Uncertificated ADSs: Overview, definition, and example
What are uncertificated ADSs?
Uncertificated ADSs (american depositary shares) are a type of securities issued by a depositary bank to represent shares of a foreign company traded on a U.S. stock exchange. Unlike certificated ADSs, which are issued with physical certificates as evidence of ownership, uncertificated ADSs exist electronically and are held in a book-entry system. This means that the ownership of the ADS is recorded and tracked digitally rather than through paper certificates.
Uncertificated ADSs provide a more efficient and modern way for investors to trade shares of foreign companies in the U.S. market, as they reduce the administrative burden associated with issuing and managing physical certificates.
Why are uncertificated ADSs important?
Uncertificated ADSs are important because they streamline the process of trading and holding foreign shares in the U.S. financial market. The absence of physical certificates reduces costs and eliminates the risks associated with lost or damaged certificates. It also allows for faster settlement times and greater ease of transferring ownership.
For foreign companies, offering uncertificated ADSs allows them to tap into the U.S. investor market without needing to deal with the complexities of issuing and managing physical shares in another country. For investors, uncertificated ADSs provide easy access to international investments with minimal administrative hassle.
Understanding uncertificated ADSs through an example
Imagine a U.S. investor wants to purchase shares of a technology company based in Germany. Instead of directly buying the shares on the German stock exchange, the investor buys uncertificated ADSs on a U.S. stock exchange like the NYSE. These ADSs represent ownership of the German company's stock but are held electronically through a depositary bank.
Since these are uncertificated ADSs, the investor does not receive a physical certificate but rather an electronic record of ownership. When the investor wants to sell their ADSs, the transaction is processed digitally, making the process faster and more efficient than if the investor had to handle physical certificates.
Example of uncertificated ADS clause
Here’s an example of how uncertificated ADSs might be referenced in a contract or agreement:
"The holder of American Depositary Shares (ADSs) acknowledges that the ADSs are uncertificated and held electronically in a book-entry system. Ownership of the ADSs is recorded by the Depositary and will be reflected in the holder’s account. The holder agrees that no physical certificate for the ADSs will be issued unless specifically requested in writing, and all transfers of ADSs will be conducted electronically."
Conclusion
Uncertificated ADSs offer a modern and efficient way for investors to own and trade shares of foreign companies in the U.S. market. By eliminating the need for physical certificates, uncertificated ADSs reduce administrative costs, improve transaction speed, and make the ownership and transfer of foreign shares simpler and more secure. This system benefits both investors and foreign companies, enabling greater participation in international markets with fewer complexities.
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.