Deutsche Bank Global Transaction Banking. Extending Voting Rights to American Depositary Receipt Holders. A Guide to the Process

Transcription

1 Deutsche Bank Global Transaction Banking White Paper Extending Voting Rights to American Depositary Receipt Holders A Guide to the Process

2 2

3 Foreign issuers with shares outstanding (Issuers) in the form of American Depositary Receipts (ADRs), may, in many cases, choose to extend voting rights to holders of their ADRs (ADR holders) for matters that have been submitted for shareholder approval. ADR holders are not direct shareholders of the Issuer, and therefore, generally do not have the right to vote the shares underlying their ADRs as if they were ordinary shareholders. In order to vote, ADR holders would need to instruct the depositary bank administering the ADR program (the Depositary ), as the record holder of the underlying shares, to vote in accordance with their instructions. This white paper provides a general overview of the procedure for extending voting rights to ADR holders. A sample timetable for the voting process is also included for illustrative purposes, although the process and timing may have significant variations depending on the Issuer, whether the ADR is listed on a stock exchange, and other factors. 3

4 Background Role of Depositary The Depositary s role is as agent to administer the ADR program in accordance with the terms and conditions of the deposit agreement which governs the program. The deposit agreement is entered into by and among the Depositary, the Issuer, and the holders and beneficial owners of the ADRs (the Deposit Agreement ). The Depositary is the record holder of the ordinary shares underlying the ADRs on the share register of the Issuer. It holds the shares backing the outstanding ADRs in custody in the Issuer s jurisdiction of incorporation (the home market ) for the benefit of the ADR holders through a custodian bank operating in the home market (the Custodian ). The Depositary maintains a register of the holders of ADRs. Voting rights of ADR holders are determined primarily by the terms of the Deposit Agreement and are guided by the rules of the stock exchange where the ADRs are listed (if any) and the laws of the Issuer s home market. The Deposit Agreement may give ADR holders a contractual right to instruct the Depositary to vote on matters that have been submitted for shareholder approval, provided it is legal and reasonably practicable to do so. If these preconditions are met, then pursuant to the terms of the Deposit Agreement, the rules of the relevant stock exchange and home market law, and an instruction from the Issuer to do so, the Depositary will extend the voting rights to the ADR holders. The Depositary will then vote, or cause to be voted, such shares for which instructions are received from ADR holders in accordance with such instructions. The Depositary does not itself exercise any voting discretion and will cause underlying shares to be voted only to the extent it has received proper and timely instructions from ADR holders, and only in accordance with such instructions. Any shares for which instructions have not been received from the underlying ADR holders would generally remain unvoted. The exception to this is if the relevant Deposit Agreement permits a discretionary proxy to be given to the Issuer, which is discussed in more detail below. 4

