Depositary receipts ('DRs') are negotiable instruments issued by a depositary bank that essentially repackages shares in another company. DRs are securities in their own right and can be listed and traded on the capital markets.

DRs are typically listed by companies incorporated outside the EU, frequently from emerging markets such as Russia and India. For such companies, a listing of DRs on an international exchange such as the London Stock Exchange can provide access to a significantly wider pool of international professional investors than a listing of shares on a company's domestic exchange.

Advantages of listing depositary receipts

Companies issue DRs principally to raise capital. DRs provide a particularly effective means for non- EU issuers to raise capital because of their appeal to international professional investors: they offer a means to invest in non-EU issuers while avoiding some of the inconveniences often associated with direct investments in the underlying shares, particularly as regards settlement.

The depositary mechanism

Setting up the requisite mechanics for a DR listing requires close coordination between the issuer, its advisers (principally its legal counsel and underwriters) and its chosen depositary bank.

The deposit agreement

The deposit agreement sets out the legal rights and obligations of the depositary and the issuer. More importantly, the deposit agreement details the rights of the DR holders, set out in the terms and conditions of the depositary receipts, which are typically annexed to the deposit agreement and reproduced in the listing prospectus.

'Listing' of depositary receipts

There are two distinct aspects to the process of 'listing' DRs in London, which occur simultaneously with each other:

• Admission to the Official List (the 'Official List') of the United Kingdom Listing Authority ('UKLA'), the United Kingdom regulator for the purpose of securities listings. DRs will be admitted to the Standard segment of the Official List – Premium Listings are only available to issuers of shares.
• Admission to trading on the London Stock Exchange's Main Market (the 'Main Market') or the London Stock Exchange's Professional Securities Market (the 'PSM').

The admission of DRs to the Official List and to trading on the Main Market will usually (though not always) be conducted in conjunction with an offering of DRs to investors, to create the requisite 'public float' of 25 per cent of the DRs. If a listing of DRs represents the first time an issuer has offered securities to investors, it will be commonly referred to as the issuer's initial public offering ('IPO').

Block listings

It is common for a DR issuer to request admission to the Official List of a greater number of DRs than it intends to have admitted to trading on the Main Market at the time of its IPO. This is sometimes known as a 'block listing'. A block listing of DRs enables an issuer to have additional DRs admitted to trading on the Main Market, up to the aggregate size of the block listing, without having to publish a new prospectus or submit new applications to the UKLA or the London Stock Exchange. For an issuer planning to issue DRs on an incremental basis or who cannot control secondary deposits into the DR facility, a block listing is important.

US considerations

US securities law is relevant to any listing of DRs. The US Securities Act 1933 (the 'Securities Act') requires any issuer that proposes to offer securities anywhere in the world to undertake a lengthy US Securities and Exchange Commission ('SEC') registration process, unless an exemption is available.

For issuers that do not intend to market DRs to investors in the US, an exemption from the SEC registration requirement is typically available under Regulation S of the Securities Act ('Reg S'). Such a transaction would be referred to as a 'Reg S only' deal. The main requirements of Regulation S are that (i) the offer or sale of DRs is made outside of the US in an offshore transaction; and (ii) no marketing of the DRs takes place in the US (referred to as 'directed selling efforts').

For issuers that intend to market DRs to investors in the US (to access demand from US institutional investors), the US portion of the transaction is typically framed within the scope of Rule 144A of the US Securities Act, which provides an exemption for resales of securities to sophisticated institutional investors, known as qualified institutional buyers ('QIBs'). Such a transaction, which would also need to rely on Regulation S in respect of sales to investors outside of the US, would be referred to as a 'Reg S/144A' deal.

Whether the DR listing is a Reg S only, or a Reg S/144A deal, great care must be taken to ensure that the conditions of the relevant exemptions are met; sanctions for breach of US securities legislation can be severe and concerns about compliance with the Securities Act can impede the ability of legal counsel to deliver the requisite opinions to underwriters, which can result in significant delays in the IPO process. Hence the importance of complying with the 'publicity guidelines' drafted for the issuer and the parties working with the issuer on its IPO.

