Understanding Delisted Funds: Protect Your Investments

Delisting is when a company is removed from a stock exchange. This can be voluntary, when the company chooses to do so for strategic or financial reasons, or involuntary, when the exchange forces the company to delist. When a company delists, investors still own their shares, but they can no longer sell them on the exchange. Instead, they have to sell them over the counter (OTC). Share prices may or may not be affected by a stock delisting. A delisted stock may continue to trade over-the-counter, but trading happens directly between buyers and sellers, and prices are not publicly disclosed until a trade is complete. This means prices can be volatile and unpredictable.

You continue to own your shares

If a fund delists, you continue to own your shares. However, you won't be able to sell them on the exchange. Instead, you'll have to sell them over the counter (OTC).

The OTC market is an informal marketplace where trading happens directly between buyers and sellers, rather than through an exchange. It's generally riskier than trading on an exchange due to reduced regulation and a lack of publicly disclosed prices. Prices can be volatile and unpredictable, and sell orders may take longer to complete.

If a company delists voluntarily, it may continue to trade on the OTC market or relist on an exchange after reorganisation. In this case, shareholders may receive additional benefits such as warrants, bonds, and preferred shares.

However, if a company is forced to delist, it may be a sign of impending bankruptcy. In this scenario, investors could lose their investment.

Shareholders should closely scrutinise the cause of the delisting and review their investment rationale. It's important to evaluate your position and determine whether to keep or sell your shares.

You get compensated for your shares

If you get compensated for your shares, it means that the company has been acquired or merged with another company. In this case, you will receive a cash payout or shares in the new, acquiring company.

In a merger or acquisition, companies generally use cash, shares, or a combination of both to acquire other companies. So, if the fund you invested in is delisted due to a merger or acquisition, you will be compensated for your shares. You might be paid out for your shares, or your existing shares might be converted into new shares in the acquiring company or a newly formed company.

For example, Burger King delisted from the New York Stock Exchange (NYSE) in 2010 when it was privatised after a buyout by 3G Capital. It then relisted two years later but delisted again in 2014 when it merged with Tim Hortons to form a brand-new company, Restaurant Brands International, which now trades publicly on the Toronto Stock Exchange (TSO).

It's important to note that delisted stocks can continue to be traded over-the-counter (OTC) on one of three different exchanges. However, trading OTC tends to be riskier and less regulated than trading on a stock exchange.

You don't get compensated for your shares

If a company you've invested in delists, there are three possible outcomes. One of these outcomes is that you don't get compensated for your shares.

This is most likely to happen when a company goes into liquidation. Shareholders are usually the last in line to receive compensation after customers, creditors, and debtholders. In the case of bankruptcy, shareholders typically aren't entitled to any new stock when the company emerges from bankruptcy, rendering their investment worthless.

In the UK, there are a few possibilities when a company goes insolvent. One option is a company voluntary arrangement (CVA), which is an agreement between the company and its creditors for a repayment plan and restructuring. This option can be painful for shareholders, but the company has a chance of surviving in its current form and the shares remain listed. However, the most common scenario for an insolvent UK business is to "go into administration," in which an administrator is appointed to manage the company's demise and settle its debts.

In the US, the usual process for an insolvent company is Chapter 11 bankruptcy, which gives management more control over the process. During administration or Chapter 11, it's likely that the company's shares will be suspended from trading. If the company's assets are less than its debt, the creditors take everything, and shareholders may get nothing for their shares.

Even if the company's assets exceed its debt, shareholders may still not be compensated. In this case, creditors get paid, and then shareholders get the remaining value in cash. However, the company's debt often outstrips any remaining value, leaving common shareholders with nothing.

While delisting doesn't directly affect shareholders' rights or claims on the delisted company, it often depresses the share price and makes holdings harder to sell. A delisted stock may continue to trade over-the-counter (OTC), but this market is less liquid than major exchanges, leading to higher transaction costs and wider bid-ask spreads. As a result, a delisting can undermine investor confidence and lead to a significant reduction in the value of shareholders' holdings.

You can still trade over-the-counter

If a fund delists, investors still own their shares, but they can no longer sell them on the exchange. Instead, they can trade over the counter (OTC). The OTC market is a financial marketplace where trading happens directly between buyers and sellers, rather than through an exchange. It's like buying a piece of art directly from the artist instead of through a gallery.

There are some advantages to trading OTC. For example, you can get access to early-stage companies that aren't large enough to trade on major exchanges or access foreign companies that trade on non-US exchanges. However, the lower barriers to entry on the OTC market mean higher risks of fraud and less transparency into a company's operations. It is also rarer for a delisted stock to get itself back onto a traditional exchange.

Trading OTC can be more challenging than trading on an exchange. Many platforms don't support OTC trading, so it may be harder to buy and sell shares. The share price may be affected by a stock delisting, and the value of shares can decrease significantly or be lost entirely. Delisted companies often lose their reputation and are stigmatised for being unable to meet the requirements of major exchanges.

OTC markets lack the liquidity offered by major exchanges, so traders are likely to face higher transaction costs and wider bid-ask spreads. Academic research has found that OTC stocks tend to have low liquidity and generate "severely negative and volatile" returns for investors.

The share price may be affected

When a company is delisted, its share price may be affected. Shareholders retain their legal rights and equity interest in a delisted stock, but the value of their holdings can be significantly reduced. Delisted stocks often experience significant or total devaluation. In some cases, stockholders can lose everything.

Delisted stocks may continue to trade over-the-counter (OTC), but the lower barriers to entry in the OTC market mean higher risks of fraud and less transparency into a company's operations. Trading OTC also means higher transaction costs and wider bid-ask spreads. These factors can contribute to a further decline in the share price.

Additionally, a delisted company may lose the trust of investors, even if it continues to operate successfully. Delisted companies often gain a stigma for being unable to meet the requirements of the major exchanges. As a result, they may lose their reputation and experience a decline in investor confidence.

In the case of an involuntary delisting, such as when a company fails to meet regulatory requirements or experiences financial difficulties, the share price is more likely to be negatively impacted. An involuntary delisting is often a sign that a company is approaching bankruptcy or facing other financial troubles. In this case, investors may lose their investment, and the share price is likely to fall.

On the other hand, a voluntary delisting may have a more positive or neutral impact on the share price. For example, if a company delists to go private or to be acquired or merged with another company, shareholders may receive a cash buyout or shares in the new, acquiring company. In some cases, voluntary delistings can even lead to an increase in the share price, especially if the reason for the privatisation is to profit from undervalued shares.

Overall, while the impact on the share price can vary depending on the specific circumstances of the delisting, it is important for investors to closely monitor their investments and seek financial advice if needed.

Frequently asked questions