American Depository Receipts

Hi to all … I understand that the holding custodian bank issues a receipt for foreign common shares and therefore a US investor can invest in the foreign security without going through the bother of having a foreign stockbroker buy them on a foreign exchange. There are also no voting rights or preemptive rights … BUT does the US bank that is the sponsor of the ADR actually have these rights. I dont think we need to know this for the SIE … i’m just curious.
All the best, Damien.

Hi @Damien!

Great question. The US bank obtains these rights, typically sells them in the secondary market, and passes on the proceeds to the ADR holders (investors). I looked for some real world examples and came across an SEC filing for Allianz SE, a German financial services company with an ADR trading in the US. This is the quote from their SEC filing:

The Depositary shall have discretion as to the procedure to be followed in making subscription* or other rights available to any Holder or in disposing of such rights on behalf of any Holder and making the net proceeds available to any Holder, provided that if by the terms of such rights offering or for any other reason it would be unlawful for the Depositary either to make such rights available to any Holder or dispose of such rights and make the net proceeds from the sale of such rights available to any Holder, then the Depositary may allow such rights to lapse. Sales of subscription or other rights, securities or other property by the Depositary may be made at such time and in such manner as the Depositary may deem advisable, and in such case, the Depositary shall distribute to the Holder hereof the net proceeds after deduction of its fees and expenses

*They’re using the term subscription in replacement of pre-emptive rights.

It’s a tough paragraph to make it through, but I highlighted the important parts. In plain English, the Depositary (the bank) has the right to do anything with them, but it’s clear they’re likely going to sell those rights and pass on the proceeds (minus fees and expenses) to Holders (ADR holders).

Other ADR SEC filings have very similar language, and I’d assume this is the standard. Also, you’re right - these details are not likely to be tested on the SIE exam, although understanding pre-emptive rights are not provided to ADR holders may be important.

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