Distribution of rights to purchase additional ADSs: Overview, definition, and example
What is the distribution of rights to purchase additional ADSs?
The distribution of rights to purchase additional ADSs (American Depositary Shares) refers to the process where a company gives its existing shareholders the opportunity to purchase additional ADSs, usually at a discounted price, before they are offered to the public. ADSs represent shares of a foreign company traded on U.S. exchanges. These rights are often issued during a capital raising event, such as a new offering of shares or a secondary offering, allowing shareholders to maintain their proportional ownership in the company.
In simpler terms, the distribution of rights to purchase additional ADSs is when a company offers its shareholders the chance to buy more of its ADSs (representing foreign shares) at a reduced price before others can buy them.
Why is the distribution of rights to purchase additional ADSs important?
The distribution of rights to purchase additional ADSs is important because it allows existing shareholders to maintain their ownership stake in the company, preventing dilution. If a company issues new shares or ADSs to raise capital, the ownership percentage of current shareholders may decrease, or "dilute." By offering rights to purchase additional ADSs, shareholders can buy enough new ADSs to maintain their original percentage of ownership. This process can be seen as a way to reward loyal shareholders and ensure they are not disadvantaged by the issuance of new shares.
For SMB owners, understanding how and when to offer rights to purchase additional ADSs can be a useful tool for raising capital while protecting the interests of current shareholders.
Understanding the distribution of rights to purchase additional ADSs through an example
Let’s say your company, a foreign corporation listed on a U.S. exchange, is planning to issue more ADSs to raise funds for expansion. To give existing shareholders the chance to maintain their ownership percentage, you distribute rights to purchase additional ADSs. Each shareholder is given the opportunity to buy additional ADSs at a discounted price. The rights are distributed on a pro-rata basis, meaning each shareholder receives rights based on the number of ADSs they already own. If a shareholder does not exercise their right to purchase additional ADSs, they may lose their chance to buy them at the discounted price.
In this case, the distribution of rights ensures that current shareholders can keep their stake in the company, even though new ADSs are being issued.
Example of a distribution of rights to purchase additional ADSs clause
Here’s an example of what a clause related to the distribution of rights to purchase additional ADSs might look like in a shareholder agreement or offering document:
“The Company hereby grants to its shareholders the right to purchase additional American Depositary Shares (ADSs) at a price of [$X] per ADS, which represents a [X]% discount to the current market price. The rights to purchase ADSs are non-transferable and may be exercised on a pro-rata basis based on the number of ADSs currently held by the shareholder. The rights will expire on [expiration date].”
Conclusion
The distribution of rights to purchase additional ADSs is an important mechanism for companies to raise capital while giving current shareholders the opportunity to maintain their proportional ownership. For SMB owners, understanding how to structure the distribution of these rights can help preserve shareholder value, reduce the risk of dilution, and support future growth by raising capital efficiently. This process ensures fairness and transparency when issuing new shares or ADSs, especially when expanding or capitalizing on new opportunities.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.