Eligibility criteria

Issuers seeking admission of DRs to the Official List in connection with a Main Market listing must satisfy both the general eligibility requirements that apply to all applicants to the Official List and the specific eligibility requirements that apply to issuers of DRs (set out in Chapters 2 and 18 of the Financial Service Authority's ('FSA') Listing Rules, respectively):

• issuer must be duly incorporated and operating in accordance with its constitution
• DRs must
• 1. conform to the law of the issuer's place of incorporation;
  2. be duly authorised according to the requirements of the issuer's constitution; and
  3. have any necessary statutory or other consents
• DRs must be admitted to trading on the Main Market
• DRs must be
• 1. freely transferable; and
  2. fully paid-up and free from all liens and from any restriction on the right to transfer
• DRs, once listed, must be expected to achieve an aggregate market value of at least £700,000
• application must relate to the entire class of the relevant DRs (ie the application must cover all DRs in issue or to be issued at the time of admission to the Official List)
• at least 25 per cent of the DRs for which application is made must be in public hands (ie part of a public float, not held by major shareholders or persons connected with the issuer) at the time of admission to the Official List and for the duration of the listing. In certain limited circumstances the UKLA will agree to lower the 25 per cent threshold
• issuer must publish a prospectus approved by the UKLA. This requirement works in conjunction with the FSA's Prospectus Rules, which set out the circumstances in which an issuer must publish a prospectus. Note that the issuer's ability to meet the disclosure requirements for a prospectus – in particular, in relation to financial statements – effectively operates as an additional criterion for eligibility.

As noted above, issuers of DRs are not required to satisfy some of the more demanding eligibility criteria that apply to an issuer conducting a Premium Listing of equity shares. For example, a DR issuer is not required to produce a three-year financial track record that relates to at least 75 per cent of its business, nor is a DR issuer required to publish audited accounts no older than six months from the date of the prospectus, or satisfy the UKLA that it has sufficient working capital available for at least the next 12 months. The prospectus does, however, need to contain all material information, so financial statement requirements still need serious consideration, particularly where the issuer has made significant acquisitions or disposals.

A typical DR listing will adopt the following structure:

• issuer's shares (either newly-issued shares, existing shares currently in the hands of a shareholder, or both) are deposited with the custodian bank of the issuer's depositary
• depositary becomes legal title holder of shares and is entered into issuer's share register
• depositary issues to investors DRs representing a certain number of issuer's shares
• depositary holds the underlying shares on bare trust for the holders of the DRs
• depositary will exercise its rights as a shareholder – including voting rights and rights to unpaid dividends – in accordance with investors' wishes, subject to the terms and conditions of the DRs
• investors are free to sell DRs in the secondary market, or, alternatively, to instruct the depositary to cancel the DRs and deliver the underlying shares instead, subject to the terms and conditions of the DRs and relevant securities laws.

• issuer applies for up to 100 DRs to be admitted to the Official List but limits the IPO to 25 DRs (ie only 25 of the DRs will be admitted to trading on the Main Market)
• issuer is permitted to have up to 75 additional DRs admitted to trading on the Main Market at any time following the IPO and in as many increments as it wishes (provided the initial listing on the Official List is maintained)
• no requirement to apply to the UKLA or London Stock Exchange for subsequent DRs admitted to trading (up to the upper limit of the block listing)
• no requirement for a new prospectus for subsequent DRs admitted to trading (up to the upper limit of the block listing)
• to enable the UKLA to monitor the status of a block listing, the issuer is required to submit a form on a six-monthly basis stating how many of its DRs are admitted to trading.

Eligibility letter

To demonstrate compliance with the UKLA's eligibility requirements, the issuer must submit to the UKLA an 'eligibility letter' no later than on the date of the first filing of the prospectus. In addition, although not required by the rules, it may be prudent to submit a pre-eligibility letter to address any particular issues unique to the issuer, for example, issues related to the financial disclosure the issuer plans to present in the prospectus.

Since DR issuers are not required to appoint a sponsor, the issuer's legal counsel will typically liaise with the UKLA on the issuer's behalf, initially to establish its eligibility for listing and ultimately to achieve the admission of its DRs to the Official List.

The timetable for a DR listing will differ from deal to deal and will depend on each company's individual circumstances.