5 Procedure for Extending Voting Rights Timing considerations Setting key dates Once the Issuer becomes aware of the date of the shareholder meeting or vote in the home market, it is advisable that the Issuer informs the Depositary as far in advance as possible. There is significant preparation required from both the Issuer and the Depositary to extend the voting rights to the ADR holders, and the entire voting process can take up to several weeks to complete. Deutsche Bank recommends that the Issuer notifies it of an upcoming shareholder vote or meeting 45 days in advance, but no less than 30 days. Deutsche Bank s standard Deposit Agreement requires the Issuer to notify the Depositary at least 30 days prior to the date of the shareholders meeting or vote, otherwise the Depositary will have no obligation to take action to extend the voting rights to the ADR holders. Top Tip The Issuer should notify the Depositary on a confidential basis of the date of the shareholder meeting or vote as soon as it becomes aware of the date, even if it has not yet notified the market, in order to allow the Depositary and the Issuer enough time to set the action plan, including the timetable / key dates. As soon as the Issuer provides timely notification to the Depositary of the shareholders meeting date or voting deadline in the home market, and informs the Depositary that it wishes to extend voting rights to ADR holders, if the Depositary deems it legal and reasonably practicable to extend the voting rights to the ADR holders, the Depositary will work with the Issuer to set an agreedupon timeframe for the key dates and action items in order to do so. First, the Depositary will set a record date for purposes of determining which ADR holders are eligible to vote (the ADR Record Date ). The ADR Record Date can but need not be the same as the shareholder record date established by the Issuer in its home market. In order to vote, an ADR holder must either be reflected on the Depositary s register of ADR holders or on the records of the ADR holder s nominee holder (bank or broker) as of the ADR Record Date. The ADR Record Date is usually 30 days before either the shareholders meeting (typically, an Annual General Meeting or AGM ) or the voting cut-off deadline in the home market for shareholders (the Local Voting Deadline ), and in fact the New York Stock Exchange recommends that the ADR Record Date be at least 30 days prior to the shareholder vote. The Depositary will also set a deadline by which the ADR holders must return their votes to the Depositary (the ADR Voting Deadline ). The ADR Voting Deadline is generally prior to the Issuer s home country voting deadline for its shareholders, because the Depositary will need time to collect all ADR holders voting instructions it receives and forward them to the Custodian or directly to the Issuer prior to the voting deadline in the home market. The Custodian or the Issuer, depending on the voting process in relation to the shares in the Issuer s home market, will then vote the shares underlying the ADRs at the shareholders meeting in the home market in accordance with the ADR holders instructions. 5

6 6

7 Preparation of proxy materials Notifications to stock exchanges The Issuer and the Depositary will arrange for each ADR holder to be provided with a set of materials including the shareholders meeting agenda and instructions and deadlines for voting (the proxy materials ) either by mail or otherwise at the ADR holder s instruction. Ideally, the proxy materials will be received by the ADR holder sufficiently in advance of the ADR Voting Deadline so that the ADR holder has enough time to review the proxy materials and provide voting instructions to the Depositary. The Depositary coordinates the distribution of the proxy materials to the ADR holders, but any printing costs to produce physical copies of the proxy materials, along with mailing costs, are borne by the Issuer. The Issuer will make the determination as to what proxy materials are to be provided to ADR holders, which may include the following: A proxy statement from the Issuer. This usually includes the shareholder meeting or voting agenda, translated into English by the Issuer. A Depositary s notice of the shareholders meeting. This notice will be drafted by the Depositary specifically for ADR holders, based on the voting provisions in the Deposit Agreement and the Issuer s notice of a meeting that is sent to shareholders in the Issuer s home market. An ADR voting card. The ADR voting card is specifically created for the ADR holders by the Depositary. It will be sent to ADR holders in lieu of the Issuer s proxy card that is provided to shareholders in the home market. The Depositary will prepare the ADR voting card based on the Issuer s proxy card. The ADR voting card will include a summary and/or translation of the resolutions to be voted on by ADR holders. It will also contain specific instructions and information for ADR holders on how to vote. Any additional information the Issuer decides to enclose such as the Issuer s annual reports or its financial performance information. For ADR programs listed on the New York Stock Exchange (the NYSE ), the listing rules of the NYSE require the Issuer to give immediate notification to the NYSE of dates set in conjunction with the calling of a shareholders meeting. The NYSE will then look to the Depositary to provide it with a separate notification of the ADR Record Date and the shareholders meeting at least 10 calendar days prior to the ADR Record Date. The NYSE recommends a 30 calendar day period between the ADR Record Date and the shareholders meeting date. Accordingly, for ADR programs listed on the NYSE, the Depositary would ideally notify the NYSE 40 days before the shareholders meeting date of the ADR Record Date, because the NYSE recommends the ADR Record Date be 30 days before the date of the shareholders meeting. The NASDAQ listing rules require 10 calendar days notice of record dates only with respect to dividends, but not for shareholders meetings. 7

