Partial entitlement ADSs: Overview, definition, and example
What is partial entitlement ADSs?
Partial entitlement ADSs are a type of american depositary shares (ADSs) that don’t carry the full set of rights or benefits that regular (or “full entitlement”) ADSs normally offer. That could mean limited voting rights, no dividend payouts (yet), or other restrictions—usually because the underlying shares in the foreign company aren’t fully paid up or legally eligible for all shareholder benefits.
ADSs are a way for U.S. investors to buy shares in foreign companies. But when those ADSs are labeled partial entitlement, they come with fewer rights—at least for a certain period of time.
Why is partial entitlement ADSs important?
If your business invests in international companies through ADSs, it’s important to know what kind of shares you’re getting. Partial entitlement ADSs might look the same on the surface, but they don’t always give you the same benefits—like voting in shareholder meetings or receiving dividends.
That matters if you’re making decisions based on expected returns or control. These shares may convert into full entitlement ADSs later, but during the “partial” phase, your rights are limited. Understanding this distinction helps prevent surprises and ensures you’re clear about what you’re actually getting as an investor.
Understanding partial entitlement ADSs through an example
Let’s say your business buys ADSs in a tech company based in South Korea. At first, you’re issued partial entitlement ADSs because the underlying local shares are newly issued and not yet entitled to dividends or voting rights.
A few months later, once the underlying shares are fully registered and cleared under South Korean law, your ADSs automatically convert into full entitlement ADSs—giving you all the usual rights, including future dividends and votes on company matters.
If you didn’t realize they were partial at first, you might have wrongly expected income or influence that wasn’t available yet.
An example of a partial entitlement ADSs clause
Here’s what a clause about partial entitlement ADSs might look like in an investment document:
“Holders of Partial Entitlement ADSs acknowledge and agree that such ADSs do not carry full shareholder rights, including, without limitation, the right to receive dividends or exercise voting rights, until the underlying Ordinary Shares become fully entitled under applicable law. Upon such entitlement, the ADSs shall automatically convert into Full Entitlement ADSs without further action required by the holder.”
Conclusion
Partial entitlement ADSs are like “on-hold” versions of regular ADSs—they exist, you own them, but you don’t get the full package of benefits right away. For U.S. businesses or investors looking into foreign companies, this is an important detail to understand upfront.
Always read the fine print when dealing with ADSs. Knowing whether you’re buying full or partial entitlements helps you make better investment decisions, avoid misunderstandings, and plan more accurately for returns or shareholder involvement.
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.