Requirement for a prospectus

In connection with an application for DRs to be admitted to trading on the Main Market an issuer must publish a UKLA-approved prospectus. The preparation of the prospectus requires a significant effort on the part of the issuer and its advisory team and is one of the principal determinants of the deal timetable.

Due diligence

Due diligence is typically undertaken by the underwriters and, particularly if the deal involves a placement in the US, both the issuer's and underwriter's legal counsel. Due diligence helps protect the issuer, its directors, and the underwriters from liability and reputational damage. The due diligence process might include:

• meetings with senior management and other key personnel
• meetings with key shareholders
• review of material documents relating to the issuer and its group (usually the issuer will create a physical or electronic data room for this purpose)
• site visits to view the issuer's principal assets and operations
• prospectus drafting sessions, at which further questions are put to the issuer's senior management in the context of the actual text of the draft prospectus
• preparation of specialist reports, such as mineral experts or property valuation reports, or a report of financial reporting procedures
• representations and warranties from the company and selling shareholders
• delivery of comfort letters from the accountants
• delivery of legal opinions from counsel.

General content of the prospectus

The principal purpose of a prospectus is to provide potential investors with the information necessary to make an informed assessment of the issuer and the rights attaching to the DRs. In other words, the prospectus must contain all information that could be relevant to an investor's investment decision – this is the overriding disclosure obligation. It supplements the equivalent overriding disclosure obligation under US rules if the transaction includes a placement in the US.

In addition to satisfying the overriding disclosure obligation, the prospectus must meet a number of detailed contents requirements, which are set out in Annex X to the FSA's Prospectus Rules. The detailed disclosure requirements that apply to prospectuses for DR listings differ in certain respects from those that apply to prospectuses for share listings.

For example, unlike in a prospectus relating to a share listing (either a Premium or a Standard Listing), there is no requirement for a DR prospectus to include a working capital statement (to the effect that the issuer and its group has sufficient working capital available for its requirements for the 12 months following the date of the prospectus), and the requirements relating to financial disclosure can be more demanding in the context of a share prospectus, particularly where the issuer has a complex financial history.

Despite these differences, the disclosure in a DR prospectus is likely to look very much like that in a share prospectus, largely because of the overriding disclosure obligation to ensure that it contains all material information (an obligation which applies equally to shares and DRs). This is particularly the case in DR deals that will be marketed to US investors – Reg S/144A deals – where the document is likely to be drafted with a keen eye on the stringent disclosure requirements in the US.

Financial disclosure

The issuer's consolidated financial statements and the accompanying analysis set out in the operating and financial review section of the prospectus are critical to an investor's investment decision. Under Annex X, a DR prospectus must include:

• audited financial statements prepared in accordance with International Financial Reporting Standards ('IFRS'), covering the latest three financial years, or such shorter period that the issuer has been in operation.
  Non-EU issuers that do not prepare IFRS financials will be spared the requirement to restate their financials into IFRS if they have been prepared in accordance with generally accepted accounting standards ('GAAP') that are 'considered to be equivalent to IFRS' (as of the date of publication the GAAP of Canada, China, India, Japan, South Korea and the US are considered equivalent for this purpose)
• interim financial statements (which may be unaudited) covering at least the first six months of the year if the last audited annual financial statements will be older than nine months from the date on which the prospectus will be approved.

In certain cases, however, it is not sufficient for an issuer to limit the financial disclosure in the prospectus to the Annex X requirements. The issuer also must meet the overriding obligation to disclose all material information, which in certain circumstances will demand the disclosure of additional financial information, above and beyond that required under Annex X.

For example, it is not uncommon for an issuer to have been incorporated as a new holding company for the listing. Such an issuer might not have any financial history of its own. In such circumstances, investors would reasonably expect to see the financial history of the underlying business in order to make an informed investment decision. Alternatively, the issuer might have recently purchased, or agreed to purchase, another large business. The disclosure will likely need to deal with that new business, perhaps through pro forma and/or separate financial statements related to that business depending on its materiality and other information that can be provided about that business.

To ensure that an issuer in circumstances such as these meets the overriding disclosure obligation, one typically cross-refers to the rules that apply to share listings. An issuer of shares whose financial statements do not provide investors with a full picture of the underlying business is deemed to have a 'complex financial history'.