8 8

9 ADR Record Date and the ADR broker search ADR holders who are either reflected on the Depositary s register of ADR holders or on the records of its nominee (bank, broker or custodian) as of the ADR Record Date will be entitled to vote, so long as voting is permitted under the Deposit Agreement and any other preconditions are satisfied. The Issuer will provide the Depositary with a set of ADR proxy materials for distribution to each ADR holder as of the ADR Record Date, either by mail or in some cases electronically, depending on the preference of the individual ADR holder. The Issuer will look to the Depositary, who administers the ADR program, to inform the Issuer of the number of printed sets of proxy materials that will be needed. Typically, one printed set is required to be mailed to each ADR holder who has not otherwise consented to receive the proxy materials in electronic form. A common misconception is that the Depositary is able to identify the number of ADR holders in the ADR program at any given point in time. The Depositary rarely has visibility as to the identity of all holders of ADRs, since in many instances ADR holders do not hold ADRs directly on the ADR register. As with other U.S. securities, ADRs can be held either in registered or beneficial form. Registered Holders are those who hold ADRs directly in their own names and are listed on the ADR register maintained by the Depositary. The Depositary is thus aware of the identity of the Registered Holders appearing on the ADR register. Beneficial Owners, on the other hand, hold their ADRs in street name through a nominee such as a bank, broker, custodian or other nominee intermediary (a Broker ). Each Broker s aggregate position in a given Issuer s ADRs (representing the holdings of all the intermediary s customers) are reflected in the electronic book entry system operated by the Depositary Trust Company (DTC), the central clearance and settlement system for U.S. securities. The ADR register will only indicate DTC s nominee (Cede & Co) as the registered holder of all ADRs that are held by participants in the DTC system on behalf of Beneficial Owners. For Registered Holders, the process of distributing proxy materials is straightforward: the Depositary will provide a set of proxy materials directly to each registered holder appearing on its ADR register (by mail, unless the ADR holder has opted to receive the materials in electronic form). Distributing proxy materials to Beneficial Owners is more complicated. The Depositary will provide the proxy materials to the Brokers who will deliver them to the Beneficial Owners (typically via Proxy Agents, as defined below). In order to know how many sets of materials are required, the Depositary will order what is commonly referred to as a broker search. Most Brokers subcontract the mailing of proxy materials to Beneficial Owners to a third party Proxy Agent such as Broadridge Financial Solutions, Inc. Proxy Agents are service providers that specialize in the delivery of proxy materials and tabulation of proxies. Proxy Agents communicate with the Brokers to calculate the number of underlying ADR accounts which are to receive printed proxy materials. This information is then provided to the Depositary, who will in turn inform the Issuer how many printed sets of proxy materials are needed. The Issuer will provide the printed materials to the Depositary, who then provides them to the Brokers for mailing to the Beneficial Owners. As the broker search takes up to five days to complete, the Depositary will order a preliminary broker search a few weeks before the ADR Record Date. The Depositary will inform the Issuer of the estimated number of printed sets of proxy materials required based on the results of the preliminary broker search, with margin for error of generally 10%. Then, as of the ADR Record Date, the Proxy Agents will conduct a final broker search to provide the Depositary with the actual number of printed sets of materials that will be required. Upon consultation with the Issuer, the Depositary may close the ADR books to cancellations of ADRs on the ADR Record Date, and the books will remain closed until either the local record date for the shareholders meeting, or the cut-off deadline to vote in the home market, to prevent double voting. This occurs if an ADR holder submits voting instructions to the Depositary in relation to the ADRs, and subsequently cancels the ADRs and obtains ordinary shares, and then votes those ordinary shares at the shareholders meeting in the home market as a shareholder, effectively voting twice. 9

