An American Depositary Receipt (ADR) is a security that represents ownership of shares in a non-US company, typically traded on a US stock exchange. ADRs make it easy for US investors to invest in foreign companies without having to deal with the complexities of trading on foreign exchanges or holding foreign currency.
ADRs are created by US banks that purchase shares of the foreign company on the foreign exchange and then issue the ADRs on a US exchange. One of the key components of the ADR is the deposit agreement, which outlines the terms and conditions of the ADR and the rights of the ADR holders.
The deposit agreement is a contract between the US bank, the foreign company, and the ADR holders. It specifies the number of shares that the US bank will hold as depositary for the ADR holders, the fees charged for issuing and maintaining the ADRs, and the procedures for converting ADRs back into shares of the foreign company.
The deposit agreement also outlines the rights of ADR holders, such as voting rights in the foreign company’s shareholder meetings and receiving dividends or other distributions from the foreign company. However, it’s important to note that the deposit agreement may restrict certain rights of ADR holders, such as the ability to vote on certain matters.
The deposit agreement is a legal document and is subject to the laws of both the US and the foreign country where the company is based. As such, it should be reviewed carefully by the US bank, the foreign company, and the ADR holders to ensure that all parties understand their rights and obligations.
Additionally, the deposit agreement should be reviewed periodically to ensure that it’s up-to-date with current laws and regulations and that it accurately reflects the terms of the ADR. Any changes to the deposit agreement should be communicated to ADR holders in a timely and transparent manner.
In conclusion, the deposit agreement is a crucial component of the ADR and outlines the terms and conditions of the ADR and the rights of the ADR holders. It’s important for all parties involved to review the deposit agreement carefully and to ensure that it’s up-to-date with current laws and regulations. With a solid understanding of the deposit agreement, US investors can confidently invest in foreign companies through ADRs.