identifying as LGBTQ+ or as a member of an under-represented racial or ethnic minority. Companies may also comply by publicly disclosing why their boards lack such representation.

How Delisting Works

Companies may choose to delist their shares (if they're planning to list them in a different jurisdiction, for example). More commonly, delisting happens at the initiative of the exchange after a company fails to comply with continuing listing requirements.

Each exchange has its own procedures for delisting a stock. The Nasdaq will begin the process once a stock trades below its required minimum share price or the price required to satisfy the required market cap minimum for 30 trading days.

The Nasdaq's listing qualifications department will then issue notice to the company giving it up to 60 calendar days to respond and up to 180 days to remedy the issue. If the listing requirement remains unmet after the expiration of this grace period, the stock may be delisted. Some violations of listing requirements, including the failure to timely solicit proxies or a staff determination that continued listing is not in the public interest, can result in an immediate delisting.

What Happens to Delisted Stocks?

A delisted stock may continue to trade over-the-counter. Because over-the-counter markets lack the liquidity offered by the major exchanges, traders are likely to face higher transaction costs and wider bid-ask spreads. Those negatives aside, the very fact of the delisting often serves to undermine investor confidence. If the company is not able to quickly regain an exchange listing, institutional investors and investment banking analysts will likely stop following the company.

Individual investors would find it harder to obtain relevant information. They have also tended to lose interest in over-the-counter stocks over time, further draining trading volume.

Selling Shares and Impact on Ownership

For insolvent companies, a delisting may precede a bankruptcy filing. But in other instances it may not signify a material change in the company's worth. Shareholders retain their legal rights and equity interest in a delisted stock even if they cannot sell their stake as readily as previously.

In any event, a delisting is rarely a good sign. Prudent shareholders will closely scrutinize its cause and, at the minimum, review their investment rationale.

Real-World Example

Shares of the J.C. Penney retail chain were delisted in May 2020 after 100 years on the NYSE, following a protracted decline in the company's fortunes. NYSE deemed the stock "no longer suitable" to trade on the exchange in May 2020, three days after the company filed for bankruptcy protection.

J.C. Penney's common stock was cancelled on Jan. 30, 2021, when the company completed the Chapter 11 bankruptcy process, and no longer trades on any exchange or market.

The Bottom Line

A delisting does not directly affect shareholders' rights or claims on the delisted company. It will, however, often depress the share price and make holdings harder to sell, even as thousands of securities trade over-the-counter.