ADRs simplify investing in foreign securities because the depositary bank "manage[s] all custody, currency and local taxes issues".
Securities of a foreign company that are represented by an ADR are called American depositary shares (ADSs).
DRs enable domestic investors to buy securities of foreign companies without the accompanying risks or inconveniences of cross-border and cross-currency transactions.
Companies may choose to issue depository receipts in another jurisdiction for a host of commercial reasons including signalling to their investors and clients about their enhanced corporate governance standard.
These shares are issued in accordance with market demand, and the foreign company has no formal agreement with a depositary bank.
Level 1 shares can only be traded on the OTC market and the company has minimal reporting requirements with the U.S. Securities and Exchange Commission (SEC).
However, the company must have a security listed on one or more stock exchanges in a foreign jurisdiction and must publish in English on its website its annual report in the form required by the laws of the country of incorporation, organization, or domicile.
Shares of companies registered under Rule 144-A are restricted stock and may only be issued to or traded by qualified institutional buyers (QIBs).
U.S. public shareholders are generally not permitted to invest in these ADR programs, and most are held exclusively through the Depository Trust & Clearing Corporation, so there is often very little information on these companies.
Regulation S ADRs can be merged into a Level 1 program after the restriction period has expired, and the foreign issuer elects to do this.
Termination of the ADR agreement will result in cancellation of all the depositary receipts, and a subsequent delisting from all exchanges where they trade.
There may be a number of reasons why ADRs terminate, but in most cases the foreign issuer is undergoing some type of reorganization or merger.
Once notified, an owner can surrender their ADRs and take delivery of the foreign securities represented by the Receipt, or do nothing.
If the owner continues to hold the ADR past the effective date of termination, the depositary bank will continue to hold the foreign deposited securities and collect dividends, but will cease distributions to ADR owners.
Usually up to one year after the effective date of the termination, the depositary bank will liquidate and allocate the proceeds to those respective clients.