US-BASED depositary banks competing to secure lucrative exclusivity deals for companies’ ADR programs are offering multi-million dollar incentive payments to cover everything from Sarbanes-Oxley compliance audits to hotel bills and travel expenses.
The payments are being disclosed for the first time under new SEC disclosure rules introduced in 2009. Depositaries like Bank of New York Mellon, JP Morgan, Citi and Deutsche Bank have long tried to keep details of the payments under wraps.
Companies’ disclosure of the payments is often carefully worded and the amount of detail provided varies from itemized laundry lists to vague lump sums. Typically, companies receiving the largest payments from the banks provide the least detail.
The incentive payments being disclosed in international companies’ annual reports represent a fraction of the total being paid because hundreds of companies whose ADRs trade over-the-counter are not required to make the disclosures. Sources have confirmed that depositaries are offering companies rich incentive payments in return for acting as the exclusive depositaries for their unlisted ADRs.
The fees paid to companies were originally intended to help offset the costs of ADR companies’ US-based investor relations activities. But many of the amounts dramatically exceed the median IR budget, which according to a survey by The Bank of New York Mellon (PDF 6.2MB) is about $500,000 in developed markets and $250,000 in emerging markets.
Depositaries finance the payments by directly charging ADR investors transaction fees or deducting the fees from company dividends before distribution. Foreign exchange spreads and interest income are other funding sources, but the costs are ultimately paid by depositary receipt investors. In essence, ADR investors are paying companies to be their shareholders, whereas the companies’ home market shareholders are not charged directly.
Some of the richest arrangements
An analysis of the disclosures in companies’ most recent annual filings finds that there is a huge range in the amounts the depositaries are paying to their corporate clients. Some of the largest payments disclosed in last year’s annual reports include:
Banco Itau Holding (NYSE:ITUB) disclosed that the Bank of New York Mellon paid it $11.9 million “for promoting and encouraging the ADR program in the market, out-of-pocket maintenance costs for the ADSs (consisting of the expenses of postage costs and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls), any applicable performance indicators relating to the ADS facility, underwriting fees and legal fees.”
Petrobras (NYSE:PBR) disclosed receiving $11.6 million from JPMorgan Chase Bank, of which $9.6 million was for “Reimbursement of investor relations expenses” including “expenses related to investor relations and travel.”
Chunghwa Telecom Co., Ltd. (NYSE:CHT) disclosed receiving $10 million from JPMorgan Chase Bank, which included an amount of $8.2 million for “reimbursement of Sarbanes-Oxley and accounting related expenses in connection with ongoing SEC compliance and listing requirements” and $784,000 for “reimbursement of investor relations efforts.”
TELMEX (NYSE:TII) reported that JPMorgan Chase Bank paid it $9.2 million, which included reimbursements “for investor relations expenses, exchange application and listing fees, and fees payable to service providers for the distribution of material to ADR holders.”
Vale (NYSE:VALE) reported being paid $9 million by JPMorgan Chase Bank for reimbursable expenses that “currently include legal and accounting fees, listing fees, investor relations expenses and fees payable to service providers for the distribution of material to ADR holders.”
Nokia (NYSE:NOK) said it received $8.96 million from Citibank, N.A. This included a sum of $7.3 million “mainly for contributions towards our investor relations activities (including investor meetings and conferences and fees of investor relations service vendors) and other miscellaneous expenses related to the US listing of our ADSs.”
Alcatel-Lucent (NYSE:ALU) said it got $7 million from Bank of New York Mellon “for our continuing annual stock exchange listing fees and our expenses incurred in connection with the ADR facility.”
Vodafone Group Plc (NASDAQ:VOD) disclosed payments of $6.3 million from Bank of New York Mellon, of which $650,000 was for “standard out-of-pocket maintenance costs” such as “annual and interim financial report delivery to holders, corporate action reporting, corporate announcement notifications, coordinating Depository Trust Company participant searches, engaging in registered holder analysis, coordinating proxy services, printing ADR certificates, distributing dividend funds and preparing and filing of US and UK tax information.” Vodafone also disclosed that it received about $5.6 million “arising out of fees charged in respect of dividends paid.”
Ericsson (NASDAQ:ERIC) reported that it receives $5 million from Citibank, N.A. per year for “legal fees, expenses related to investor relations in the US, US investor presentations, ADS-related financial advertising and public relations, fees and expenses of Citibank as administrator of the ADS Direct Plan, fees in relation to our Form 20-F and SOX compliance.”
Fibria Celulose S.A. (NYSE:FBR) said Citibank, N.A. paid it $5 million for expenses related to the ADS program, annual stock exchange listing fees, standard out-of-pocket maintenance costs, and “certain investor relations programs or special promotional activities.” Citibank has also agreed to provide additional payments “based on any applicable performance indicators relating to the ADR facility.”
BP plc (NYSE:BP) reported amounts of $4.6 million from JPMorgan Chase Bank . This included NYSE listing fees of $500,000 and $1 million in “broker reimbursements” to Broadridge and other service providers for the distribution of hard copy material to ADR beneficial holders.