10 Printing and Mailing Once the preliminary broker search is completed and the Depositary and the Issuer are informed as to the estimated number of sets of proxy materials that will be needed, the proxy materials will be printed, and, following completion of the final broker search (which can take up to five days to complete), they will be mailed to Registered Holders and Beneficial Owners of ADRs. Under the terms of the Deposit Agreement, the Issuer bears the costs of printing and mailing the proxy materials. Printing The Issuer is responsible for providing sufficient physical copies of the printed proxy materials, in English, to the Depositary for mailing to ADR holders. The Issuer may choose to outsource the printing of the materials to the Depositary in the U.S., or it may opt to print the materials itself and ship them to the Depositary from its home country (this latter option must allow time for the proxy materials to clear U.S. customs). Mailing Once the printed proxy materials are received by the Depositary, the Depositary will arrange for the appropriate number of sets to be mailed directly to the Registered Holders on its ADR register, and for the appropriate number to be delivered to the Brokers (or, to the Proxy Agents engaged by the Brokers) for mailing to the Beneficial Owners holding in nominee name through the Brokers. For listed ADR programs, the Depositary will also deliver copies of materials to the NYSE or other U.S. stock exchanges as required by the relevant listing rules. Deutsche Bank recommends that the printed materials be mailed at least 21 days before the ADR Voting Deadline. While the Depositary will mail the materials directly to the Registered Holders appearing on its ADR register, the Brokers (via their Proxy Agents) mail proxy materials to the Beneficial Owners. Proxy Agents may take up to one week from the date they receive the proxy materials to mail. Once the proxy materials are mailed, it will take additional time for the Beneficial Owners to actually receive the materials. Top Tip The proxy materials cannot be mailed to Beneficial Owners of ADRs until after the final broker search is completed, up to five days after the ADR Record Date. The final broker search is necessary for the Brokers and their Proxy Agents to identify Beneficial Owners of record on the ADR Record Date entitled to vote. The Proxy Agents can take up to one week from the date they receive the printed sets of proxy materials to mail. Therefore, it is often recommended that an estimated number of sets of materials be printed based on the results of the preliminary broker search, and delivered to the Proxy Agents on or before the ADR Record Date. This way, they will be in the hands of the Proxy Agents and ready to be mailed promptly following completion of the final broker search five days after the ADR Record Date. Deutsche Bank recommends mailing the proxy materials to ADR holders a minimum of 21 days before the ADR Voting Deadline to allow the ADR holders sufficient time to review the proxy materials, and return their votes. Voting Generally, Registered Holders and Beneficial Owners of ADRs are provided with the option to return votes by telephone, mail, or electronic means such as through the internet. Immediately following the ADR Voting Deadline, the Depositary will receive the voting results from the Brokers and/or their Proxy Agents and will combine them with the votes the Depositary receives directly from the Registered Holders. The Depositary will then tabulate the voting instructions it receives and forward the final results to the Custodian or directly to the Issuer in the home market prior to the Local Voting Deadline in accordance with instructions from the Issuer or the rules of the Issuer s home market. The Custodian or the Issuer will then vote the number of shares corresponding to the ADRs for which voting instructions have been received from ADR holders in accordance with the ADR holders voting instructions. 10

11 Discretionary proxy Proxy advisory firms Although, in general, shares represented by ADRs for which no voting instructions (or incomplete voting instructions) are given will remain unvoted, in some ADR programs, the Deposit Agreement permits a discretionary proxy. A discretionary proxy applies if, for any reason, on or before the ADR Voting Deadline, the Depositary has not received instructions from any ADR holder in respect of any resolution or the instructions fail to specify how the Depositary should vote. In such event, the Deposit Agreement may provide that such ADR holder shall be deemed to give a discretionary proxy to a person designated by the Issuer to vote the shares underlying the unvoted ADRs at the shareholders meeting. In most cases, even if the Deposit Agreement provides for a discretionary proxy, the discretionary proxy will not be given for any proposal as to which the Issuer informs the Depositary that (i) the Issuer does not wish the discretionary proxy to be given, (ii) substantial opposition exists with respect to such proposal, or (iii) such proposal would materially and adversely affect the rights of holders of shares. To prepare for the shareholder meeting or AGM, some issuers may engage a proxy advisory firm to assist them with the AGM process. Proxy advisory firms typically assist the issuer with the AGM process from start to finish; they may help the issuer obtain feedback from investors (including ADR investors in the U.S.) on the proposed meeting agenda, assist with drafting or preparation of the agenda, work with investors to help them understand the agenda once it is mailed out, and communicate the timetable to investors so that the votes are returned on time to the tabulator. db RAM : DB Resolution Analysis Monitor Deutsche Bank offers its depositary receipt issuer clients a pre- AGM planning online tool called DB Resolution Analysis Monitor ( db RAM ). Prior to an AGM, db RAM enables companies to assess proposed AGM resolution topics against the published voting policies of the major proxy advisory firms. db RAM can provide the following benefits: assess the risk of proposing certain resolution items, help save issuers valuable time during the pre- AGM planning process, and provide a useful resource to raise corporate governance levels and understanding of proxy advisory firm policies. 11

