What Happens to a Shareholder When Delisting Occurs?

by John Csiszar, Demand Media
    Delisting often results in a decline in value.

    Delisting often results in a decline in value.

    When a company is delisted, its stock no longer trades on one of the major stock exchanges. In a direct sense, nothing happens to a shareholder when delisting occurs. The shareholder still owns the same percentage of the company as before, and he is free to sell the shares to any willing buyer. However, in financial reality, the delisting of a company is usually a huge negative. It often occurs after a company goes bankrupt or as it approaches bankruptcy.

    Ownership

    When you buy a stock, you own it until you either sell it or, in some cases, the company redeems it from you. If a stock gets delisted, you don't have to hand over your ownership rights. However, those rights often become worthless. In many cases, delisting occurs due to corporate bankruptcy, which typically wipes out original shareholders in favor of newly issued stock. Even if you hold on to your delisted shares, you often won't receive any shares in the company when it emerges from bankruptcy.

    Decline in Value

    Before a stock gets delisted, an announcement is made to the marketplace. Sometimes, a company will voluntarily delist its shares and make the announcement itself, but other times an exchange will announce that a company no longer meets its listing requirements. Because a delisted stock can be hard to sell, many investors will sell after a delisting announcement, driving the price down. This is particularly true in cases of bankruptcy, where there is usually no use in holding on to the delisted shares.

    Decline in Liquidity

    If you are a shareholder in a stock, you are free to sell the stock to whoever will buy it. Your trade does not necessarily have to occur on a stock exchange. However, one of the main reasons for the existence of the stock exchanges is to provide liquidity for investors. Liquidity refers to the availability of buyers and sellers in a particular stock. Normally, when you want to sell a stock, you simply enter an order with your broker, and your shares find their way into the hands of a willing buyer. If your stock gets delisted, it will usually trade on the "over-the-counter" market, which doesn't provide easy access to buyers. It could become difficult, if not impossible, to sell your stock.

    Private Buyout

    In some cases, a stock getting delisted might actually turn out to be a good thing for shareholders. If a company decides to go private instead of remaining publicly traded, it is essentially buying out existing stockholders. In exchange for your shares, the company will offer you cash. After the buyout, the shares will be delisted. If you don't accept the buyout offer, you will keep your shares but they will become worthless upon delisting.

    About the Author

    John Csiszar began writing in 1989 at the ERIC Clearinghouse for Junior Colleges. His work appears in various online publications, including The Huffington Post. Csiszar earned a B.A. in English from UCLA and served 18 years as an investment adviser and certified financial planner.

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