Do American Depositary Receipt Holders Have Voting Rights?

American Depositary Receipts (ADRs) are financial instruments allowing U.S. investors to own shares of foreign companies without directly engaging in international stock exchanges. These receipts simplify investing in non-U.S. entities, facilitating broader access to global markets. ADRs bridge the gap between U.S. investors and foreign companies seeking to access American capital markets.

Understanding American Depositary Receipts

An American Depositary Receipt is a negotiable certificate issued by a U.S. depositary bank, representing a specified number of shares in a foreign company. These certificates are denominated in U.S. dollars and trade on U.S. stock exchanges, such as the New York Stock Exchange and Nasdaq, or over-the-counter (OTC) markets. The underlying foreign shares are held in custody by a local bank in the foreign company’s home country.

The structure involves the U.S. depositary bank purchasing the foreign company’s shares and then issuing ADRs against those shares. Each ADR can represent a fraction of a share, a single share, or multiple shares of the foreign security, determined by a set ratio. This arrangement allows U.S. investors to buy and sell foreign company stock easily through their brokerage accounts, eliminating the need for direct foreign currency transactions or navigating foreign market regulations. The depositary bank also manages currency conversions and local tax issues related to dividends.

ADR Holder Voting Rights

The ability of American Depositary Receipt holders to exercise voting rights for the underlying foreign shares is typically indirect and limited. The U.S. depositary bank plays a central role in facilitating these rights, acting as the intermediary between the ADR holder and the foreign company. ADR holders do not directly vote at shareholder meetings as common stock owners would.

Instead, the depositary bank often attempts to implement a “pass-through voting” mechanism. This involves the depositary bank notifying ADR holders of upcoming shareholder meetings and providing them with proxy materials. Holders can then submit their voting instructions to the depositary bank, which consolidates these instructions and, if permitted by the deposit agreement and the foreign company, casts the votes on behalf of the ADR holders. However, the depositary bank generally does not exercise discretion in voting unless explicitly instructed by the ADR holder or if the terms of the deposit agreement allow for such action in the absence of instructions.

Key Factors Affecting Voting Rights

The extent to which ADR holders can exercise voting rights largely depends on whether the ADR program is sponsored or unsponsored, and, if sponsored, its specific level. Sponsored ADRs are established through a formal agreement between the foreign company and a single U.S. depositary bank, outlining the depositary bank’s responsibilities, including facilitating voting rights. Conversely, unsponsored ADRs are issued by a depositary bank without the direct involvement of the foreign company. Multiple unsponsored ADR programs for the same foreign company can exist, issued by different U.S. banks. Holders of unsponsored ADRs generally do not receive voting rights.

Sponsored ADR programs are categorized into three levels, each with different regulatory requirements that influence voting rights.

Level I ADRs

These are the most basic, trading only on the over-the-counter market with minimal U.S. Securities and Exchange Commission (SEC) reporting obligations. While some Level I programs may offer limited voting participation, it is often less robust than higher levels.

Level II ADRs

These are listed on U.S. stock exchanges and require more stringent SEC reporting, including filing annual reports on Form 20-F. This increased regulatory oversight often correlates with a greater likelihood of the depositary bank facilitating voting rights.

Level III ADRs

These represent the highest level of sponsorship, allowing foreign companies to list on major U.S. exchanges and raise capital through public offerings in the U.S. These programs involve comprehensive SEC registration (e.g., Form F-1, F-3, or F-4) and ongoing reporting, typically ensuring the most direct and consistent pass-through of voting rights to ADR holders.

Exercising Voting Rights and Related Considerations

When voting rights are available to an ADR holder, the process typically begins with the depositary bank distributing proxy materials. These materials contain information about the matters to be voted upon at the foreign company’s shareholder meeting. ADR holders usually submit their voting instructions to the depositary bank through various methods, such as an online portal or by mail. The depositary bank then aggregates these instructions and votes the underlying shares accordingly.

ADR holders must be aware of the specific deadlines for submitting voting instructions, as these can be strict and often differ from those for direct shareholders of the foreign company. The terms of the deposit agreement, which can be found in the ADR prospectus or through the depositary bank, govern the mechanism for exercising these rights. Depositary banks may also charge fees for services related to the administration of the ADR program, including those associated with facilitating voting. These fees, which might range from $0.01 to $0.05 per ADR, are sometimes deducted from dividend payments.