Only penny stocks get delisted, right?  Not exactly. With companies like $5 billion chip-maker Infineon Technologies or $50 billion insurer Allianz SE, delisting is not an issue for micro-caps alone.  Delisting happen – even picking up in late 2009 in both the U.S. and Canada – making it more important than ever to understand why it happens and what to do about it. 

A delisting can happen for a number of reasons, the most obvious (and most common) of which is a failure to meet the continued listing requirements of the relevant exchange; other motivators of delisting activity include bankruptcy and voluntary delisting, often intended to pre-empt action by oversight bodies. Regardless of whether the delisting is mandatory or voluntary, however, there may be consequences to delisted companies, including share price reduction and decreased access to credit lines. In order to mitigate damaging fallout from the delisting, companies often search for alternatives such as share consolidation, listing on a junior exchange, or “going dark” in the U.S., all of which will be explored in greater detail below.

With so many factors pointing to more delistings on the horizon, now is a good time for public companies to examine why a delisting can happen, what the consequences are, and the possible alternatives.

To put the trend in perspective: Over the 12 months leading up to June 2009, the total number of NASDAQ-listed securities fell from 3,080 to 2,894. As of last week, another 22 were pending suspension or delisting. Meanwhile, the main board of the Toronto Stock Exchange has declined from 1,587 issuers to 1,475 over the past year – a reduction of 112 – with 45 of those issuers having been delisted in the past three months. Any way you look at it, 2009 is proving to be a scary year. And the numbers suggest there is more to come. NASDAQ lists two hundred companies as non-compliant, and the TSX has placed over a hundred under delisting review in 2009 alone.

The most common reason for a company’s delisting is its failure to meet the continued listing requirements of the relevant exchange. In the cases of NASDAQ and the TSX, listing requirements are quantitative (minimums for bid price, market cap, assets, etc.) and qualitative (compliance with corporate governance standards). For NASDAQ Capital Market companies (formerly the Small Cap Market), the minimum bid price is $1.00. In addition, companies on that market must have a market cap of $35 million; stockholders’ equity of $2.5 million; or $500,000 in net income over two of the past three years. For the TSX, market cap, total assets and annual revenue must each exceed $3 million.

As a result of the market meltdown in 2008, both NASDAQ and the TSX elected to alter their approaches to delisting reviews. NASDAQ suspended its market cap and minimum bid requirements, only reverting to the original rules on July 31. The TSX took a different approach, electing instead to extend the time permitted issuers to remedy a listing deficiency from 120 days to 210 days. That measure expired on October 1.

To appreciate how different these two approaches are, consider the case of Forbes Medi-Tech, a cross-listed nutraceuticals company. In January 2009, Forbes’ market cap fell below the $3 million requirement for continued listing on the TSX. The TSX notified Forbes that the company had until August to get back on-side (210 days, per the extended cure period). When it failed to do so, it was delisted.

Compare that to the company’s NASDAQ experience. Forbes’ bid price fell below $1.00 on the NASDAQ in August 2008. But when NASDAQ’s moratorium took effect in October, Forbes had 154 days left in the 180 day cure period. As a result, when the moratorium was lifted, Forbes’ clock started from 154 days, even though the company’s bid price had been under $1.00 for over a year. The company has until January 2010 to rectify the bid price issue and preserve its NASDAQ listing.

As an example of how continuous listing requirements actually work, consider automotive website operator Autobytel. When the company went public in the heady dotcom days of 1999, its share price hovered in the $40 range. By October 2008, though, the company’s share price had fallen below $1.00, a price it hasn’t achieved since. With the suspension of certain listing requirements in place, however, it wasn’t until September 2009 that the company was considered off-side.

At that point, Autobytel received a letter from NASDAQ advising the bid price over the preceding 30 business days had been below the minimum $1.00 price required for continued listing. Per NASDAQ’s standard procedures, Autobytel has been given 180 days to rectify this (by maintaining a bid price of $1.00 for ten consecutive business days), failing which NASDAQ may elect to delist the company. In the event it is unable to achieve compliance, Autobytel has the option of accepting the delisting or appealing to a Hearing Panel. A share consolidation may address the bid price concern temporarily, but to stay listed for the long-term, the company will need to rejuvenate interest in its stock.

An even less desirable situation arises where a company enters bankruptcy or similar proceedings. On October 5, Canadian media conglomerate CanWest Global filed for protection under the Companies’ Creditors Arrangement Act. Next month, the stock will be delisted from the TSX. As with many Canadian companies undergoing a restructuring, CanWest may hope to return to the exchange when (or if) it emerges from the CCAA proceedings.

