Authored by Winston & Strawn partner Simon Luk
HONG KONG, March 26 /PRNewswire-Asia/ -- The following is a position paper prepared by Simon Luk, Luk & Co Hong Kong in February 2009, and released to media today, which discusses Asia-based American Depository Receipt programs in which the author has experienced.
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ADRs for Listed Asian and Chinese Companies:
First Road to the U.S. Equity Markets
By Simon Luk, Partner and Chairman of Asia Practice,
Winston & Strawn LLP
February 2009
Introduction
What do S-Oil Corporation, Lenovo Group Limited, and Beijing Beida Jade Bird Universal Sci-Tech Company Limited, diverse listed Asian and Chinese companies in very different businesses, have in common? All of these companies have created sponsored Level I American Depositary Receipt, "ADR", programs to facilitate the trading of their listed shares in the United States. Continuing a trend begun in the late 1980s, many new Depositary Receipt, "DR", programs were created by Asian and Chinese issuers in the past few years. Attached to this article is a list of some ADR programs the author worked on.
I. ADR Overview
The ADRs, invented in 1927, gave American investors their first opportunity to purchase foreign stock without concern for settlement delays and other vagaries associated with overseas securities transactions. ADRs are increasingly recognized as solid investment mechanisms by U.S. investors seeking to purchase the securities of foreign issuers.
Asia based ADRs, negotiable certificates issued by U.S. depositary banks, represent shares of listed Asian companies deposited with custodial banks in Asia. Individual receipts can represent a single foreign share, multiple shares, or a fraction of a share. ADRs or more properly, the underlying American Depositary Shares, "ADSs", must be registered with the United States Securities and Exchange Commission, the "SEC", and can trade in the U.S. over-the-counter, the "OTC", market or, depending on the level of compliance with U.S. disclosure and registration requirements, on a national exchange.
There are two main types of ADR facilities: the sponsored ADR, of which there are three tiers, Levels I, II, and III, all created pursuant to a deposit agreement between a depository bank and the issuer of an underlying security, and the unsponsored ADR facility, created by a depository acting on its own or at the prompting of potential investors.
Not too many unsponsored ADR programs are established as they are considered less favorable to issuers and investors, partly due to the lack of control by issuers. Sponsored ADR programs with full U.S. trading privileges consist of Level II programs, which involve full U.S. registration but no new securities issued by the issuer, and Level III programs, which involve a securities issuance by the issuer and are, in fact, full-fledged U.S. public offerings. Level I programs, by contrast, do not permit the issuer to sell shares in the U.S. nor do they permit trading on U.S. securities exchanges. They do, however, permit trading "over-the-counter," and since they are much less expensive to establish than Level II or Level III programs, they are usually the first choice of a foreign company without any substantial U.S. presence.
II. ADRs in Hong Kong
In 1978, The Hong Kong and Shanghai Banking Corporation became the first Hong Kong-based entity to issue ADRs. Since then, many other Asian companies have established ADR programs, the majority having done so within the past few years. The following factors have contributed to the popularity of ADR programs with Asian companies.
1. Ease of Creation.
Asia and China listed companies wishing to enter the US equity
markets can do so quite easily by creating a sponsored Level I ADR
program. Such a program allows non-affiliated shareholders of an Asian
listed company who hold unrestricted shares under U.S. law to enjoy
some of the benefits of public trading of their securities in the U.S.
without requiring the company to change its reporting procedures. The
Level I compliance process is rather simple. To create a Level I
program, an Asian issuer needs to submit a form F-6, accompanied by
relevant disclosures, to the SEC. As a result of the recent
amendments to Rule 12g3-2(b) of the Securities Exchange Act of 1934,
the "Exchange Act", the Rule 12g3-2(b) exemption is now self-executing
and it is no longer necessary to apply for an exemption from
registration from the SEC under rule 12g3-2(b) of the Exchange Act. A
foreign private issuer is now eligible to claim the Rule 12g3-2(b)
exemption as amended as long as it meets the following three
conditions:
(i) The issuer currently maintains a listing of the subject class of
securities on one or more exchanges in its "primary trading
market";
(ii) The issuer is not required to file or furnish reports under the
Exchange Act Section 13(a) or 15(d); and
(iii)The issuer has published in English specified non-US disclosure
documents, from the first day of its most recently completed
fiscal year on its internet website or through an electronic
information delivery system generally available to the public in
its "primary trading market", unless claiming the exemption upon
or following its recent Exchange Act deregistration; and the
issuer must continue to publish such information promptly after
it is made public in order to remain in compliance with the
exemption.
