Nov 162012
 

Earlier this year, HSBC won a case against HM Revenue and Customs involving the payment of stamp duty on ADRs as part of its ill-fated purchase of US sub-prime lender Household in 2003. It wasn’t exactly a high-profile case and I only stumbled across it recently while searching for something completely different. But looking at legal commentary on it, the judgment raised an awkward question about the legal status of American depository receipts (ADRs).

ADRs in brief

An ADR provides a way for shares in a foreign company to be traded on US exchanges. The underlying foreign shares traded on the overseas exchange are deposited in a custodian bank and the depository bank issues a receipt giving the buyer rights over these shares. This receipt can be traded in the US markets – either on exchange or off-exchange depending on the nature of the ADR – just like a normal share. See here for a fuller explanation of how ADRs work.

The buyer of the ADR is not recorded on the company’s shareholder register, but they are entitled to all the economic benefits from them and we usually work on the basis that the investor is the beneficial owner. This is actually how most domestic shares are held these days anyway – rather than the individual investor being on the shareholder register, they are held “in street name”/”in nominee”, which means the legal owner is a non-trading subsidiary of your broker, but you are the beneficial owner (English law, and systems derived from it, allowing strict legal title to be separated from beneficial rights).

Crucially, beneficial ownership separates the shares from the assets of the stock broker, meaning that in the event the firm fails, they are not available to the broker’s creditors – the investor still has rights over them. So HSBC’s case against HMRC was interesting because the tribunal found itself considering the question of whether an ADR actually carries a beneficial ownership in the underlying shares. Continue reading »

What is an American depositary receipt (ADR) or a Global depositary receipt (GDR)?

 FAQs
 

An American depositary receipt (ADR) or global depositary receipt (GDR) is a simple way for investors to invest in companies whose shares are listed abroad.

The ADR or GDR is essentially a certificate issued by a bank that gives the owner rights over a foreign share. It can be listed on a stock exchange and bought and sold just like a normal share.

The holder of an ADR or GDR is entitled to all benefits such as dividends and rights issues from the underlying shares. They are sometimes – but not always – able to vote.

As you might expect from the name, an ADR is listed in the US. A GDR is typically listed in London or Luxembourg. A depositary receipt where the issuing bank is European will sometimes be called a European Depositary Receipt (EDR), although this term is less common.

Continue reading »