Such an issuer is required to disclose

1. the financial statements of another entity (for example, the entity that operates the issuer's underlying business); and/or
2. pro forma financial statements that demonstrate the impact of a recent or anticipated transaction (such as the acquisition or sale of a large business) on the issuer's financial statements.

While the complex financial history regime for share issuers does not apply to DR issuers, it is not uncommon for DR issuers to look at it by analogy to help satisfy the overriding disclosure obligation – in particular, by including the financial statements of an entity other than the issuer. The issuer and its legal counsel would usually address issues relating to the financial statement package with the UKLA by means of a pre-eligibility letter and agree an approach at an early stage in the transaction.

Drafting style

• the prospectus should be drafted in a manner that is comprehensible and easy to analyse
• it should avoid bullish rhetoric and 'marketing speak' in favour of neutral language, balanced and complete descriptions, and factual statements that can be substantiated
• discussion of the issuer's prospects requires particular care
• forward-looking statements will to some extent be necessary (for example, to describe the issuer's strategy or material capital expenditure plans). These statements should be drafted carefully to avoid unnecessary exposure to liability (ie if the anticipated event or outcome does not occur)
• drafting should try to ensure that the issuer's beliefs and expectations are not construed as statements of fact and, for material matters, might be accompanied by discussions of the factors that could cause actual outcomes to differ from those envisaged
• profit forecasts – statements that could be taken to suggest, for example, that the issuer will generate a particular income in the future – should generally be avoided.

Responsibility and liability

A DR issuer is required to make a statement in its listing prospectus to the effect that it takes responsibility for the contents of the prospectus. In addition, third-party experts who have prepared information or reports for use in the prospectus (such as reporting accountants and mineral experts) are required to accept responsibility for the contents of their reports. Unlike in a share listing, there is no requirement for the issuer's directors to take express personal responsibility for the prospectus.

Any party that takes responsibility for a prospectus will be liable under the Financial Services and Markets Act 2000 ('FSMA') to pay compensation to any person who acquires DRs and suffers a loss as a result of any untrue or misleading statement, or a material omission, in the prospectus. Depending on the circumstances, investors may be able to bring a claim under a different head of liability (for example, under the common law either for negligent misstatement, or false or misleading pre-contractual misstatement) against the issuer and potentially others; however, the FSMA offers investors a clear, purpose-built route to recovery.

In practice, steps will be taken to help guard against the issuer's (and its directors') potential liability through the due diligence carried out by it and its advisory team prior to, and in connection with, the drafting of the prospectus prior to its publication.

Continuing obligations regime

An issuer with DRs trading on the Main Market is required to comply with a range of continuing obligations. The majority of these requirements are set out under the FSA's Disclosure and Transparency Rules. The key theme in this context is disclosure. Disclosure of pertinent information to the market allows investors to make informed investment decisions. This, in turn, promotes investor confidence and facilitates the proper functioning and development of the market.

For many issuers, particularly those conducting an IPO, the practice of disclosing material information to the market is likely to represent a significant divergence from previous practice. It is therefore crucial that the issuer is properly advised of exactly what it will be required to do once its DRs are listed. This advice must be delivered at a sufficiently early stage in the listing process to enable the issuer to introduce procedures to ensure that it is able to comply with its continuing obligations immediately after listing. One of the very first steps a DR issuer needs to take, in advance of listing, is to appoint a Regulated Information Service ('RIS'), such as the London Stock Exchange's Regulatory News Service. The issuer is required to make its disclosures to the market via its appointed RIS.

Disclosure obligations

In overview, a DR issuer admitted to trading on the Main Market is required to disclose to the market via its appointed RIS:

• information that could affect the price of the DRs ('inside information') – as soon as possible after it arises
• periodic financial reports – DR issuers are required to publish an annual financial report, no later than four months after the relevant year end (six months for issues of DRs admitted to the PSM). In addition, DR issuers customarily publish half-yearly reports.

As soon as an issuer submits its application for its DRs to be admitted to trading on the Main Market or the PSM, it is required to notify its appointed RIS as soon as possible of any inside information which directly concerns it, save in a narrow set of circumstances in which the rules entitle it to delay disclosure.

