How Corporate Actions Are Handled on Depositary Receipts

When a foreign company undergoes a corporate action—a stock split, rights offering, merger, or spin-off—the impact on ADR holders is not automatic. The depositary bank manages the adjustment, and the outcome hinges on the depositary agreement, the foreign company’s choice, and local law.

Why corporate actions are not automatic

When a foreign company declares a stock split, bonus share issuance, or other capital structure change, the depositary does not instantly adjust ADR holdings. The foreign company’s local law governs the underlying securities; the depositary’s agreement with the foreign company (and with ADR holders) determines what flows through to the US side.

For example, a Spanish company may issue new shares to existing shareholders as a capital reorganization. The underlying common shares held in the depositary’s foreign custody account are split 2-for-1. The depositary must then decide: adjust the ADR ratio so each ADR represents twice as many shares, or handle the new shares via another mechanism. The answer is in the ADR agreement and the depositary’s notice to holders.

Unlike a US stock split, which happens overnight across all exchanges, an ADR corporate action can take weeks. The depositary sends notice (usually by email or via your broker), describing the action, the record date, the ex-date, and the holder’s options or automatic treatment.

Stock splits and bonus shares

A stock split is typically the simplest corporate action. If the foreign company splits 2-for-1, the depositary adjusts the ADR ratio correspondingly. An investor who held 100 ADRs (each representing one underlying share) now holds 200 ADRs (each representing half an underlying share). The economic effect is the same: before, 100 shares at $50 = $5,000; after, 200 shares at $25 = $5,000.

The depositary executes this seamlessly. No cash changes hands, and the investor’s account is updated. The opposite—a reverse split (e.g., 2-for-1 consolidation)—works the same way: 200 ADRs become 100 ADRs, each representing twice as many shares.

Bonus share issuances (sometimes called “stock dividends”) are handled similarly. If the foreign company issues one new share for every five held, the depositary increases the share count in its custody account and adjusts the ADR ratio. The investor may receive additional ADRs in their account without paying anything.

Rights offerings and ADR holders

A rights offering is more complex. The foreign company grants shareholders the right to buy new shares (usually at a discount) in proportion to existing holdings. The right itself is a security; it can be exercised, sold, or allowed to expire.

If the depositary agreement permits, the ADR holder receives a description of the offering and is notified of their entitlement (e.g., the right to buy 10 new shares per 100 shares held). The holder may then:

1. Exercise the right by paying the subscription price and receiving new shares (and new ADRs).
2. Sell the right through a broker or the foreign exchange.
3. Do nothing, in which case the right expires.

If the depositary agreement does not permit transferring rights to ADR holders, or if the foreign company restricts non-resident participation, the depositary typically sells the rights in the foreign market and distributes the net proceeds as a cash payment—a “cash in lieu” settlement. The ADR holder receives the economic benefit (the spread between the subscription price and the market price of the share) but not the voting right or the actual share.

For unsponsored ADRs or some older sponsored agreements, the treatment may differ; rights may be withheld entirely, and the ADR holder receives nothing. Always check the depositary’s notice for the specific action.

Mergers, acquisitions, and redemptions

When a foreign company is acquired, the treatment of ADRs depends on the deal terms. If the acquirer is also a foreign company with its own ADR program, ADR holders may receive ADRs of the new entity. If the acquirer is a private company or does not have a US listing, the depositary may be forced to redeem the existing ADRs in cash or settle the deal’s proceeds (e.g., if the merger consideration is a mix of stock and cash).

In some cases, the acquiring company may terminate the ADR program entirely. The depositary issues a final notice giving ADR holders a deadline to redeem ADRs (converting them to the underlying foreign shares) or accept a forced cash settlement at a price set in the agreement. If the deal is all-cash and the price is locked, the cash settlement is straightforward. If the consideration includes stock, the timing and conversion rate may be contested.

ADR holders have little control in a merger scenario. The underlying foreign company negotiates the deal, and the ADR holders must accept the treatment specified in the merger agreement and confirmed by the depositary. This is a key risk of holding ADRs in smaller or less-established foreign issuers: a major transaction can force an illiquid redemption or a forced conversion to unfamiliar securities.

Spin-offs and carve-outs

If a foreign company spins off a division as a new entity, the treatment again depends on the agreement and local law. In some cases, new shares of the subsidiary are distributed to existing shareholders, and the depositary receives those shares in custody. The depositary may then:

1. Establish a new ADR program for the subsidiary and distribute new ADRs to existing holders.
2. Sell the subsidiary shares in the foreign market and distribute the proceeds as a cash dividend.
3. Hold the shares in custody but not issue new ADRs, leaving the ADR holder with fractional interests in the subsidiary that cannot be traded.

Depending on the foreign company’s size and the structure, the new subsidiary may be too small or illiquid to justify a separate ADR program. In that case, a cash settlement is common. The ADR holder loses the ongoing economic participation in the spun-off business and receives only the one-time valuation set by the market sale.

Extraordinary dividends and adjustments

Some corporate actions result in an extraordinary or special dividend—a large one-time payout unrelated to operating earnings. A foreign company may pay a special dividend to fund a major acquisition or return capital. The depositary withholds this dividend and distributes it as cash (minus foreign withholding taxes).

In rare cases, if a company pays an extraordinary dividend that significantly reduces its market value, the depositary agreement may allow for an adjustment to the ADR ratio or a cash-settlement option to prevent a value transfer away from non-participating holders.

Redemption and termination

Some ADR agreements include a redemption clause allowing the issuer or the depositary to unilaterally terminate the program and force holders to exchange ADRs for underlying shares or cash at a stated price. This is rare but possible. Termination notices are sent to holders with a deadline (often 30–60 days) to redeem or convert. If an ADR holder does not act, they may be forced into a cash settlement at an outdated price.

Best practices for ADR holders

Monitor corporate action notices carefully. Many ADR holders miss key deadlines because notices are sent by email or through a third-party website and are easy to overlook.

Check the depositary agreement. Before buying an ADR, or if a major corporate action is announced, read or request the depositary agreement to understand your rights. Sponsored ADRs typically have more favorable terms (rights are often passed through).

Understand the difference between deposited and non-deposited shares. In some countries (e.g., India, South Africa), not all shares are eligible for ADRs; a corporate action may create ineligible shares, and the depositary will be forced to sell them.

Consult on tax implications. A forced cash settlement, a merger consideration that includes stock, or a spin-off that creates tax deferral or gain-recognition issues can have unexpected tax consequences. Consider professional tax advice for complex corporate actions.

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