Delisting: A primer for directors.

• Author: Baronsky, Kenneth J.
• Position: Regulatory Oversight

The board should not assume that it is always possible to come back into compliance. Consider carefully the appropriate and effective responses to the prospect of a delisting.

DURING THE HEYDAY of the most recent IPO boom, the New York Stock Exchange and the Nasdaq seemed to open their doors with much fanfare to all comers. Now that we have been in a bear market, these organizations are culling troubled companies from the ranks by delisting securities that do not meet their continued listing standards. This leaves the management of companies faced with losing their Nasdaq or NYSE listing with numerous questions, such as what can or should they do when notified that the company has fallen out of compliance with the continued listing standards and what effects delisting can have on the company. Unfortunately, there is a dearth of information on the many different issues that arise in delistings. This article is intended to address some of those issues.

Why are companies delisted?

A company's securities can be delisted for many reasons. On the quantitative side, the NYSE and Nasdaq have numerical continued listing standards that companies must meet. These standards deal with issues such as a stock's average trading price, the number of shareholders, and a company's average market capitalization and shareholders' equity. 'When companies fail to meet some or all of these standards, exchanges may consider delisting their securities. Delisting can also be considered when companies fail to meet qualitative standards. These requirements include making required SEC filings, having clean audit opinions, and not operating in a manner contrary to the public interest.

Both the NYSE and Nasdaq can summarily delist a security if they believe doing so is necessary to protect the market and/or potential future investors. However, both the Nasdaq and NYSE may allow a company that has fallen out of compliance to submit a plan or proposal for returning to compliance with the continued listing standards. For an NYSE-listed stock, the proposed plan must, with one exception discussed below, demonstrate that the company will return to compliance within 18 months of the company's receipt of notification that it was out of compliance. A Nasdaq-listed company may propose a plan to return to compliance within a certain time or even request a waiver from compliance with certain standards. Each exchange's staff has discretion to accept or deny a company's proposal.

If an exchange chooses summary delisting or rejects a company's proposal to return to compliance with the continued listing standards or for waiver of those standards, the company may appeal that decision. At the NYSE, the appeal is to a committee of the NYSE's board of directors. There is a multilayered appeal process for Nasdaq delistings; that process can, but need not always, end with a review by the Nasdaq board of directors.

If a company loses its appeal(s) at the exchange level, it may seek further review by the SEC. If the company loses before the SEC, it may seek review of that decision before a United States Court of Appeals.

Preventing delisting at the first level of review

As with litigation in courts, it is best to win at the first level because it is difficult to reverse a decision by the exchange staff. The company should thus put its best foot forward at this stage of the delisting process.

If the factual basis of the staff's initial determination is incorrect, the...