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If your company has become the subject of an unsponsored ADR program without your participation or approval, Depositary Management Corporation is an invaluable resource to help you learn about the implications of such a program and what course of action should be taken. Depositary Management Corporation can advise your company as to the ramifications of an unsponsored ADR program and assist your Board and management in determining the best strategy for dealing with such a program. If your company chooses to transition to a sponsored ADR program, ensure that the sponsored program is properly structured to provide the maximum level of financial and other benefits to your company. Our advisory services are available on a success fee basis, with no fees being charged to your company unless you decide to proceed with the establishment of a sponsored ADR program and receive quantifiable financial benefits thereunder, in which case we will negotiate a competitive fee arrangement.
Following are answers to some questions commonly asked by companies upon discovering the existence of unsponsored ADR programs for their shares. For more detailed information about unsponsored ADRs and to discuss how we can help your company establish, manage and profit from a sponsored depositary receipt program, CONTACT US.
Effective October 10, 2008, the SEC adopted rule changes to Rule 12g3-2(b) that have made it easier for U.S. depositary banks to establish unsponsored ADR programs without a company’s consent and/or knowledge. Under the new rules, if a depositary has a reasonable belief that a foreign-listed company publishes certain required information on its website in English and satisfies other basic criteria, the depositary can unilaterally establish an unsponsored ADR program for the company’s securities.
For many companies, the most effective way to take control of an unsponsored ADR program is to establish a company-sponsored ADR program operated by a single ADR depositary. This allows the company to eliminate all unsponsored programs, participate in the revenues received by the depositary under the program, manage litigation risk, obtain program-related services from the depositary, and otherwise control the terms of the program including the rights to which ADR holders are entitled.
The establishment of a sponsored ADR program in place of an unsponsored program can produce significant and tangible benefits including the following:
- A sponsored ADR program generates ongoing cash contributions and expense reimbursements from the depositary bank that is appointed to administer the program. These payments can be used for a broad range of purposes including investor relations activities, legal fees and many other expenses related to the company’s securities.
- Under a sponsored ADR program your company would have the ability to contractually manage and control potential legal risks, whereas no such possibility exists in the unsponsored context.
- A sponsored ADR program would give your company control over the terms of the program including rights granted to investors. In an unsponsored program ADR holders typically are not given a number of critical rights, including voting and informational rights. A sponsored program enables the company to decide precisely what rights its ADR investors should receive.
- A sponsored ADR program can create greater visibility in the U.S. market. The program can qualify for listing on the NYSE’s ArcaEdge or on OTC Markets Group’s OTCQX platform, both of which are designed for Level 1 ADR issuers.
- Companies can engage in more effective communication with ADR holders under a sponsored ADR program. The depositary can assist in identifying ADR holders and analyzing investor information, allowing for focused IR and investor outreach.
- In a sponsored program, the company has the opportunity to broaden its U.S. shareholder base, strengthen relationships with U.S. investors and increase liquidity and global valuation.
- Unsponsored ADRs can be established by multiple depositary banks, each of whom can impose different fees and other charges on holders of ADRs (such as the exchange rate applied to the conversion of dividend payments into US Dollars). Under a sponsored ADR program with a single depositary, the same fee structure, exchange rate and other charges apply to all ADR holders, eliminating investor confusion and disparate treatment of ADR holders.
- Sponsored ADRs can be used to fund compensation plans for companies that have U.S. employees, and potentially can be used for other strategic purposes such as merger and acquisition transactions.
- Setting up a sponsored ADR program is a relatively quick and straightforward process, and can be done at no cost to your company as the depositary will generally reimburse the expenses of establishing the program. If you create a Level 1 ADR program (the simplest type of sponsored ADR program, which trades in the over-the-counter markets) you will incur no additional disclosure or regulatory obligations under U.S. law.
With over 30 years of legal and business expertise in the DR market, our principals are uniquely qualified to assess all aspects of a proposed ADR program. From an economic standpoint, we will advise as to the proper financial incentives your company should receive under a sponsored ADR facility. Most companies fail to obtain the full value to which they should be entitled from their depositary receipt programs, since they are often unaware of the numerous sources of revenue to which depositaries have access in administering a program. Depositary Management Corporation will also advise as to the level of depositary services that should be provided to your company and its ADR holders, and the protections from legal risk that should be afforded under the contractual provisions covering the program. After an ADR program is launched, we will monitor the program on a continuous basis to ensure you are receiving the full complement of services and financial contributions, and we will otherwise oversee your service providers’ compliance with the terms of the program.
The costs of establishing a sponsored ADR program are generally reimbursed by the depositary that has been appointed to service the program. Moreover, Depositary Management Corporation will not charge any fees unless you receive financial contributions from the depositary. To learn how your company can benefit from our expertise with no up-front financial commitment, click here to read about our competitive fee arrangements.
As the subject of an ADR program, your company may be exposed to risk and potential liability for claims brought by holders of depositary receipts and other market participants. This risk can exist not only with a sponsored ADR program, but in the context of an unsponsored program as well, to the extent your company has jurisdictional contacts within the U.S. However in a sponsored ADR program risk exposure can be reduced through the use of contractual provisions. Depositary Management Corporation will ensure that the contracts you enter into in connection with a sponsored ADR program provide the highest degree of protection from legal risk. We will review your operative ADR agreements, recommend any changes that could help reduce and/or minimize risk and, if requested, assist in the negotiation of such documents with your depositary.
Depositary Management Corporation will help you replace your unsponsored ADR programs with a sponsored program on optimal terms, and at no direct cost to your company. To learn how your company can benefit from our expertise with no up-front financial commitment, click here to read about our competitive fee arrangements.
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