What to do if a stock gets delisted?
In stock investing, one of the things that could shock a newbie stock investor is the prospect of a stock getting “involuntarily delisted”.
Being “delisted” means the stock will no longer be “publicly traded”, that is, it will no longer be tradable on the stock exchange.
So what do you do now?
First things first: no need to panic. It’s not like the delisted company has vanished and there’s no way for you to get your money back.
BUT: You have not lost your entire money (not yet, that is) but frankly speaking, you must be ready for the possibility that you might incur a loss.
Voluntary vs. Involuntary Delisting
To be clear, there are two types of delisting in an exchange, including the Philippine Stock Exchange (PSE).
Voluntary Delisting is when a company decides to remove its stock as a traded stock on the exchange. They might do so if they feel they won’t be able to comply with the listing rules of the exchange or if they believe going private would be a better competitive move.
An example of a company that opted for “voluntary delisting” was Splash Corporation back in 2016. The company’s stock, then trading as “SPH” in the PSE, was removed following a voluntary delisting request of Splash Corp. based on “the low trading volume of SPH shares over the last 24 months, the response of the investing public to the ongoing share buyback program, and the company’s desire to avoid telegraphing its business plans to its competitors.”
Other companies that previously sought voluntary delisting include Alaska Milk Corp. (AMC), Eton Properties (ETON), and San Miguel Properties (SMP) which all found it difficult to comply with the PSE’s 10% minimum public ownership rule, thus, the decision to delist.
The second, and more shocking type, is Involuntary Delisting, which from the name itself suggests that the removal was not intended by the company and most likely came about as a result of the penalty imposed on it by the exchange.
An example of a company that was penalized with involuntary delisting was Alphaland Corp. (ALPHA) in 2014 over “repeated violations of disclosure rules” following allegations of simulated share sale between Ashmore Investment Management Limited/Alphaland Holdings (Singapore) and Credit Suisse (Singapore).
More recently, the PSE has initiated involuntary delisting procedures against Calata Corp. (CAL) after CAL’s owner and CEO was found to have repeatedly violated “multiple disclosure requirements” and the “blackout rule” that bans directors and principal officers, who possess certain material information about their companies, from trading their shares within a prescribed period.
Companies slapped with an involuntary delisting penalty are not allowed by the PSE to re-list within the next five (5) years. In addition, directors and officers of said company would be disqualified from becoming directors or officers of any other company applying for listing within the same period.
What happens when a stock gets delisted?
The good news is that investors who own shares of the delisted company do not lose their rights as stockholders of the company. Even if the stock is no longer traded in the PSE, investors still get to receive dividends (if and when they are distributed), participate in stockholder meetings, and retain their vote in corporate matters up for approval.
The bad news, though, is that:
- It’s now more difficult to find buyers of the shares because the stock is not widely available as before since it’s no longer traded in the PSE;
- In the absence of liquidity and open market pricing, the stock price could fall since prices will be set through direct negotiations only between buyers and sellers; and
- Higher capital gains tax are to paid on gains from the sale. Publicly listed stocks are charged a regular rate of 1.5% capital gains tax. In contrast, delisted or privately-held stocks are charged a capital gains tax rate of 5% if the net capital gain is less than P100,000 or 10% if the gain is more than P100,000.
What are options for investors of a delisted company?
Unfortunately, shareholders have very limited options once the stock has been fully delisted from the exchange. Some possible options:
Option #1: Find a direct buyer of the stocks
Investors can scout for potential buyers who might be interested to acquire shares of the delisted company. This could prove to be difficult, though, since the stock is no longer made available for sale in the PSE. Still some investors who would want to bet on the company (with a likely belief that the share price would appreciate once the company is re-listed) might show interest to acquire the shares at a negotiated price.
Option #2: Wait for the Tender Offer of the company
The second option is to wait for the company to announce the Tender Offer. The “tender offer” is the invitation of the company to acquire or buy back outstanding shares from the public at a predetermined price.
Regardless if the company is to undergo voluntary or involuntary delisting, the PSE will require the company to make the tender offer. This move is supposedly meant to protect the interest of minority shareholders. During the tender offer, the company will invite stockholders to tender and sell their shares at the given offer price and predetermined period.
Investors, though, are not required to accept the offer, especially if they believe the offer price is way below the expected price. In such a case, investors might have no other recourse but Option 3 below.
Option #3: Hold on to the shares
Stockholders who can’t find direct buyers of the shares or those who chose not to avail the company’s tender offer will simply have to hold on to the shares.
As explained earlier, they still get to retain their rights as stockholders, and the only definite disadvantage is the lack of liquidity due to the absence of open market trading of those shares. Investors can still earn from the dividends, if distributed, and can choose to sell those shares in the future if there is a willing buyer.
Alternatively, investors can wait for the stock to be listed on the exchange again and possibly benefit from the exponential increase in price. But that could happen many years later — or perhaps, not at all.
So if you’re a stockholder of a delisted company, decide which of the options above would be good for you.
Otherwise, you might end up being a stuck-holder. :)
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