Imagine you buy your first stocks in the stock market, and a few days later, you see news that the company you invested in might be delisted from the stock exchange. What should you do at that moment? Will you lose your money? To answer this question, it's important to analyze each case individually, but it’s not always as serious as the media portrays. Delisting from the U.S. stock exchange has both advantages and disadvantages that every investor should be aware of.

In this article from Hapi, we explain what stock delisting is, what happens to the stock in each specific case, and why it’s crucial for you to know what happens when a stock in your portfolio stops trading on the stock market.

What is a stock delisting?

A stock delisting refers to the removal of a stock from trading on the stock exchange, either voluntarily or involuntarily.

Voluntary reasons:

• Acquisition by another company: This usually happens when a parent company sees benefits from the synergies of the acquisition. Two popular cases are the acquisition of Slack (WORK) by Salesforce (CRM) and Activision (ATVI) by Microsoft (MSFT).
• Becoming private: By going private, shareholders and the board of directors can make important business decisions more swiftly. Additionally, it reduces many costs associated with complying with U.S. stock market regulations.

Involuntary reasons:

• Failure to meet listing requirements: Some violations could include not maintaining a minimum price or market capitalization or failing to submit financial statements.
• Bankruptcy or ceasing operations: This is often linked to the previous point, as bankrupt companies are often unable to meet financial or minimum price standards. In these cases, it’s essential to monitor alerts and consider selling early.

If a stock is delisted involuntarily, it’s possible for it to be relisted in the future if the company corrects its issues and meets stock exchange standards. This often involves improving transparency and financial strength.

Twitter case: When a company goes private

Recently, Elon Musk completed the acquisition of Twitter, turning it into a private company. What happens to its shares?

After the transaction, Twitter's shares stopped publicly trading on the New York Stock Exchange after more than nine years. The company then recorded all shareholders at the time of the delisting through their brokers. These brokers received $54.20 per share, the agreed price Musk paid to acquire the company, which was valued at approximately $44 billion.

In theory, once this happens, those who bought Twitter shares just need to wait to receive their payment.

What are the requirements for listing on the stock exchange?

Companies must immediately report major news to the Securities and Exchange Commission (SEC), submit quarterly and annual reports promptly, and comply with several ongoing corporate governance requirements. Failure to meet any of these requirements may lead to delisting.

Companies that don’t comply are notified by the stock exchange and usually have time to correct the issues, or the stock exchange will proceed with delisting. This would be an involuntary delisting. After delisting, shares may trade on the Over-The-Counter (OTC) market.

Why might Chinese stocks be delisted from U.S. exchanges?

Since late 2020, the risks of major Chinese companies delisting from U.S. exchanges have been increasing. This started with the introduction of the Holding Foreign Companies Accountable Act, which states that the SEC may delist Chinese stocks if U.S. regulators are unable to review their audits for three consecutive years.

In recent years, the SEC has begun warning Alibaba and other Chinese companies listed in the U.S. about non-compliance. Five of the eight companies controlled by the Chinese government have already started voluntary efforts to withdraw from U.S. exchanges due to these requirements.

Investors holding Chinese stocks that delist from U.S. exchanges should know that these stocks will likely transition to trading in China or Hong Kong with little difficulty. Therefore, it’s important to understand how this process works and what options your broker offers in that case.

Lastly, it’s important to note that the potential delisting of Chinese stocks from U.S. exchanges doesn’t necessarily mean that China wants to isolate itself from global financial markets. In fact, these events could reinforce China's growing economic influence and strengthen its local stock exchanges.

How to sell a stock that’s going to be delisted

If you’re aware of the possibility that a company will be delisted, selling your shares is likely a good idea. Involuntary delistings and the events leading up to them decrease a company's value, and if bankruptcy occurs, there’s a good chance you’ll lose your entire investment.

When a stock stops trading as part of a merger or because the company goes private, you have a limited time to sell your shares before they are converted to cash or exchanged for the acquiring company's shares at a predetermined conversion rate.

Ultimately, the key to making any financial decision when there’s a chance a company will be delisted from U.S. exchanges is understanding whether it’s happening voluntarily or involuntarily. It's also important to know what specific consequences each case has for your shares.

To stay informed about investment topics and personal finance, don’t forget to follow Hapi’s social media and subscribe to our blog. If you’re not investing yet, you can do so commission-free with Hapi, an app for investing in stocks and cryptocurrencies. Click here to start your journey into the world of investing.