Office of the Chief Accountant:
Letter to PricewaterhouseCoopers LLP
Regarding Corporate Value Consulting
August 30, 2001
Mr. Lawrence W. Keeshan
1177 Avenue of the Americas
New York, New York 10036
Dear Mr. Keeshan:
The staff has reviewed your letter of August 30, 2001 concerning PricewaterhouseCoopers, LLP's (PwC) planned sale of its Corporate Value Consulting business (CVC Business) to The McGraw-Hill Companies (McGraw-Hill). In your letter, you detail key terms of the transaction and conditions that PwC will comply with following completion of the transaction. Your letter concludes that, following completion of the transaction and under the specified conditions, PwC would not have a "mutual or conflicting interest" or a "direct or material indirect business relationship" with, or a "direct financial interest or material indirect financial interest" in, any of its audit clients that are also clients of or enter into business relationships with or invest in McGraw-Hill, or that are invested in by McGraw-Hill or any CVC Business partner or employee.
Assuming that the representations set forth in your letter are and continue to be accurate, and further assuming that PwC continues to comply with each of the conditions set forth in your letter, the Office of the Chief Accountant ("OCA" or the "staff") will not assert that PwC's independence from an audit client has been impaired solely because that audit client is also a client of, enters into a business relationship with or invests in McGraw-Hill, or is invested in by McGraw-Hill or any CVC Business partner or employee. Of course, PwC otherwise remains fully subject to the Commission's independence requirements. OCA has taken this no-action position based on its evaluation of the relevant legal and policy considerations and does not hereby adopt or endorse the analysis or conclusions set forth in your letter.
The conditions detailed in your letter include, among other things, that: 1) the transaction is essentially a sale for cash, and PwC will not receive or retain any equity interest in McGraw-Hill or the CVC Business; 2) McGraw-Hill will not use the "PricewaterhouseCoopers" name or logo, but for a transitional period will be entitled to refer to the historic ownership of the CVC Business; 3) PwC will not have any corporate governance or management interest in McGraw-Hill or the CVC Business; 4) there will be no revenue or profit sharing between PwC and the CVC Business; 5) shared services between PwC and the CVC Business will be limited and transitional in nature; 6) the term for the provision of the services pursuant to the Transitional Services Agreement and sublease or similar arrangements will in no event extend beyond December 31, 2003; and 7) except to the limited extent set forth in your letter, there will be no joint marketing agreements between PwC and the CVC Business until McGraw-Hill ceases to refer to the historic ownership of CVC by PwC and ceases to occupy space leased by PwC. OCA emphasizes that failure to comply with any of the conditions in your letter will vitiate this no-action position. This response expresses OCA's position only on these particular facts and circumstances and does not purport to express any legal conclusions on this or any other matter.
John M. Morrissey
Deputy Chief Accountant
cc: Marc S. Rosenberg, Esq.
Robert E. Curry, Jr., Esq.
Scott L. Bennett. Esq.
Elliot V. Stein, Esq.
Lawrence W. Keeshan
August 30, 2001
CONFIDENTIAL TREATMENT REQUESTED
Office of the Chief Accountant
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: PricewaterhouseCoopers LLP/Corporate Value Consulting Transaction
Ladies and Gentlemen:
We hereby request that the Staff of the Securities and Exchange Commission (the "Commission" or "SEC") advise that, based upon and subject to the matters referred to herein, it will not recommend that the Commission take enforcement action against PricewaterhouseCoopers LLP or any of its subsidiaries (collectively, "PwCUS"), or any other firms conducting audit activities outside the United States for SEC registrants under the name "PricewaterhouseCoopers" or derivations thereof or otherwise as part of the PricewaterhouseCoopers network of firms (together with PwCUS, "PwC"), asserting that PwC is not "independent" based upon the attribution to PwC of the activities of the corporate value consulting business now owned by PwCUS (the "CVC Business") following completion of the sale of the CVC Business to The McGraw-Hill Companies, Inc. ("Buyer") described below. The CVC Business subsequent to its acquisition by Buyer is referred to herein as the CVC division of Buyer. Buyer is not an audit client of PwC, and PwC is not otherwise required under applicable rules to maintain independence from Buyer.
The federal securities laws require that financial statements filed with the Commission by public companies, investment companies, broker-dealers, public utilities, investment advisers and others be certified (audited) by independent public accountants.1 The federal securities laws also authorize the Commission to define "accounting, technical and trade" terms used in the federal securities laws.2
The Commission has adopted Rule 2-01 of Regulation S-X regarding independence of accountants.3 The general standard set forth in Rule 2-01(b) provides that:
"The Commission will not recognize an accountant as independent, with respect to an audit client, if the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant's judgment."4
Rule 2-01(b) further provides that:
"In determining whether an accountant is independent, the Commission will consider all relevant circumstances, including all relationships between the accountant and the audit client, and not just those relating to reports filed with the Commission."