An Asian issuer that meets the three conditions of Rule 12g3-2(b) as
amended can automatically claim the exemption without having to submit
a written application to or otherwise notifying the SEC.
2. Market Visibility.
Many Asian companies have very small American shareholder followings.
Creating an ADR program serves as a means of introducing the United
States public to a particular Asian company and its securities. By
establishing a presence in the U.S., an Asian company could benefit
from certain name recognition and a heightened profile. In addition,
after the creation of an ADR program, an Asian company can attempt to
enhance its visibility in the U.S. marketplace by establishing
relationships with analysts, fund managers, brokers, and U.S. based
ADR holders.
3. Expansion of Shareholder Base.
The potential enlarged investor market afforded to Asian companies
with ADR programs allows them to increase their shareholder base. A
number of companies that created sponsored Level I ADRs now find that
approximately 5-15% of their shareholders are ADR owners. A broader
potential shareholder base may lead to higher trading volumes in an
Asian company's securities and possibly a stabilization of or an
increase in its share price.
4. Non-Applicability of Certain U.S. Securities Laws.
The U.S. has the world's most comprehensive securities regime. These
laws and regulations, administered by the SEC, generally require firms
to make broad disclosures about their operations when registering
publicly-traded shares and/or maintaining listings for such
securities. Consequently, many listed foreign firms are reluctant to
issue shares in the American capital markets. Level I ADR programs,
however, allow listed foreign companies to facilitate some U.S.
trading in their securities while disclosing only that information
about financial and operational matters that is required to be
disclosed in its country of incorporation or where its securities are
traded.
5. Access to Certain U.S. Institutional Investors.
Institutional investors, such as pension funds, insurance companies
and mutual funds, hold some of America's largest securities
portfolios. These investors are expanding their foreign equity
holdings. International securities are attractive to these investors,
who increasingly seek to diversify their portfolios to minimize risks
and maximize their potential growth by tapping opportunities
throughout the globe. A recent study showed that two-third of U.S.
institutions owning foreign equities exclusively held ADRs. Moreover,
U.S. law places limitations on the ability of some institutional
investors to purchase certain foreign securities. Indeed, a number of
U.S. institutions are required to use ADRs for their investments in
securities issued outside of the U.S. Thus, a listed foreign company
can reach powerful American institutional buyers by creating an ADR
program.
6. Platform for Future U.S. Listing and Capital Formation. Lastly, an ADR
program can be used as a springboard both for listing on an American
exchange, through a sponsored Level II ADR program, and/or raising
capital in the U.S. markets, through a sponsored Level III ADR
program or sales pursuant to Rule 144A under the Securities Act of
1933, the "1933 Act", a device which under certain circumstances
facilitates the private placement of securities in the U.S. Although
companies initially can opt to create Level II or Level III programs,
the overwhelming majority have preferred to test the market with the
creation of Level I ADRs. Companies make this election because Level
II and III programs cost significantly more, require continuous
reporting under U.S. securities laws, compel the issuer to make
comprehensive disclosures to the SEC and oblige that the issuer keep
records in compliance with U.S. generally accepted accounting
principles. At present, there are a few Asian corporations which have
listed on a U.S. exchange and/or made a US public offering.
III. Creating an ADR Program
A. Necessary Documentation
The process involved in creating a Level I ADR program is relatively simple. It does not require any disclosure by the issuing Asian company other than those already required under the home country's securities laws. A form F-6, to which a deposit agreement is attached as an exhibit, must be filed with the SEC in order to comply with the sponsored Level I ADR regime.
1. The Deposit Agreement: This agreement, negotiated between a depository
bank and a foreign issuer, governs their relationship and details the
terms and conditions of the proposed ADR program. The agreement should
cover all aspects of the planned ADR program, and include detailed
provisions addressing the rights and responsibilities of each party.
