ADRs: access to the US capital markets for foreign private issuers

Chinese companies wishing to raise capital and list their securities in the US as foreign private issuers may offer either their ordinary shares or American Depository Shares (ADSs) evidenced by American Depository Receipts (ADRs). An ADR is a negotiable certificate that represents ADSs, which in turn represent the underlying foreign shares. ADSs are typically issued by a US bank, called the depository. The depository, in turn, has a foreign correspondent, called the custodian, with which the underlying foreign shares have been deposited. ADRs are the form in which the overwhelming majority of foreign issuers offer and list their securities in the United States.

Under US securities laws, a “foreign private issuer” is defined as a non-US issuer (other than a foreign government) the majority of whose stockholders, directors and officers are non-US persons, the majority of whose assets are located outside the US and whose business is administered principally outside the United States.

ADRs offer several benefits to foreign issuers and their US investors. First, ADRs avoid the difficulties often encountered in transferring shares between US and non-US clearing systems. ADRs are transferred just like a domestic US stock certificate, without regard to foreign transfer procedures. Second, since each ADR may represent one or more ADSs (or even a fraction of an ADS), ADRs facilitate compliance with minimum price listing requirements and market expectations regarding the price of an offered security if the US dollar equivalent of the market value of the underlying shares would be unusually high or low. An ancillary benefit when ADRs represent multiple underlying ADSs is that listing fees, which are typically based on the number of securities listed, are lower. Third, ADRs avoid problems US investors may encounter with foreign securities that may be available only in bearer form. These include difficulties in receiving information about dividends (announced only in foreign newspapers) and difficulties in establishing compliance with listing standards regarding the minimum number of holders. Fourth, dividends are collected by the depository, converted from local currency into US dollars and paid to the US investors.

Julie Allen is the co-chair of the capital markets practice group of Proskauer Rose. Her practice focuses on capital markets and public company representation, including M&A.