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financial reporting requirements and trade on national U.S. exchanges (e.g., NASDAQ or NYSE), with the primary distinction between the two levels being that Level III can raise new capital via the ADR facility (Citi 2019).

      Following the ADR, the second most common DR is a global depositary receipt (GDR), which is a generalized form of the ADR. For example, a Chilean company could offer shares to European investors in Europe by engaging a depositary bank to implement a GDR program. Likewise, a European depositary receipt (EDR) is a DR used for investors based in Europe. Other country-specific programs exist, such as CREST Depository Interests (CDIs) for U.K.-based investors and Transferable Custody Receipts (TraCRs) for Australia-based investors, each designed to conform with local regulations and norms.

      DRs offer benefits for issuers and investors alike. For issuers, a DR is a useful tool to diversify the investor base beyond the home market, which contributes to increases in investor recognition of the company (Foerster and Karolyi 1999). Additionally, having new investors in the company also raises trading liquidity for the company's shares. In certain instances, companies may use DRs to raise capital or to fund cross-border merger or acquisition activity. Similarly, DRs facilitate stock ownership for employees in the company's overseas subsidiaries. For investors, globalizing a portfolio is simplified via DRs because they trade, clear, settle, and pay dividends in the investor's home currency and by its market conventions, eliminating foreign custody and safekeeping charges. When transacting in DRs, investors pay taxes only as levied by their home market. Moreover, depending on tax treaties between the home market and the market of the invested company, investors may receive dividends without foreign withholding taxes. For institutional investors whose charters prevent transacting in foreign securities, DRs may be recognized as local market stocks.

Alongside these benefits come certain disadvantages for DR issuers and investors. For the issuer, DRs can create direct listing costs and periodic fees charged by securities exchanges. Moreover, DRs may create reporting obligations, raising audit costs as a corollary, maintaining compliance with securities regulators in the overseas market (Doidge, Karolyi, and Stulz 2010). Failure to comply could result in fines and sanctions for the DR listing. For investors in DRs, despite being quoted and traded in a local currency, DRs fail to protect against risks from changes in exchange rates and inflation of the foreign currency, or changes in the political and regulatory environments of the overseas market. Although arguably simpler than investing directly in a foreign market, DRs still require coordination by the depositary bank, safekeeping by the custodian, and other services. These institutions typically pass the cost of these services through to investors in DRs, in some instances as a direct fee or as a deduction from the dividends paid by the company. Finally, investors may find DRs to be illiquid in their home market, despite adequate trading activity in the issuer's home market.

      Dual Listings

      Dual listings, also referred to as “Siamese twins” or “dual-headed” enterprises, are atypical, and ostensibly a vanishing corporate structure in which two legally distinct companies operate as if they were a single economic enterprise, retaining independent legal identities. A set of contractual agreements pool operations and link the cash flows and control of the dual-listed companies (DLCs) into a single entity. Profit-sharing and other arrangements associate rights, cash flows, and ownership of one entity of the pair to those of the other, based upon a predefined ratio, thereby implying that ownership in either of the pair should be equivalent to the other contractually. Because each pair's shares manifest ownership in a different company, shares between the pairs are not fungible. Unlike a cross-listing, which offers investors the same shares on multiple markets, a DLC's shares are associated with discrete underlying companies.

      In most cross-border combinations, a single holding company combines the merging companies. Still, dual-listing transactions arose from a desire to merge business operations while retaining individual corporate identities. This separation permitted the involved companies to retain their respective tax jurisdictions, national identities, exchange listings, and distinct shareholder bases. The survival of the discrete legal entities likewise avoids unintended political or tax-related negative synergies that might arise following standard merger or acquisition transactions (U.K. Panel on Takeovers and Mergers 2002).

      Although the DLC structure is not unique to specific industries or countries, most historically have involved a U.K.-domiciled pair. Current and historical examples of DLCs include Unilever, a consumer products manufacturer; Royal Dutch Shell, an oil and gas company; Carnival, a cruise line operator; and SmithKline Beecham, a pharmaceutical and consumer healthcare manufacturer (now part of GlaxoSmithKline). At one point in their respective histories, these four companies could be categorized into three forms of dual-listing structures: combined entities, separate entities, and stapled stock.

In the combined entities structure, Companies A and B form a new jointly owned company, which owns the assets of both A and B and subsequently pays dividends to each based on the equalization ratio, but A and B remain separately traded entities (Cleary Gottlieb Stein & Hamilton 2002). Although the businesses merge, legal identities remain independent, making this structure similar to a joint venture model. If a combined entity's structure is infeasible, for instance, due to financial, legal, or other constraints, A and B may choose to merge via a separate entity's structure. In this “synthetic merger,” A and B retain ownership of their respective assets and maintain legal separation, but they operate as if they were a single company (Hancock, Gray, and Sommelet 2002). Finally, effecting a merger through a stapled stock structure involves combining the assets into a jointly held company while preserving A and B's listings (U.K. Panel on Takeovers and Mergers 2002). Unlike in the combined entities structure, the shares of A and B are stapled together and cannot be traded separately, minimizing the price variances that might arise if traded separately. Figure 2.1 distinguishes between simplified ownership structure charts existing for DLCs.

FIGURE 2.1 Dual-listed Shareholder Structures

      This figure, modified from the U.K. Panel on Takeovers and Mergers (2002), portrays the three most frequent dual-list-company simplified corporate structures firms may adopt: separate entities, combined entities, and stapled stock. The separate entities and combined entities structures retain two independent shareholder bases, while the stapled stock structure amalgamates the two distinct shareholder bases into a single group.

      Source: U.K. Panel on Takeovers and Mergers (2002).

In most DLCs, the two companies combine operationally into a single organization, giving the joint enterprise the same potential scale benefits as a traditional merger, such as purchasing power or vendor consolidation. Unlike in a traditional merger, the separate legal entities survive, preserving certain attributes, such as the source of dividends or domicile. These traits guard against potentially undesirable repercussions from merging. By retaining national identity and source of income, the company usually can maintain its listing on the national stock exchange and index constituency. For example, Unilever NV, a Dutch-registered company, and Unilever PLC, a U.K.-registered company, enjoy membership in both the Euro Stoxx 50 and FTSE 100 indexes. Without the DLC structure, PLC and NV together may not have qualified for membership in both indexes.

      The agreements linking DLCs are understandably complex. In some instances, such as in Royal Dutch Petroleum and Shell Transport & Trading's DLC before its unification, the structure creates duplication and inefficiencies. Royal Dutch and Shell each had separate management teams and boards of directors. Even in cases where an identical board of directors manages the DLC, such as for Unilever,

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