12 Cost saving measures Issuers of ADRs often look for ways to reduce the printing and mailing costs associated with extending voting rights to ADR holders. In contrast to Issuers with ADR programs that are listed on U.S. stock exchanges (known as Level II or Level III ADR programs), ADR programs that are not listed on any stock exchange (known as Level I ADR programs) are not subject to U.S. stock exchange rules. Level I ADR programs thus have more flexibility than Level II or Level III ADR programs in the method they use to distribute voting material to ADR holders, and in fact have the option not to pass on voting rights to ADR holders at all. Accordingly, if permitted in their respective home market, Level I ADR Issuers may choose not to extend voting rights to ADR holders, or to extend voting rights only to Registered Holders. Level II and Level III ADR Issuers, on the other hand, are required by the rules of the U.S. stock exchanges to extend voting rights to all ADR holders and are subject to the timing / notice requirements set by the relevant U.S. stock exchange, unless they can obtain an exemption from complying due to conflicting requirements in their home market. Although foreign private issuers are technically not subject to U.S. Securities and Exchange Commission (SEC) proxy rules, all ADR issuers including listed ADR programs, may wish to explore with their U.S. counsel whether, in order to reduce the distribution costs associated with extending voting rights to ADR holders, they may avail themselves of the Notice and Access provisions of the U.S. SEC proxy rules. Under Notice and Access, so long as the Issuer complies with certain notice and other requirements, the Issuer may mail to ADR holders only a brief notice that provides summary information regarding the shareholder meeting and includes a link to the other proxy materials which are made available on the Issuer s website. Top Tip Issuers with ADR programs that are listed on U.S. stock exchanges (Level II and Level III ADR programs) are required under the rules of the U.S. stock exchanges to extend voting rights to all ADR holders. They typically mail printed proxy materials to all ADR holders (both Registered Holders and Beneficial Owners). Issuers with Level I ADR programs (unlisted ADR programs) may choose not to extend voting rights to ADR holders, or to extend voting rights only to Registered Holders. For unsponsored ADR programs, Issuers have no involvement in establishing the ADR program, and market practice is not to extend voting rights to ADR holders. 12

13 Please do not hesitate to contact James Kelly or Laura Bonner or Tom Murphy if you have any questions regarding the matters discussed. This White Paper is a summary presented for general informational purposes only. It is not a complete analysis of the matters discussed herein and should not be relied upon as legal advice. 13

