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Foreign private issuers 9.1 American depositary receipts J.P. Morgan (Depositary Receipts Group) The tranche of shares that foreign issuers sell to U.S. investors when going public typically takes the form of American depositary shares, commonly known as ADRs. These instruments subsequently trade just like ordinary shares on the NYSE, another U.S. stock exchange or in the over-the-counter market. (a) Advantages for issuers For foreign issuers, going public in the United States has numerous advantages beyond an initial capital raising. Ready access to world’s largest equity market: A U.S. listing affords ready access to the world’s largest equity market, facilitating future capital raising through follow-on, secondary and rights offerings. Diversification of shareholder base and valuation support: By going public in the United States and maintaining a listing there, U.S. investors can more easily invest in a foreign issuer. For some foreign issuers, a U.S. listing results in higher corporate governance standards, further increasing its appeal. Attracting U.S. investors helps broaden and diversify a foreign issuer’s shareholder base, reducing the issuer’s dependence on investors in its home market for its capital needs. Moreover, the incremental demand that U.S. investors can bring to bear on a foreign issuer’s shares helps drive its market valuation—and hence lowers its cost of capital—over the long term. U.S. acquisition currency: Because the ADRs used to raise capital in the United States are dollar denominated, they can eventually be used to make stock-based acquisitions of U.S. companies. Generally, U.S. shareholders are more likely to accept ADRs than foreign shares. Stock-based compensation for U.S. employees: Being dollar denominated, ADRs allow foreign issuers to establish stock purchase and option plans for U.S.-based employees. Absent these plans, foreign issuers can be at a significant disadvantage when competing for talent in the U.S. labor market. ADRs also allow for the creation of direct purchase and dividend reinvestment plans, which can enhance the investment appeal of a foreign issuer. Enhanced corporate visibility in the United States: Finally, by going public in the United States, a foreign issuer can increase its visibility not just in the U.S. investment community, but in the commercial and consumer markets that make up the world’s largest economy. Many U.S. citizens own equities and tend to follow publicly traded companies. Consequently, a U.S. listing can raise a foreign issuer’s corporate profile as well as capital. The effectiveness of ADRs is why 162 foreign issuers have used this instrument to raise over $44 billion in capital (IPOs only) in the United States during the past decade alone. 1 As of December 31, 2012, 262 foreign issuers had ADRs listed on the NYSE. 1 Capital raised using ADRs, by region—2002 to 2012 ($MM) $11,552 $3,874 $29,082 65% – APAC 9% – EMEA 26% – LATAM Source: J.P. Morgan, Bloomberg, other depositary banks, stock exchanges, January 2013 1 Source: J.P. Morgan, Bloomberg, other depositary banks, stock exchanges, January 2013. Capital raised using ADRs, by sector—2002 to 2012 13% – Communications 28% – Technology 22% – Financial 13% – Industrial 6% – Energy 8% – Consumer, noncyclical 7% – Consumer, cyclical 3% – Basic materials Source: J.P. Morgan, Bloomberg, other depositary banks, stock exchanges, January 2013 (b) Advantages for investors The effectiveness of ADRs for raising capital in the United States is due to their appeal to investors—these instruments are a convenient way to directly invest in international companies while avoiding many of the risks typically associated with securities held in other countries. For U.S. investors, ADRs: • are easier to purchase and hold than a foreign issuer’s underlying ordinary shares; • trade easily and conveniently in U.S. dollars and settle through established clearinghouses; • pay dividends in U.S. dollars; • eliminate local custody arrangements; and • provide notifications of corporate actions in English. (c) Establishing an ADR program ADR structures: A Level III ADR program listed on the NYSE (or on another U.S. stock exchange) allows a foreign issuer to realize all of the aforementioned benefits of ADRs, including raising capital from 98 NYSE IPO Guide
Foreign private issuers individual investors. Alternatively, capital can be raised from qualified institutional investors only via a private placement, known as a Rule 144A offering. A Level II ADR program allows a foreign issuer to list on a U.S. stock exchange, but not raise capital. Under a Level I program, the ADRs are not listed, trading instead in the over-the-counter market. How ADRs are created: ADRs are normally created when the shares of a foreign issuer—either those currently trading in its local market or newly issued shares in connection with an offering of securities—are deposited with a depositary bank’s custodian in the issuer’s home market. The depository then issues to investors ADRs representing those shares. At any time thereafter, an investor can sell these ADRs in the secondary market (e.g., the NYSE) or have the sponsoring depositary bank cancel the ADRs and receive the underlying ordinary shares that can be sold in the foreign issuer’s local market. Setting up an ADR program: Once a foreign issuer has chosen an ADR structure, it will work closely with a depositary bank to establish and maintain the ADR program. Time frames and requirements for launching a program will vary. However, certain characteristics are common to any ADR structure. Setting the ADR-to-share ratio: Each ADR issued will represent a certain number of underlying ordinary shares held in custody in the foreign issuer’s home market. There is no official rule for setting the ratio for ADRs. However, the share prices of sector peers should be taken into consideration in order to establish a ratio that will result in an initial price per ADR that investors will perceive to be “attractive.” The ratio initially selected may affect the transaction costs that a foreign issuer’s investors will pay. For instance, since fees for issuance (and cancellation) are assessed in cents per ADR, an ADR that is priced “too low” can add incremental transaction costs for investors. U.S. investment in foreign equities 6.0 5.0 4.0 3.0 2.0 1.0 0 2.6 2004 Value ($ trillions) % Equity portfolio 3.3 2005 4.3 2006 2007 2008 2009 Parties that work with the foreign issuer: Establishing an ADR program requires close coordination between the foreign issuer, its chosen depositary bank and each firm’s legal counsel. When raising capital in the United States, the issuer also relies on other advisors, such as accountants, investment bankers and investor relations firms. The chart on page 100 summarizes the roles and responsibilities of each party involved. On page 101 is a sample timetable for the establishment of a Level III ADR program. The deposit agreement: As a first step toward establishing an ADR program, the foreign issuer and its chosen depositary bank negotiate a deposit agreement. This contract details the legal relationship and obligations of the depositary bank and the issuer, describes the services the depositary and issuer will provide and sets forth the rights of ADR holders and the fees they must pay the depositary bank. Some terms are standard, but deposit agreement provisions may vary from program to program depending on the legal requirements of the foreign issuer’s home market, the objectives of the depositary bank and individual issuer specifications. 5.2 2.7 4.0 4.6 2010 4.2 2011 4.6 Q1 2012 4.2 Q2 2012 Q3 2012 Q4 2012 The deposit agreement includes provisions relating to the following: • deposit of the issuer’s shares; • execution and delivery of the ADRs; • issuance of additional shares by the issuer in compliance with applicable securities laws; • transfer and surrender of the ADRs; • setting of record dates by the depositary; • voting of the foreign issuer’s underlying shares (i.e., the shares evidenced by the ADRs); • obligations and rights of the depositary bank and the holders of the ADRs; • distribution by the depositary of cash dividends, stock dividends, rights to acquire additional shares of the issuer and other distributions made by the issuer; • circumstances in which reports and proxies are to be made available to ADR holders; • tax obligations of depositary receipt holders; • fees and expenses to be incurred by the issuer, the depositary and ADR holders; • prerelease of ADRs; and • protections for the depositary and the issuer (i.e., limitations on liabilities) 4.5 4.7 25% 20% 15% 10% 5% 0% Source: Federal Reserve, March 2013 NYSE IPO Guide 99
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