What is radiation?
Deletion is the deletion of a stock listed security. Cancellation of a title can be voluntary or involuntary and generally occurs when a business ceases operations, declares bankruptcy, merges, does not meet registration requirements or seeks to become private.
Key points to remember
- Delisting occurs when a security is removed from a stock exchange
- Cancellation generally means that a security has not met the requirements of the exchange.
- The most common requirement is that of price; a price below $ 1 per share for an extended period is not preferred for the main indices.
- The consequences of delisting are significant and some companies strongly avoid being delisted.
How radiation works
Companies must comply with specific guidelines, called “listing standards”, before they can be listed on the stock exchange. Each stock exchange, like the New York Stock Exchange (NYSE), has its own set of rules and regulations for listings. Companies that do not meet the minimum standards set by a stock exchange will be involuntarily struck off. The most common standard is price. For example, a company whose share price is less than $ 1 per share for a period of several months risks being struck off. Alternatively, a company can voluntarily request to be struck off.
Some companies choose to go public when they identify, using cost-benefit analysis, that the costs of listing outweigh the benefits. Cancellation requests often occur when companies are bought by private equity firms and will be reorganized by new shareholders. These companies can request delisting to become listed on the stock exchange. In addition, when listed companies merge and negotiate as a new entity, the old separate companies voluntarily request delisting.
Involuntary dismissal from a business
Reasons for delisting include violation of regulations and failure to meet minimum financial standards. Financial standards include the ability to maintain a minimum price of stocks, financial ratios and sales levels. When a company does not meet the registration requirements, the exchange of announcements will issue a non-compliance warning. If the non-conformity persists, the exchange removes the company’s actions.
To avoid being delisted, some companies will undergo a reverse allocation of their shares. This has the effect of combining several actions into one and multiplying the price of the action. For example, if a company performs a 1 in 10 reverse spread, it could increase its share price by 50 cents to five dollars per share, in which case it would no longer be in danger of being downgraded.
The consequences of delisting can be significant, as stocks not traded on one of the major exchanges are more difficult to find and buy for investors. This means that the company is unable to issue new shares on the market to establish new financial initiatives.
Often, involuntary write-offs are a sign of poor financial health or poor corporate governance. Warnings issued by an exchange must be taken seriously. For example, in April 2020, five months after receiving notice from the NYSE, the clothing retailer Aéropostale Inc. was struck off for non-compliance. In May 2020, the company filed for bankruptcy and began trading over the counter (OTC). In the United States, securities written off can be traded over the counter, except when they are written off to become a private company or due to liquidation.