What to Do if Your Company Receives a Delisting Notice From NASDAQ or NYSE-AMEX

April 25, 2012

Louis Taubman

As our previous articles have discussed, as a result of a number of factors, including negative allegations from short sellers and suspicion from regulators, Chinese companies with stock that trades publicly in the U.S. have faced unprecedented challenges in the last 18 months. Among these challenges, for companies whose stock is traded on Nasdaq or listed on the NYSE-AMEX, is the potential for delisting from these premier markets. This can be particularly troubling for management and directors of these companies, as in many cases becoming a Nasdaq traded or NYSE-AMEX listed company represents the culmination of several years of effort and recognition of your company as an international company worthy to compete in the global economy. Therefore, receipt of a notice of delisting from one of these premier markets or exchanges can cause great embarrassment and have negative repercussions not only for the company’s stock price but with local government officials, banks and other parties in China whose good will is important to the company’s business in China. However, although receipt of a notice of delisting is a very troubling occurrence, there are still options available to a company that receives such a notice. Therefore, it is important to understand how the delisting procedure works and what you can do as the manager or director of a company that receives such a notice.

On both Nasdaq and NYSE-AMEX delisting can occur for a number of different reasons, however, delisting notices usually fall into one or both of two categories: (a) failure to meet the substantive continued listing requirements of the market or exchange and/or (b) “public interest” concerns. The former category deals with objective criteria for continued listing on the exchange or trading on the market. Such requirements include the company’s stock price, the requirement to file 10-Ks and 10-Qs, composition of the audit committee and other similar objective criteria. The latter category is a subjective evaluation by the staff of Nasdaq or NYSE-AMEX that a particular company poses a risk to investors in the company’s stock and is usually based on concerns raised by third parties such as short sellers, regulators or plaintiff class action attorneys. Because public interest concerns are subjective rather than objective, they can be much more difficult to rebut. Unfortunately, very often a notice of delisting will cite both objective continued listing requirements and subjective public interest concerns as the reason for potential delisting of a company’s stock.

It is important to understand that if your company receives a notice of delisting it does not mean that the company has no options with regard to maintaining its listing. In most cases, if a company has fallen out of compliance with the objective substantive listing qualifications (e.g. failure to file a required periodic report or failure to maintain the minimum stock price) the staff of the exchange or market will provide the company with an opportunity to present a plan of compliance that explains how the company plans to remedy its compliance shortfalls. In such cases, the company, together with its outside counsel and advisors, should communicate with the staff of the exchange or market in order to understand their concerns and work within the allotted time frame to present a credible and well thought out plan of compliance. In most cases, if the company has not had similar issues in the past and its plan is credible, the staff of the exchange will use its discretion to allow the company some period of time (usually three to six months) to achieve compliance.

If the company has had past problems complying with the objective continued listing standards, or if the staff has raised a “public interest” concern, the staff may determine not to accept a plan of compliance from the company. In such cases, the company has the right to request a hearing from Nasdaq or NYSE-AMEX before a panel, which is usually comprised of two or more industry and compliance professionals, to determine whether or not continued listing is appropriate for the company’s stock. Once a company requests such a hearing, it will be given a certain amount of time to prepare a submission for the hearing panel. The staff of the exchange or market seeking delisting will also be given the opportunity to prepare a written submission in response to the company’s submission. Both parties will then be invited to participate in an in-person hearing before the panel.

Once the hearing is complete, the hearing panel will generally render its verdict within three to six weeks following the hearing. If the hearing panel determines that the company’s stock should remain on the market or exchange, the company’s stock will either continue trading or be reinstated if it had been previously suspended. If the hearing panel does not rule in favor of the company, its stock will no longer be permitted to trade on the Nasdaq or be listed on the NYSE-AMEX. Although a negative decision can be appealed, such further appeals are rarely granted and, even if granted, rarely result in reversal of the hearing panel’s decision. Therefore, since such hearings are similar to arbitration or litigation in many ways, it is important that the company seek out counsel with experience representing companies in similar situations. A familiarity with the process and procedure can be a great advantage to the company and can mean the difference between a stock that continues trading on a premier market or exchange and one that trades over-the-counter.

Also, please remember that if your company is delisted this is not the end of the road. Following delisting, if the Company is current in filing its periodic reports with the SEC, it’s stock may be able to trade on the OTC QB and OTC BB and, if it is not, it’s stock will be able to trade on the OTC Pink market. Companies that are interested in other options such “going dark” or “going private,” should consult earlier articles in this series for further information.

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