Stock market trading is inextricably linked to risk. However, there are troubles, the consequences of which can be minimized provided that there is sufficient awareness of them. It is possible and necessary. Let’s talk about one of these pitfalls – delisting of the company from the stock exchange.
Exchange of companies
Joint-stock companies with the goal of expanding their business usually seek to enter the stock exchange and become public. To do this, they need to go through a procedure called listing. After its passage, the shares of the company fall (or do not fall) into the list of securities admitted to circulation on the exchange. Each exchange has its own requirements for this, but the fact (and even an attempt) of passing the listing indicates that the company is open to investors and willing to disclose financial results.
There is a reverse procedure called delisting, after which the company leaves the exchange. That is, its shares and other securities cease to be traded on it. In principle, this is not unusual for joint-stock companies of average capitalization. Some companies leave the exchange, some express a desire to appear on it – a normal work process. At one time, such well-known companies as Baltika and Ostankino Meat Processing Plant left the exchange. Their products did not get any worse.
More loud examples can be given. More recently, in 2018, the well-known mobile communications company Megafon left the London Stock Exchange. In the same year AvtoVAZ left the Moscow Exchange. Let’s figure out what makes the management of a joint stock company make such a decision, and, most importantly, what delisting threatens to a private investor – the owner of the company’s shares.
Debit and credit
To begin with, it is necessary to tell what gains and losses occur as a result of delisting. First of all, the financial costs of the company are reduced: no need to pay the stock exchange for services. Workflow is simplified: there is no longer any need to send financial statements to the exchange. Anyway, you can remove this reporting from open access and not show it to anyone except the tax inspectorate and shareholders. In addition, the company receives some protection from an unfriendly takeover: after all, its shares are not freely available.
The joint-stock company becomes inaccessible such attractive ways of attracting working capital, such as issuing bonds and additional issue of shares. In fact, the only option is a bank loan. After delisting, difficulties arise with the potential sale of part of the business: buyers can no longer focus on the stock price of the company’s shares.
Leave or stay
Weighing the above pros and cons, the joint stock company is considering the possibility of leaving one or another exchange.
The fact is that clause 6 of article 14 of federal law No. 39-FZ “On the Securities Market” dated 04/22/1996 gives stock exchanges the right to stop admission of securities to organized trading without any explanation. The only restriction imposed in this case on the exchange is the impossibility of such termination earlier than three months after its public announcement.
In practice, stock exchanges try to build relationships with issuers based on maximum transparency. Therefore, the listing rules usually indicate explicitly all the reasons for which the issuer’s shares may be excluded from Wells Fargo Routing number the list of securities admitted to trading. However, the exchanges do not forget about their rights. The Moscow Exchange, for example, warns that, along with these grounds, when considering the issue of exclusion or leaving a security, the following will also be taken into account:
- issuer’s financial condition;
- reputation and reliability of the issuer;
- interest in securities by potential investors;
- circumstances (facts) giving reason to believe that the rights and interests of investors may be violated;
- other significant circumstances.
The full list of reasons why the Moscow Exchange can exclude shares from the list of tradable ones is quite extensive, and it does not make much sense to give it in its entirety.
However, forced delisting is still quite rare, and, in most cases, the exclusion of shares from the list of traded on the exchange occurs at the request of the issuer.
At the call of the heart
Such a desire can arise in a wide variety of cases, but a standard list of motives can be given. Typically, company management decides to leave the exchange if:
- over a long period of time, either no transactions at all took place on the company’s shares, or their volume was negligibly small;
- periodic payments levied by the stock exchange were too large, and the economic effect of the presence of shares in organized exchange trading did not live up to expectations;
- the bulk of the company’s shares (more than 95%) turned out to be concentrated in the hands of one or more majority investors, and there is no point in continuing to quote the free balance on the stock exchange;
- the joint-stock company suspends work or is going to close at all;
- the company withdraws securities from circulation in connection with a restructuring or change of jurisdiction.
As you can see, most of the items on the list are related either to the deterioration of the financial position of the company, or to its restructuring.
Only without panic
Let’s move on to the most burning issue for a private investor: what to do with stocks in a portfolio if the threat of delisting hangs over them. The main advice is simple – do not panic.
There were times when shareholders Usaa routing number began to receive dividends precisely after delisting, as the company gained profit as a result of cost reduction. Nevertheless, in the general case, it is better to get rid of such shares. Let’s see how to do this with the least loss.
As already mentioned, after the announcement of the exchange’s decision to terminate the admission of shares to organized trading, the investor has three months, during which the shares will still be listed on the exchange. Of course, selling stocks at this time will be quite difficult, but there is still such an opportunity. However, delisting initiated by the stock exchange is an extraordinary event, indicating that the company’s affairs are very bad. Most private investors try not to deal with such securities, so the chance to encounter forced delisting is minimal for them.
The probability of meeting the issuer’s voluntary decision to leave organized trading is much higher. In this case, minority shareholders do not have to worry at all: since 2012, their rights have been reliably protected by law. Until that moment, it was believed that delisting was a matter of relations between the company and the exchange, and the state did not care much about it. However, at the end of 2011, by the decision of the management, a number of small and medium-sized companies left the newly organized Moscow Exchange, which led to numerous complaints from shareholders who did not manage to sell their securities at a market price. In December 2012, the corresponding changes were made to the federal law No. 208-ФЗ “On Joint-Stock Companies”.
Now, subparagraph 19.2 of paragraph 1 of Article 48 of this law states that the decision on delisting of shares is exclusively within the competence of the general meeting of shareholders. Section 49 of the same law states that a three-fourths majority (75%) of all voting shares is required to implement such a decision. Moreover, the decision is made in the manner prescribed in paragraph 3 of Article 7.2 of the law. And finally, this very article 7.2 says that shareholders who voted against or did not vote at all have the right to demand redemption by the company of their shares. The buyback rules are governed by Articles 75 and 76.
If you translate from a legal language into a regular language, it all boils down to the fact that after deciding on delisting, the company is obliged to offer private investors an offer at a price not lower than the average weighted market price over the past six months.
In life, as you know, anything can happen, therefore, we will consider the option in which the proposed offer, for one reason or another, was ignored. So, we have in our portfolio a certain number of shares that we want to get rid of, but they are no longer traded on the exchange. In this case, there is only one road – to an organized Over-the-counter market . It circulates the shares of companies that could not be listed on the stock exchange. Or, as in our case, delisted. In Russia, the leading trading platform for the OTC market is the RTS Board information system.
Access to this system, as well as to the exchange, can only be obtained through an intermediary – a brokerage company. However, unlike the exchange, electronic transactions cannot be concluded in it. All transactions are made by telephone between employees of brokerage companies. Yes, uncomfortable. Yes, the broker will take an impressive commission. But, there is simply no other way.
So, we outline the main things that a private investor needs to know about delisting:
- Delisting – the procedure after which the company’s shares cease to be traded in organized exchange trading. In other words, the company leaves the exchange.
- Delisting can be forced (by decision of the exchange) or voluntary (at the request of the joint stock company).
- In the case of forced delisting, the shares will continue to be traded on the stock exchange for three months after the publication of this fact.
- After a decision is made on voluntary delisting, the company is obligated to offer private investors an offer to purchase their shares at the weighted average market price over the past six months.
And finally: the best treatment is prevention. Investors who do not have sufficient experience in the stock market are not advised to invest in shares of companies with precarious financial situation, no matter what the profit.