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.