What an ADR Actually Is

Rule 12 of 14 in this unit2.1.1

2.1.1 Equity Securities

SIE outline 2.1.1

SEC Investor Bulletin, verbatim: "An ADR is a negotiable certificate that evidences an ownership interest in American Depositary Shares ("ADSs") which, in turn, represent an interest in the shares of a non-U.S. company that have been deposited with a U.S. bank." Each ADR represents "one or more shares of a foreign stock or a fraction of a share", and its price "generally corresponds to the price of the foreign stock in its home market, adjusted for the ratio". NOT "an ADR is a foreign share listed on a U.S. exchange." The foreign share never leaves; it sits on deposit with a U.S. bank, and what trades here is a certificate representing an interest in it.

The method for this kind of question

1h45m ÷ 80 items = 78.75 seconds per item. A classification item here should cost about 40.
Stop hunting for a rule. Every fact in this lesson is a term in a document, so the stem must hand it to you.
Arrears: count the missed years, then ADD the year now due. Dropping that last step is the classic error.
Rights vs warrants: either axis classifies it. Weeks and below-market → right. Years and above-market → warrant.
"Attached to the bonds" is a warrant, every time.
An ADR trading in dollars does NOT remove currency risk: the dollar price is the foreign price after the exchange rate.
Next: SIE Practice Quiz #5: Equity Securities, every answer explained.

Now answer

1 question on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Above the exam

A corporation's charter authorizes 5,000,000 shares, of which 5,000,000 are already issued and outstanding, and the charter is silent on pre-emptive rights. The board wants to issue 1,000,000 more shares to a new institutional investor. Can it do so immediately, and could an existing shareholder demand a pro rata right to buy into that new issuance first?

A. No, issuing beyond the 5,000,000 authorized ceiling requires a charter amendment first; and no shareholder may demand a pre-emptive right, since the charter never expressly grants one B. Yes, the board may issue freely up to any amount; and every shareholder may demand a pro rata right automatically C. No, because pre-emptive rights automatically block any new issuance once shares are fully authorized D. Yes, since the ceiling only limits authorized shares, not issued ones; and no pre-emptive right exists here

How sure are you?

Sure Fairly sure Guessing

Correct: A. All 5,000,000 authorized shares are already issued, so any new share requires a charter amendment to raise the ceiling; separately, silence on pre-emptive rights is a denial under the charter default rule, not a presumption in the shareholder's favor.

B. The board cannot issue past its own authorized ceiling, and pre-emptive rights are never automatic; they require an express charter grant.

C. Pre-emptive rights do not exist here at all (the charter is silent, which denies them), so they cannot be blocking anything.

D. The ceiling limits total shares that may be issued, and this corporation has already issued its full authorized amount, so the ceiling is the live constraint here.

Unit: SIE outline 2.1.1

Next ruleCurrency Risk Survives the Wrapper

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