The preliminary note to Rule 2-01 states that, in considering the standard set forth in Rule 2-01(b), the Commission looks to, among other criteria, whether the relationship or the provision of service "creates a mutual or conflicting interest between the accountant and the audit client."5
Rule 2-01(c) applies the standards set forth in Rule 2-01(b) to particular circumstances that are considered to impair an accountant's independence.6 For example, Rule 2-01(c)(1) provides that an accountant will not be considered independent if "the accountant has a direct financial interest or a material indirect financial interest in the accountant's audit client . . .." In addition, Rule 2-01(c)(3) provides that:
"An accountant is not independent if, at any point during the audit and professional engagement period, the accounting firm or any covered person in the firm has any direct or material indirect business relationship with an audit client, or with persons associated with the audit client in a decision-making capacity, such as the audit client's officers, directors or substantial stockholders."
The Commission's interpretations of Rule 2-01 are collected in Section 600 of the Codification of Financial Reporting Policies (the "Codification"), entitled "Matters Relating to Independent Accountants."7 Section 602.02.c of the Codification restricts the independent accountant from performing "bookkeeping and related professional services" that might cause a "mutuality of interest" to develop between the auditor and its client. In addition, Section 602.02.e of the Codification addresses business relationships - such as joint ventures, limited partnership agreements, and investments - that may impair an auditor's independence. That section provides, in part, that:
"Direct and material indirect business relationships . . . with a client . . . will adversely affect the accountant's independence with respect to that client. Such a mutuality or identity of interests with the client would cause the accountant to lose the appearance of objectivity and impartiality in the performance of his audit because the advancement of his interest would, to some extent, be dependent upon the client."
PwC desires to obtain assurance that its independence will not be deemed impaired pursuant to Rule 2-01 or any other provisions of the Commission's independence rules to the extent that the CVC division of Buyer provides certain valuation services for, or Buyer, the CVC division of Buyer, or any departing CVC partner or employee enters into business relationships with, PwC audit clients and/or makes investments in PwC audit clients, or to the extent that PwC audit clients invest in Buyer.
PwC believes that, under the conditions detailed in this letter, it would not have a "mutual or conflicting interest" or a "direct or material indirect business relationship" with, or a "direct financial interest or material indirect financial interest" in any of its audit clients that are also clients of or enter into business relationships with or invest in Buyer, or in which Buyer or any departing CVC partner or employee invests. This conclusion is based on the conditions detailed in this letter, including, among other things, that: 1) PwC will not receive or retain any equity interest in Buyer or the CVC division of Buyer; 2) Buyer will not use the "PricewaterhouseCoopers" name, but for a transitional period will be entitled to refer to the historic ownership of the CVC Business; 3) PwC will not have any corporate governance or management interest in Buyer or the CVC division of Buyer; 4) there will be no revenue or profit sharing between PwC and the CVC division of Buyer; and 5) shared services between PwCUS and the CVC division of Buyer will be limited and transitional in nature.
Pursuant to the Agreement for the Purchase and Sale of Assets dated as of August 2, 2001 (the "CVC Purchase Agreement"), and other agreements specified therein (the "Ancillary Agreements" and, together with the CVC Purchase Agreement, the "Agreements"), PwCUS will sell its CVC Business to Buyer.
The principal terms of the proposed transaction are:
- The Buyer shall pay a cash purchase price (the "Purchase Price") for the CVC Business, together with the PwCUS non-competition agreement referred to in paragraph 4 below and a non-exclusive, perpetual, royalty-free license to use certain intellectual property of the CVC Business. PwCUS will retain all pre-closing liabilities of the CVC Business.
- A portion of the Purchase Price will be paid to PwCUS for payment on to the departing CVC partners immediately following the closing (the "Exit Payment"); PwC will have no economic interest in the Exit Payment.
- PwCUS will retain certain obligations (i) to the departing CVC partners under the pension plans available to partners of PwCUS for the amount of benefits accrued through June 30, 2001, and (ii) to the departing CVC partners and employees under retirement benefit plans available to partners and employees of PwCUS, respectively, in each case for the amount of benefits accrued through closing (such pension and retirement benefits collectively, the "Accrued Benefits"). The length of service of departing CVC partners and employees with Buyer subsequent to the closing will be counted toward the vesting of Accrued Benefits (i.e. eligibility to receive payment of those Accrued Benefits to which the partner or employee is entitled) but not for the purposes of accruing additional benefits or any other purpose. Such continued vesting of Accrued Benefits is not tied in any way to PwC's future financial or other performance.
- For five years following the closing of the transaction, PwCUS will not compete with the CVC division of Buyer in accordance with the terms of the covenant not to compete set forth in Section 5.11 of the CVC Purchase Agreement and Exhibits A and B thereto.