Under the terms of a typical deposit agreement, the issuer agrees to
pay certain costs incurred by the depository in maintaining the ADR
program, while the depository agrees to serve as a facilitator for the
issuance of the ADRs and as an intermediary between the issuer and
purchasers of the ADRs representing the underlying shares.
2. The Form F-6 Filing: This filing, a simple registration statement for
the ADR, is made pursuant to provisions of the 1933 Act. It
incorporates by reference various provisions of the deposit agreement.
Typically, the F-6 for a sponsored Level I ADR is executed by the
depository bank, but must also be signed by a majority of the issuer's
board of directors, who undertake, if necessary, to make limited
future disclosures.
B. Timing
Although the registration process for most securities issued in the U.S. is quite lengthy, a Level I ADR program can be created with relative expedience. Completion of the entire process generally can be accomplished in as few as three to six months. This allows any Asian or Chinese company seeking to enter the U.S. market to do so quickly and to take advantage of the benefits mentioned above.
IV. Future Prospects
The ADR is a mechanism with good potential for listed foreign companies. Developing an ADR program can benefit an issuer and can lead to the creation of a number of opportunities for entering the U.S. equity markets. Asian and Chinese companies have established more new sponsored ADRs than the companies of any other country. Because so many listed Asian and Chinese companies have already created ADR programs, the future prospects for other Asian and Chinese companies seeking to enter the ADR markets look attractive. Furthermore, the recent amendments to the Rule 12g3-2(b) exemption enacted by the SEC should encourage the creation of many new sponsored and unsponsored ADR programs.
Examples of Level I and Level II Asian and Chinese ADR issuers represented by the author (In Alphabetical Order)
1. Artel Solutions Group Holdings Limited
2. Beijing Beida Jade Bird Universal Sci-Tech Company Limited
3. Burwill Holdings Limited
4. Chen Hsong Holdings Limited
5. China Rich Holdings Ltd.
6. ChinaCast Communication Holdings Ltd.
7. Chitaly Holdings Ltd.
8. Companion Building Material (Holdings) Limited
9. Daiwa Associate Holdings Limited
10. Digiwave technologies Inc.
11. Egana International (Holdings) Ltd.
12. Emperor (China Concept) Investments Ltd.
13. Emperor International Holdings Ltd.
14. Frankie Dominion International Limited
15. Glorious Sun Enterprises Ltd.
16. Golden Resources Development International
17. Greater China Technology Group Limited
18. Hanny Holdings Ltd.
19. HB International Holdings Ltd.
20. Heng Fung Holdings Company Limited
21. Hong Kong Daily News Holdings Ltd.
22. Jinhui Holdings Company Ltd.
23. Jinhui Shipping and Transportation Limited
24. K. Wah Construction Materials Ltd.
25. K. Wah International Holdings Ltd.
26. Kenfair International (Holdings) Ltd.
27. Kingboard Chemical Holdings Limited
28. King Pacific International Holdings Ltd.
29. Lai Sun Development Company Ltd.
30. Legend Holdings Limited
31. Magician Industries (Holdings) Limited
32. Moulin International Holdings Ltd.
33. Ngai Hing Hong Company Limited
34. Onfem Holdings Ltd.
35. Pacific Andes International Holdi
36. Pan Sino International Holding Limited
37. Paul Y.-ITC Construction Holdings Limited
38. Recor Holdings Ltd.
39. S-Oil Corporation
40. Shanghai Wai Gaoqiao Free Trade Zone Development Co. Ltd.
41. Shenzhen Special Economic Zone Real Estate and Properties (Group) Co.
Ltd.
42. Smartone Telecommunications Holdings Limited
43. Star Telecom International Holding Limited
44. Techtronics Industries Co. Ltd.
45. Theme International Holdings Ltd.
46. Thiz Technology Group Ltd.
47. Tomorrow International Holdings Limited
48. Truly International Holdings Ltd.
49. Tung Fong Hung (Holdings) Limited
50. Universal Holdings Ltd.
51. Vodatel Networks Holdings Limited
52. Yeebo (International Holdings) Ltd.
(In addition to the above, Winston & Strawn LLP is assisting a number of Chinese issuers to establish their level I ADR programs.)
Media Contact:
Caroline Cheung
Tel: +852-2292-2180
Email: ccheung@winston.com
