Split-up of ADRs: Overview, definition, and example
What is a split-up of ADRs?
A split-up of ADRs refers to the process of dividing or reconfiguring American Depositary Receipts (ADRs) in a way that changes the number of ADRs outstanding, typically by increasing the number of ADRs per share or vice versa. ADRs are financial instruments that represent shares of a foreign company traded on U.S. stock exchanges. A split-up of ADRs may occur as part of a corporate action, such as a stock split by the foreign company whose shares are represented by the ADRs.
In the case of a split-up, the foreign company’s stock or ADRs are split in a way that allows shareholders to hold a greater number of ADRs (if a reverse stock split occurs) or fewer ADRs (if a forward stock split occurs). This can affect the price and the marketability of the ADRs.
Why is a split-up of ADRs important?
The split-up of ADRs is important because it allows a foreign company to adjust the market price of its ADRs, making them more attractive or accessible to investors. This might be done to meet listing requirements, increase liquidity, or make the ADRs more affordable to a broader range of investors. It can also be a way for a company to manage shareholder base or to increase trading volume by reducing the price per ADR.
For investors, understanding the split-up of ADRs is crucial because it impacts the number of ADRs they hold and may affect the value or trading patterns of the ADRs. Businesses that issue ADRs also need to clearly communicate the implications of any split-up to their shareholders to avoid confusion.
Understanding split-up of ADRs through an example
Imagine a foreign company, ABC Ltd., that has its shares traded on a U.S. exchange through ADRs. The company decides to implement a 2-for-1 split of its ADRs. This means that for every ADR an investor holds, they will now hold two ADRs at half the original price per ADR.
If an investor previously held 100 ADRs at $50 each, after the split, they would hold 200 ADRs at $25 each. The total value of the investment remains the same, but the number of ADRs has increased, and the price per ADR has decreased, making them more accessible to investors.
In another example, a company may choose to implement a reverse split of ADRs, where each shareholder receives one ADR for every two ADRs they previously held. If an investor originally held 200 ADRs at $10 each, after the split, they would hold 100 ADRs at $20 each, maintaining the same total value but with fewer ADRs.
An example of a split-up of ADRs clause
Here’s how a split-up of ADRs might be described in a shareholder agreement or corporate action announcement:
"In the event of a split-up of the American Depositary Receipts (ADRs) representing shares of the Company, shareholders will receive additional ADRs in proportion to the split. For example, in a 2-for-1 ADR split, shareholders will receive twice the number of ADRs, with the price per ADR adjusted accordingly."
Conclusion
The split-up of ADRs is a corporate action that allows foreign companies to adjust the number and price of their ADRs in the market. This can make ADRs more accessible to investors or improve the liquidity of the securities. For investors and businesses alike, understanding the implications of a split-up helps ensure informed decision-making and proper adjustment of investment positions following such changes.
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.