A Discussion of Delisting by Public Companies

The public company legal system is similar to that for public offerings in that both are cornerstones for building sound capital markets. This article will not go into details on the necessity of mandatory public listing, or the strength of public information, which have been much discussed elsewhere; rather, it will attempt to discuss things from more of an ordinary person's point of view and, equally important, further explore issues concerning the mechanism by which publicly listed companies withdraw from the market, that is, carry out a so-called delisting.

It is said that revisions of the Company Law currently under deliberation include an amendment on delisting which provides, in part, that if any company wishing to withdraw its public listing may do so once it obtains a special resolution of the shareholders' meeting to that effect. This may be more restrictive than the current rules provide, under which a company can be delisted following a resolution of the board of directors, but to say whether its rules are exhaustive requires further inquiry.

As a practical matter, securities regulations require certain enterprises to make public their financial and business information mainly because enterprises use capital markets to raise funds from the public, and hence their financial, business and operating successes and failures directly affect the interests of investors, and do merely concern the interests of managers. Put another way, a public company's shares, circulating among the investing public, are not unlike goods on store shelves whose contents must be disclosed before transactions take place. If certain companies, after having raised funds openly, are unable to continue making public their business operating conditions, then outside shareholders will have difficulty deciding whether to continue holding their shares or sell off their holdings. Also, potential investors will be unable to obtain the information they require to decide whether to buy and hold the stock. That is to say, a corporation that cannot continue to make its operating conditions public is like a product that has been removed from the shelf: It loses its basic ability to circulate. Holders of the stock lack an easy means are kept from getting out, and potential investors are kept from getting in.

From this one can see that, for an enterprise positioned as a public company, to turn around and withdraw its public status has far-reaching consequences, and it is not something that can be decided by simple majority rule:

• Since the enterprise's operating conditions are no longer made public, its shares of course lose their ability to circulate. Shareholders experience a direct and clear loss in the value of their property. For stockholders in a weak voting position, the result of imposing a majority vote by force is actually to encroach on their property rights.
• Corporate managers' reasons for taking their companies private go beyond acquisition by outsiders, and in fact poor management leads to many such instances, and it is precisely in those situations when shareholders most need to know the corporations operating conditions. If directors, using their managerial power, or majority shareholders, withdraw a public listing by means of a majority vote, then it amounts to opening the door wide for such directors or shareholders to act without regard for others.
• At a public company, the thing that outside shareholders not engaged in running the company depend on the most is their ability to sell off their shares in a timely fashion, without being subject to bad managers. For such shareholders, making operating information public no longer is the same as receiving a verdict to the effect that their property rights, vis à vis their shareholdings, will no longer be honored. In other words, for minority shareholders, losing the right to information is equivalent to losing their property rights.