NYSE and the Large Company Exception to the Delisting Policy

This Blog has previously discussed a tradition of weak enforcement of listing standards by the exchanges, although some companies do get delisted from time to time. But how do Self Regulatory Organizations (SROs) determine which companies to delist? As we saw in the case of Fog Cutter Capital Group Inc. v. SEC , No. 3-11934, 2007 WL 148833 (DC Cir. Jan. 23, 2007) a company can be delisted for conduct by the CEO and the board's response to the conduct.  Another basis for delisting is noncompliance with the periodic reporting requirements under Section 13(a) of the Exchange Act.  

Any company listed with the NYSE that fails to file its periodic reports with the Commission in a timely manner is subject to the delisting procedures contained in NYSE Rule 802.01E.  The Rule gives the NYSE the sole discretion to provide a company up to two consecutive six-month extensions and to continue listing a company beyond that period  in “certain unique circumstances" so long as the Exchange finds, among other things, "that the company may have a position in the market – such that delisting from the Exchange would be significantly contrary to the national interest and the interest of public investors.”  

In the case of Navistar Int’l Corp., Securities Exchange Act Rel. No. 55304 (Feb. 13, 2007), the Commission addressed the "national interest" exception.  Navistar failed to file its annual report for fiscal year 2005.  The Company received two six month extensions but still did not file the report.  As a result, the NYSE ordered the company delisted.  In an appeal to the SEC, Navistar argued, among other things, that the "national interest" exception applied and that it ought not to be delisted.  

Navistar's main argument was based on the fact that its market capitalization ($3.2 billion) and its role in the trucking industry (particularly supplying vehicles to the military for use in Iraq and Afghanistan) was enough to justify application of the "national interest" exception.  The Commission disagreed.  "These facts alone, however, fail to establish a substantial likelihood that NYSE abused its discretion by concluding that Niavstar's delisting would not be significantly contrary to the national interest or have serious implications for the country as a whole.  Navistar does not contend, and nothing in the briefs or other submissions to date support the conclusion, that the NYSE's delisting of Navistar will prevent it from continuing to operate its business and to provide military vehicles for use in Iraq and Afghanistan." 

Thus, the decision, at least in part, turned on the fact that the market capitalization of Navistar was not enough to warrant continued listing.  In other words, very large companies potentially get a pass because of their market capitalization (even if they meet the "national interest" element, the rule has five other criteria that must be met).  See, e.g., Fannie Mae  (delisting of company with market capitalization of $49.75 billion would not be in public interest).  

The case, therefore, demonstrates a bias in favor of larger companies, which, one suspects, is highly consistent with a for profit company seeking to maximize its profits.  See a prior post here discussing the profit making nature of the NYSE.  Where a company’s actions are so egregious that the NYSE decides to delist, larger companies are still awarded more protection since it will rarely be the case that they can be taken off the Exchange without “serious implications” to the country as a whole.

Additional material on the process used by the NYSE for delisting a company may be found on the DU Corporate Governance website.

Comments

[Steve]

Good post, but a few comments:

Won't there usually be a correlation between the size of the company and the externalities of delisting? If you delist a very large company (e.g., GE), aren't you wiping out a liquid market for lots of stockholders? With these considerations in mind, is it sensible to have a bright-line rule that applies to all companies? Reasonable minds can differ....

I suppose I take issue with the word "bias," which could imply that there are not significant policy concerns implicated by very large companies that are not present (or not to the same extent) with smaller companies. That implication would be, in my opinion, incorrect.

[J. Robert Brown]

Fair comment. As for wiping out liquid markets for shareholders, the Commission emphasized that Navistar would still be publicly traded in the pink sheets. Go figure. Mostly, though, I also know that delisting the very large would be more damaging to the bottom line of the NYSE, an obvious concern for a for profit company. It seems to me that the problem of wiping out liquidity applies to all companies. The only real difference is the notion that somehow delisting large companies could be disruptive to the markets. But is that really true? So long as shareholders and the market received sufficient notice, presumably there would be time to adjust. Moreover, it would certainly send a message the the Exchange cared about the enforcement of listing standards for all companies. Any thought on writing some posts for this Blog?

[Steve]

I agree completely that the NYSE, as a for profit entity, would have a great interest in not delisting these large companies!

It would be interesting to see some data or an event study on the effects of an 8-K that discloses a delisting notice to see how stockholders react. In my experience, there is not a massive sell-off; perhaps that's due to all the extensions routinely granted by the exchanges (everyone knows that it isn't the death knell).

[rick jones]

Are folks assuming a correlation between company size and the rate at which its shares trade? I would think that the NYSE's profit comes not so much from the size of the company but the frequency with which those shares are traded.