14 Annex Illustrative timetable for the ADR voting process This is an illustrative timetable only and the timeframes and steps may vary depending on issuer requirements and type of ADR program Action Timing The Issuer notifies the Depositary of the AGM date The Depositary will arrange a preliminary broker search to provide the Issuer with an estimated number of Beneficial Owners of ADRs. The Depositary will set the ADR Record Date and create a timetable. The Depositary and the Issuer will reach agreement as to the key action dates. The Depositary will prepare the Depositary s notice of the meeting and ADR proxy card for the Issuer s approval, based on the Issuer s meeting agenda. 10 days notice of record date to U.S. stock exchange (for Level II and Level III ADR programs listed on NYSE only) The Depositary must notify the NYSE at least 10 days before the ADR Record Date. The NYSE recommends the ADR Record Date be 30 days prior to the shareholders meeting; thus, the notification to the U.S. stock exchange must be 40 days before the shareholders meeting. Although Level I ADR programs and NASDAQ-listed are not subject to the notice requirements of U.S. stock exchanges, we recommend they follow generally the same timetable as NYSE-listed ADR programs to allow enough time for holders to vote. ADR Record Date for proxy voting. Ideally, the ADR Record Date will be at least 30 days before the shareholders meeting (as recommended by the NYSE) to follow best practices and allow enough time for ADR holders to vote. Final broker search conducted on the ADR Record Date. As of the ADR Record Date, the Proxy Agents will conduct the final broker search to determine the number of sets of proxy materials that must be mailed, as only ADR holders of record on that date may vote. The final broker search can take up to five business days to complete. At least 45 days before the shareholders meeting At least 40 days before the shareholders meeting At least 30 days before the shareholders meeting At least 30 days before the shareholders meeting The final broker search can take up to five days to complete. 14

15 Action Printing of proxy materials Typically the Issuer will print all proxy materials other than (i) the Depositary s notice of meeting and the ADR proxy card for Registered Holders which are printed by the Depositary, and (ii) the ADR proxy card for Beneficial Owners, which is printed by the Proxy Agents. Once printed, the Issuer will deliver the proxy materials to the Depositary and the Depositary will then provide them to the Brokers and/or their Proxy Agents in anticipation of mailing to Beneficial Owners (the Depositary will coordinate the mailing of proxy materials to Registered Holders). The printed proxy materials will include: Meeting invitation/agenda ADR proxy card (one for each of Registered Holders and Beneficial Owners, as applicable) Depositary notice of meeting Any additional information provided by the Issuer Return envelope Outgoing mailing envelope. Mailing of proxy materials The Depositary will mail to Registered Holders upon receipt of printed materials. Proxy Agents may take up to one week to mail to Beneficial Owners from the time they receive the printed materials. Additional time must be factored in for Beneficial Owners to receive the materials through the mail. ADR holders submit votes Proxy Agents advise the Depositary of the voting results as of the ADR Voting Deadline. The ADR Voting Deadline will be in advance of the local deadline to vote the shares, how far in advance will depend on local requirements. Depositary instructs the Custodian or the Issuer, as applicable, to vote the underlying shares in the local market The Depositary will submit to the Custodian, or, directly to the Issuer, the ADR voting results, depending on the Issuer s or local law requirements. The Custodian or the Issuer will then vote the shares in accordance with ADR holders instructions by the Local Voting Deadline, or at the shareholders meeting, if applicable. If the Deposit Agreement provides for the granting of a discretionary proxy and any ADR holders have failed to instruct, the Depositary will deliver a Power of Attorney for the discretionary proxy. Timing At least one week prior to the date for mailing Proxy Agents can take up to one week to mail from the time they receive the proxy materials. It is recommended that the Proxy Agents commence mailing at least 21 days before the ADR Voting Deadline (see below), so the materials would need to be with the Proxy Agents approximately one week in advance of that. At least 21 days before the ADR Voting Deadline On or before the ADR Voting Deadline On or before the Local Voting Deadline or at the shareholders meeting, as applicable 15

16 This brochure is for information purposes only and is designed to serve as a general overview regarding the services of Global Transaction Banking. The general description in this brochure relates to the Global Transaction Banking services offered to customers as of April 2014, which may be subject to change in the future. This brochure and the general description of the services of Global Transaction Banking are in their nature only illustrative and do not therefore contain or cannot result in any contractual or non-contractual obligation or liability of Deutsche Bank AG or any of its affiliates. Copyright April 2014 Deutsche Bank AG. All rights reserved.