Telefonos de Mexico, S.A.B. de C.V. (NYSE:TMX) said JPMorgan Chase Bank paid it $4.5 million, including for “legal and accounting fees, listing fees, investor relations expenses and fees payable to service providers for the distribution of material to ADR holders.”
Sanofi-Aventis SA (NYSE:SNY) said its payments from JPMorgan Chase Bank total $4.4 million, which includes a fixed ceiling of $4 million per year for “expenses sanofi-aventis incurs relating to legal fees, investor relations servicing, investor-related presentations, ADR-related advertising and public relations in those jurisdictions in which the ADRs may be listed or otherwise quoted, investor relations channel, perception studies, accountants’ fees in relation to our annual report” and other costs. JPMorgan has also agreed to waive up to $425,000 each year in servicing fees.
WSP Holdings Limited (NYSE:WH) disclosed payments from JP Morgan Chase Bank of just over $4 million for “certain expenses we incur that are related to establishment and maintenance of the ADR program, including investor relations expenses and exchange application and listing fees” in 2008 and 2009.
Anheuser-Busch InBev NV (NYSE:BUD) reported payments of $3.7 million from The Bank of New York Mellon for 6 months of “expenses we incurred or paid amounts on our behalf to third parties in connection with the ADS program.”
In addition to these companies, many more have reported payments from depositaries greater than the $500,00 median developed market IR budget.
From big legal bills to $380.26 for Internet, telephone and mail charges
Disclosure of depositary bank payment arrangements varies greatly between companies, even though the SEC requires that they “describe all fees and other direct and indirect payments made by the depositary to the foreign issuer.” Many companies have used boilerplate language provided to them by their depositary banks.
There are also some questions to be asked about how companies are able to isolate costs that benefit only their ADR activities. For example, an investor presentation in New York that is webcast around the world benefits more than just ADR investors, who are the ones directly footing the bills.
These questions and others are brought into sharper focus when you start to dig into the more detailed disclosures about the types of expenses the payments cover.
SK Telecom Co., Ltd. (NYSE:SKM) breaks down the $2 million it received as:
- Expenses for preparation of SEC filing and submission: $965,102
- Listing Fees: $194,413
- Education/ Training $168,546
- Corporate Action $647,578
- Miscellaneous $96,481
Mindray Medical International Limited (NYSE:MR) explains the $1.5 million it received from BNY Mellon this way:
- Consulting Fees $264,274
- Current Auditor $445,000
- Prior Auditor $270,000
- Legal $139,776
- Investor Relations $92,027
- Market Data Consultant $61,897
- ADS administration $174,753
LG Display Co Ltd. (NYSE:LPL) discloses a huge legal bill in its $1.5 million in total payments, which break down like this:
- Reimbursement of listing fees: $38,000
- Reimbursement of settlement infrastructure fees (including DTC fees): $8,505
- Reimbursement of proxy process expenses (printing, postage and distribution): $16,506
- Reimbursement of legal fees: $1,190,300
- Contributions toward our investor relations efforts (non-deal roadshows / investor conferences and investor relations agency fees, etc.): $186,397
HSBC Holdings plc (NYSE:HBC) is very particular about accounting for the comparatively modest $301,218 it received:
- Stock exchange listing fees: $104,906
- Fulfilment costs: $196,312, including:
- shareholder meeting costs (printing and distribution of materials and vote tabulation): $21,785
- beneficial holder searches: $167,300
- sundry costs including: postage and envelopes for mailing annual and interim financial reports, dividend warrants, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls: $7,227
Compania Cervecerias Unidas S.A. (NYSE:CCU) is positively pernickety about making sure we know how its $65,900 was spent:
- PWC USGAAP audit: $11,100
- PWC 20F review: $13,200
- 20F translation: $4,500
- Banco Santander Conference: $7,300
- Deutsche Bank Conference: $16,800
- Bank of New York ADR issuers conf: $1,100
- Merril Lynch Conference: $2,100
- Latibex Conference: $8,600
- Miscellaneous $1,200
But probably nothing beats the eye for detail displayed by the finance folks at India’s companies. Sify Technologies Limited (NASDAQ:SIFY), for example, provides this about the $124,582.85 in payments from Citibank:
- Broker Fee: $52,837.95
- Call Charges: $767.05
- Fee for material related to our Extraordinary General Meeting: $3,342.62
- Internet, telephone and mail charges: $380.26
- Notice mailing: $904.59
- Printing and mailing: $14,136.86
- Processing Fees: $26,759.90
- Processing Fees for Annual meeting: $24,406.54
- Text Conversion charges: $900.00
- Balance credit available: $147.08
One has to applaud these companies for their disclosure when you see the many companies that provided next to no detail on what the payments are supposed to cover. In fact, it’s surprising how little attention these payments have received from the financial media and investors.
Believe me, there’s a lot more where these come from.
What’s your view on payments by depositary banks to ADR issuers? Should companies that benefit from the additional liquidity, profile and capital raising that comes from access to the US market be receiving these payments? Are the fees fair? Comments are open.