Companies need to maintain certain requirements by the stock exchange to continue as a listed company. Some of these requirements for the ASX include a minimum of 300 non-affiliated investors and a market capitalisation of at least A$15 million. Stocks can voluntary or involuntary delist. Involuntary delisting can occur when the company has breached one of the requirements of the stock exchange. Another reason may be the company is in liquidation and unable to operate.
Voluntary delisting means the company has chosen to delist. Reasons for this can be the company has chosen to go back to being a private company as regulatory requirements may drain the company’s finances. There are hefty listing fees which need to be paid annually. Companies can also delist in the event of a merger or acquisition.
Public Companies Going Private
Public companies are required to report publicly as they are accountable to their shareholders. This creates a short-term focus on reporting to ensure these figures are positive so the market reacts well to the share price. Longer term projects which do not generate earnings may be given less attention by the company such as research and development. Therefore, private companies have more flexibility on how they invest their funds. When a public company wants to transition to private, a tender offer may be proposed by a private group to shareholders to buy their shares at a price significantly higher price than market. A majority of voting shares need to accept the offer and when that occurs the shares are sold to the private bidder. Once the buyout has been executed then the stock becomes delisted. Shareholders who do not take up the tender offer may find it hard to sell the shares as the stock becomes more illiquid.
Mergers and Acquisition
Delisting can also occur when the company has merged or has been taken over by another company. When this happens, the shareholders need to vote on the deal and it needs to be approved by the regulator. If it is only a cash deal, then the shareholders of the company being taken over will receive cash for their shares and after the official closing date, the stock will cease trading. If the merger is a stock deal, then the shares of the company being taken over will be replaced by the acquirer by the ratio specified in the deal.
What to do if you own shares in a company which delists involuntarily
If the company that you have invested is in liquidation, then you may be able to claim a capital loss if the liquidator or administrator declares in writing that you will not receive any distributions. To do this, you can offset this capital loss to any capital gains you have in your share portfolio to minimise the tax you will need to pay. Shareholders have a lower rank than creditors including bond holders in the distribution of assets in a liquidation.
Lauren Hua is a private client adviser at Fairmont Equities.
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