Delisting Detailed: What It Takes to Get the Boot From an Exchange

Also, what happens to delisted companies.
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Is there an article on the delisting process? Or better yet, can someone comment on the Legato Systems (LGTOE) situation for us suckers holding the stock? -- Joseph Kuehn


Stock exchanges compete fiercely to attract listings. When an exchange tells one of your companies to take a hike, take a hint.

If a stock is delisted, or removed from an exchange, it's not always bad news. A stock can be delisted if a company is acquired by another, or perhaps the company has decided it would rather see its stock trade on the

New York Stock Exchange

instead of the



If a company is forced to delist, however, it's safe to say that it's probably having some problems.

"Delisting basically has to do with the fact that the company is not as strong economically or as widely held as it was before," says Edward Fleischman, a securities attorney with law firm


in New York and a former commissioner of the

Securities and Exchange Commission


"You have to try to get thrown off the Nasdaq and the NYSE. It doesn't happen easily."

Legato hasn't reached that point.

The storage management software company based in Mountain View, Calif., issued a press release on April 19, saying it had been informed by the Nasdaq listing qualifications department that it had become subject to delisting procedures as a result of its delay in filing its 10-K, or annual report, for fiscal 1999.

"The company is working cooperatively with the Nasdaq staff and will request a hearing with the Nasdaq Listing Qualifications Panel. As a result of this hearing, any action by the Nasdaq to delist the Company's common stock will be stayed pending a decision by the Nasdaq Listing Qualifications Panel," the release says.

The company didn't provide an update. A call to chief financial officer Stephen Wise was referred to spokesman Ed Cooper who did not respond to two messages.

These troubles probably aren't surprising to Legato shareholders. The company has been plagued by accounting problems, and independent auditors are reviewing transactions from last year. The stock has plunged 81.2% this year.

So far, Legato's predicament is unresolved. However, this situation does make you wonder what it takes to force a stock to delist from an exchange.

The two main stock exchanges in the U.S. -- the NYSE and the Nasdaq -- each have requirements that a company must meet initially to get its stock listed and trading. (The Nasdaq actually operates the Nasdaq National Market, the more widely recognized market, and the Nasdaq SmallCap Market, which has its own listing requirements.)

The Nasdaq's financial and size requirements read differently but are similar to NYSE's (though the NYSE's requirements are considered to be more stringent). On the Nasdaq, for example, a company is required to have at least 400 shareholders who own 100 shares or more each. The Nasdaq also has an initial requirement of 1.1 million shares of public float -- the portion of a company's outstanding shares that is in the hands of public investors, as opposed to company officers, directors or controlling-interest investors.

The exchanges also have financial requirements applying to revenue and earnings. For example, the Nasdaq has an initial listing requirement for the market value of the public float, ranging from $8 million to $20 million.

All of this is to ensure that a company whose stock is about to start trading is financially sound.

Once a company gets its stock listed on an exchange, it must continue to meet certain criteria, called the continued listing requirements.

On the Nasdaq, a company must maintain at least 400 round-lot shareholders, for example. If a company falls below that number, it will probably be hearing from the Nasdaq.

Companies on both exchanges also must meet certain reporting requirements. "They must be current in the public reporting of information," says Brandon Becker, an attorney with

Wilmer Cutler & Pickering

in Washington and a former SEC official. That means a company is going to run into problems if it files its annual report late, as Legato recently discovered.

Moreover, a company that is struggling financially could fall below the continued listing standards regarding stockholders' equity or market capitalization, and be forced to delist.

Obviously, a bankruptcy filing is a sign that a company is having some money problems. The stock of


, the discount retailer, was delisted from the Nasdaq last May around the time the company filed for Chapter 11 bankruptcy protection.

However, getting the boot from an exchange is often not immediate and swift. Companies can appeal that a delisting is inappropriate, possibly arguing that the company will be in compliance shortly.

"In my experience, it is more common to have that debate than say you counted the numbers wrong," says Becker.

On the NYSE, for example, a company falling below the listing requirements will first trigger a review. The exchange will speak with the company, which may come back into compliance, say, once a company updates the necessary financial information.

"The official process probably takes a long time," says Fleischman. But "it doesn't take a long time for the administrators to say you don't make it anymore."

Last year, 873 listings were deleted from the combined Nasdaq National and SmallCap markets, including voluntary and merger-related delistings. At the end of the year, 4,829 companies traded on the two markets combined, with 3,836 trading on the more familiar National Market. The NYSE was unable to say how many companies were delisted last year. But, based on the number of delisting press releases on its Web site, it appears that about 60 securities were delisted last year.

To get a sense of how many companies are delisted from both exchanges and why, check out their Web sites. On the NYSE's site, the

Press Room includes a list of delisting announcements. The

Nasdaq Newsroom includes a list of deleted companies.

If a stock does get thrown off an exchange, it doesn't stop trading. Often, a delisted stock goes to the

OTC Bulletin Board

, whose parent is the

National Association of Securities Dealers

, or the

Pink Sheets

. These quotation services are the homes of tiny, infrequently traded stocks and are not stock exchanges. There's no mechanism of electronic delivery of orders on these services, for example.

"You have a lot less liquidity and no transparency," says Fleischman.

These services merely provide quotes on these stocks and don't have relationships with the companies whose stocks trade there. Think of them as unsupervised flea markets. The

OTC Bulletin Board and

Pink Sheets do not impose listing standards, though the companies that trade on them are regulated by the SEC.

Most penny stocks -- speculative and risky stocks with prices less than $1 -- are bought and sold via these quote services. Loehmann's stock is now quoted on the OTC Bulletin Board under the ticker LOEHQ, and the last available quote was about a 11 cents a share.

"In an extreme market, these stocks are very difficult to trade," says Andrew Madoff, head of Nasdaq trading at

Bernard L. Madoff Investment Securities

, a wholesale market-making firm in New York City. "If the market gets crazy, you may not be able to get your order executed at all."

"It's a buyer-beware market," adds Cromwell Coulson, chairman of the

National Quotation Bureau

, which owns the Pink Sheets.

That's the fate a company faces if it gets the boot from the NYSE or Nasdaq.

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