In the context of DRs, inside information is information that:

• is precise
• has not been made public
• relates (directly or indirectly) to the issuer or the DRs
• would be likely to have a significant effect on the price of the DRs if made public (ie is 'price sensitive').

The issuer must consider each set of circumstances on its own merits and reach a judgement as to whether it is in possession of inside information and, therefore, whether an announcement is required (or, alternatively, whether there are grounds to justify delaying an announcement). Very often, the key consideration is whether the information in question is price sensitive.

In addition to the requirement to disclose inside information on an ad hoc basis, a DR issuer on the Main Market must publish its annual financial report as soon as possible after it has been approved and, at the latest, four months after the end of the financial period to which it relates (six months for issuers on the PSM).

In summary, the annual report must contain:

• audited consolidated IFRS financial statements
• management report, including a corporate governance statement (disclosing the corporate governance code to which the issuer is subject; the extent of its compliance with such code; and a description of the issuer's internal control and risk management arrangements in relation to its financial reporting process)
• responsibility statement, attesting to the accuracy of the information in the report.

Unlike issuers of listed shares, DR issuers are not required to produce half-yearly reports or interim management statements. However, it is common for DR issuers to publish half-yearly reports as a result of market expectation and best practice.

The requirement to publish details of transactions in the issuer's shares carried out by 'persons discharging managerial responsibilities' ('PDMRs') and their connected persons does not apply to DR issuers. However, the UKLA has at least informally stated that compliance with the PDMR regime by DR issuers would be best practice.

Regulation of market behaviour

In addition to the continuing obligations disclosure regime described above, DR issuers, by virtue of having securities admitted to trading on the Main Market, must refrain from certain behaviour – broadly referred to as 'market abuse' – that could prejudice investors and jeopardise the efficient operation of the market. Both civil and criminal market abuse regimes apply to issuers with DRs listed on the London Stock Exchange, as well as to their directors and other officers.

Continuing obligations that do not apply to issuers of depositary receipts

As noted earlier, DR issuers are not subject to the full demands of the continuing obligations regime that applies to issuers of shares (particularly those with a Premium Listing of shares).

Some DR issuers comply with the PDMR regime on a voluntary basis as a matter of best practice.

A PDMR is a director or a senior executive of the issuer who:

1. has regular access to inside information relating, directly or indirectly, to the issuer; and
2. has power to make managerial decisions affecting the issuer's future development and business prospects.

If the regime were voluntarily followed to the letter, PDMRs and their connected persons would notify the issuer in writing of the occurrence of all transactions conducted on their own account in the issuer's securities, within four business days of the day on which the relevant transaction occurred. The notification would include:

• name of the PDMR or, where applicable, the connected person
• name of the issuer
• reason for requirement to notify
• description of the relevant security
• nature of the transaction (for example, an acquisition or disposal)
• date and place of the transaction
• price and volume of the transaction.

The issuer would then notify the above information to an RIS as soon as possible (and, in any event, by the end of the business day following receipt of the information by the issuer).

In terms of disclosures to the market, DR issuers are not required to publish:

• half-yearly financial reports or interim management statements
• details of acquisitions or disposals of major shareholdings
• details of transactions in the issuer's securities carried out by PDMRs and their connected persons.

However, as noted above, many DR issuers make some or all of the above disclosures on a voluntary basis as a matter of best practice.

DR issuers are not required by the rules to follow the expansive corporate governance regime with which issuers of Premium Listed equity shares must comply, including:

• Listing Principles
• UK Code on Corporate Governance
• Model Code (while the Model Code does not apply to DR issuers, the guidance it provides on when an issuer and its senior management may conduct trades in the issuer's shares is instructive to DR issuers planning to conduct such trades)
• requirement to obtain shareholder approval for related-party transactions
• requirement to prepare circulars and obtain shareholder approval for major transactions.

An issuer might nevertheless give serious consideration to complying with certain of these corporate governance rules to assist with the marketing of its DR listing and if it has ambitions to progress to a Premium Listing of equity shares, to acclimatise to the more demanding regime it would be required to follow as a Premium Listed issuer.