Delisting Costs and Corporate Mobility in Europe

Comparing the Difficulty of Delisting Across Jurisdictions

Debate over the so-called ‘exodus’ of companies delisting from the London Stock Exchange (not to mention other exchanges) typically focuses on the usual explanations of soaring compliance burdens and better market conditions (such as liquidity and valuations) elsewhere. We aim to broaden the debate in a recent paper by drawing attention to an under-appreciated feature of listing regimes: the regulatory costs of delisting, meaning the regulatory barriers to exit. Listing regimes that make it more difficult or costly for issuers to delist can be expected to lead to comparatively fewer voluntary delistings but could also theoretically result in fewer listings (IPOs) in the first place, if exit costs are high enough to deter entry for some firms.

Which jurisdictions impose the highest regulatory costs of delisting?

We construct two indices that permit the measurement and comparison of delisting costs between jurisdictions. Our Take Private Index measures the difficulty of voluntary delisting (eg, in an M&A transaction), and our Market Migration Index measures the difficulty of voluntary delisting when migrating a listing from one public trading venue to another.

Our indices allow for a relative comparison of which jurisdictions in our dataset have the most and least regulatory barriers to delisting, and could be used by finance academics as to control for regulatory differences when examining rates of delisting.

We categorise jurisdictions as having a prohibitive, permissive, or differential regulatory approach to voluntary delistings.

• Prohibitive regimes set out requirements that effectively preclude voluntary delistings, such as a very high (more than 90 percent) quorum or shareholder approval requirement, or if the cumulative effect of multiple delisting requirements impose prohibitively high costs (as reflected by our index composite scores).
• Permissive regimes impose less stringent requirements for voluntary delisting than prohibitive regimes, with a shareholder vote requirement (if any) not exceeding 75%.
• Differential regimes impose prohibitively costly requirements for take-private delistings, but are permissive with respect to market migrations.

Table 1: Classifying delisting regimes

Table 1 presents our classification. Each column presents jurisdictions in order of highest regulatory costs of delisting (at the top) to the lowest costs (at the bottom) for that regime type, as measured by our indices. For example, France has the most prohibitive delisting regime (ie, the most difficult for listed firms to exit), and the United States has the least prohibitive (ie, most permissive) regime that imposes effectively no material regulatory obstacles to terminating a listing.

Implications for the free movement of capital in the EU

Considering the lack of harmonised delisting rules in the EU and wide variation in the regulatory costs of delisting among EU Member States, our paper examines whether prohibitively costly delisting regimes are in conformity with Articles 63-66 TFEU on the free movement of capital.

We apply doctrinal tests from the EU Court of Justice’s Golden Shares and corporate mobility jurisprudence, and suggest that while delisting rules do not engage Article 63 TFEU, they likely engage the rights of companies to exercise their freedom of establishment pursuant to Articles 49 and 54 TFEU by analogy. We propose that an EU home state’s rules contained in our market migration index should be subject to review by the Court of Justice, on an intermediate standard of review (as in VALE), since the legal rationale that motivated the Court in Cartesio and Polbud is equally applicable in the context of a company seeking to delist in one EU Member State and migrate its listing to another.

From a policy perspective, we suggest that regulatory impediments to delisting and migrating to another market negatively affect the efficient allocation of capital in the EU. Lowering the regulatory costs of delisting in prohibitive regimes where voluntary delisting is excessively difficult is an appropriate policy response to facilitate corporate mobility and increase capital allocation efficiency in the EU.

Jonathan Chan is an Assistant Professor at McGill University, Faculty of Law.

Carsten Gerner-Beuerle is a Professor of Commercial Law at University College London (UCL) Faculty of Laws.

The paper is available here.