But not all delistings are imposed on issuers. Perhaps the least common route to a delisting is the decision to do so voluntarily (except where it is simply a pre-emptive measure). The market crash and economic crisis of the past two years has caused many companies to reexamine the cost vs. benefit equation for listing on a securities exchange. Public company compliance and listing costs are not insignificant, often running into the millions of dollars annually. For some companies, those costs eat into dwindling cash reserves. For others, the complexity associated with multi-jurisdictional reporting brings into question the value of foreign listings.

In late September, German insurer Allianz SE declared its intention to delist from the New York Stock Exchange, and subsequently from a number of European Exchanges (including the LSE). With less than 5 percent of total trading in Allianz shares taking place on those exchanges, the company elected to focus on its main platform – the Frankfurt exchange. It also noted reduced reporting requirements and expected annual savings of several million euros.

No matter what motivates the delisting of a public company, there will be consequences for the issuer and its investors that should not be ignored. Cyclacel, a New Jersey-based pharmaceutical company that had half a million dollars of revenue in the first six months of the year, describes many of the possible consequences in the Risk Factors section of its 10-Q for the six month period ended June 30, stating:

“A delisting of our common stock from the NASDAQ Global Market could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, suppliers, customers and employees and fewer business development opportunities.”

There can be other consequences as well. On January 8, 2009, Canadian pharmaceuticals company Bellus Health was delisted from NASDAQ. After reflecting on a deficiency letter advising that the company’s market value was below the minimum required to maintain listing, Bellus elected to delist voluntarily. It was not an easy decision. Before doing so, the company had to obtain the consent of a majority of the holders of the company’s 6% convertible senior notes (issued in November 2006 for proceeds of $42 million). Delisting also meant Bellus no longer had access to a $60 million equity line of credit facility.

Assuming a company does face delisting, what can it do to mitigate any damaging fallout? On-line search technology provider Copernic took the “standard” approach taken by NASDAQ companies in response to a minimum bid price issue – it implemented a share consolidation. Like Autobytel, Copernic was excused from its non-compliance as a result of the moratorium on delistings self-imposed by NASDAQ. However when the company was advised that it would be delisted if it failed to achieve compliance by September 30, Copernic elected to proceed with a share consolidation. On July 21, the shareholders elected to empower management to proceed with a consolidation (in the range of 2:1 to 10:1, at management’s discretion). On September 11, management implemented a 7:1 consolidation. So far, so good – the share price has remained relatively flat since the consolidation. But only time will tell if this was effective. Consolidations have historically shown to be a deferral mechanism when it comes to delisting, rather than a permanent cure.

A second common approach for companies seeking to counter an impending delisting on one exchange is to list on a junior exchange. CanWest, for example, may consider listing on the NEX board of the TSX Venture Exchange, allowing it to maintain a market for its shares while the company proceeds with its restructuring. Meanwhile, when chip-maker Infineon elected to withdraw from the NYSE earlier this year, it chose to list its American Depositary Shares on the top tier of the U.S. over-the-counter market – OTCQX. While these markets require less in the way of disclosure (and impose much lower fees), they provide an ongoing mechanism for investors to buy and sell shares.

A third alternative available for delisted issuers in the U.S. is to “go dark”. While delisting eliminates a market for a company’s shares, “going dark” eliminates public company status. By deregistering under the Exchange Act, a company can suspend or even terminate its public reporting obligations (which continue irrespective of whether a company has been delisted). Audio systems designer Rockford announced in August its intention to voluntarily delist from NASDAQ and subsequently deregister its shares. In outlining the reasons for the decision by its Board, Rockford highlights the typical reasons a company might consider pursuing this somewhat radical step – limited trading, the costs associated with public company reporting and compliance, and the fact that its public company status has not enhanced the company’s ability to raise capital. In July, Brazilian miner MMX Mineracao e Metalicos S.A. – a company with a billion dollar market cap – followed up a 2008 TSX delisting with an application to the Ontario Securities Commission for a decision under section 1(10)(b) of the Securities Act that it is no longer a reporting issuer in Canada (the Canadian equivalent of going dark).

The decision of whether or not to delist is not a pleasant one for a company, but with so many factors pointing to more delistings on the horizon, now is a good time for public companies to examine why a delisting can happen, what the consequences are, and any possible mitigating actions. By understanding what could trigger a delisting, the alternatives to a delisting, and the consequences if delisted, companies can plan in advance their activities on numerous fronts, including strategy, finance and communications. Counsel can assist in this process by monitoring activity in this space and recognizing signs of trouble before it is too late.