- PwC will not receive or retain any equity interest in Buyer or the CVC division of Buyer, and after the closing of the transaction, there will be no corporate governance, management or direct or indirect financial ties between PwC and the CVC division of Buyer (other than as described above or pursuant to the transitional services and other arrangements described below).
Conditions to No-Action Confirmation
We request that, subject to compliance with the following conditions, the SEC Staff (the "Staff") not recommend enforcement action to the Commission based upon the attribution to PwC of the activities of the CVC division of Buyer following completion of the transaction under the following conditions:
- As a consequence of this transaction, PwC will not receive or retain any equity interest in the CVC division of Buyer or Buyer.
- Buyer will not be entitled to use the "PricewaterhouseCoopers" name or logo, and neither PwC nor the CVC division of Buyer will represent in any publication, advertisement, press release, name plates, office signage, business cards or other similar material that it is the same firm, or controls, manages, governs or is affiliated with the other, or any affiliate, subsidiary or division of the other. Buyer will have the right, however, for a transitional period of three years, to refer to the historic ownership of the CVC division of Buyer in all publications, letterhead and stationery, name plates, office signage, business cards and similar materials, as follows: "Standard & Poor's Corporate Value Consulting, formerly a U.S. PricewaterhouseCoopers business".
- PwC and Buyer will maintain separate corporate governance, management and financial structures and interests, including: separate boards of directors (including no contractual right by PwC to representation on Buyer's Board of Directors and no service on the Buyer Board of Directors by any then-active PwC partner or employee or former partner or employee with continuing financial ties to PwC other than under pension and retirement benefit plans available to broad categories of former personnel), executives, employees, capital, credit lines or facilities, client bases, governing documents, operating policies, financial operations and financial and accounting policies. Buyer and PwC will not exert financial or other influence over the other party's corporate governance, management and financial structures or interests.
- After the closing, PwC will not accrue, pay to or receive from the CVC division of Buyer any royalty, interest, dividend or other payment, whether or not tied to the performance of the CVC division of Buyer, except for payments required to be made under the Agreements (e.g., indemnity payments, liquidated damages payments, and payments for transitional services), which payments are described in Annex A hereto. Accordingly, PwC and the CVC division of Buyer will not share profits or revenue from valuation consulting or any other engagements or agreements.
- After the closing, PwC will not make any payments to the departing CVC partners and departing CVC employees except as described in paragraph 3 of Factual Background, above, and except that PwCUS has agreed to indemnify the departing CVC Partners with respect to litigation or other proceedings related to their performance of duties or responsibilities as members of the Partnership prior to closing, to the same extent that PwCUS would indemnify its continuing partners under the same circumstances.
- PwC and Buyer may, but will be under no obligation to, refer clients to one another (other than as described below); and PwC and Buyer may not pay referral fees or other compensation for such referrals to each other nor to any subsidiary, affiliate, employee or agent of the other. PwC and Buyer may not enter into any co- or joint marketing, advertising or similar agreements or arrangements which are inconsistent with the foregoing conditions or which do not clearly state that PwC and Buyer (including the CVC division of Buyer) are separate firms. In connection with entering into the non-compete covenant of the CVC Purchase Agreement, and in conformity with the conditions set forth in paragraph 4 above, PwCUS and Buyer have agreed that for the period from the closing until December 31, 2003, PwCUS will use reasonable efforts, consistent with applicable professional standards, to refer certain services presently offered by the CVC Business to Buyer on a non-exclusive basis at no cost to Buyer. Buyer will not have the right to publicize such referral arrangement to clients or while marketing CVC Business services. At the later of the date Buyer ceases to refer to the historic ownership of the CVC division of Buyer and the date that all of the offices of the CVC division of Buyer cease to occupy space leased by PwC (as described in paragraph 7 below), Buyer and PwC will be free to contract and enter into business relationships with one another as would any other two independent entities, including compensated referral and joint marketing arrangements.
- PwCUS and Buyer will enter into a transitional services agreement (the "Transitional Services Agreement", attached as Exhibit F to the CVC Purchase Agreement) under which PwCUS will provide Buyer with certain infrastructure and information services, office facilities and other services specified in the schedules to the Transitional Services Agreement. The services provided under this arrangement may have varying terms. Transitional services and facilities will be provided in accordance with the Transitional Services Agreement so long as (i) the CVC division of Buyer is separate from PwC's other businesses (as described below) and (ii) charges for the services and facilities are determined at arm's length (defined as not greater than cost, the basis historically used by PwCUS to allocate expenses to the Financial Advisory Services line of service of which the CVC Business forms a part), and appropriate provision is made so that confidential information is not communicated between PwC and Buyer.
Under the Transitional Services Agreement, PwCUS will not receive services from Buyer and PwCUS will not generate a profit on the services it provides to Buyer. The term for the provision of the services pursuant to the Transitional Services Agreement will in no event extend beyond December 31, 2003 (except for the use of certain personal property leased by PwCUS (e.g. computers and other immaterial assets) which may extend through the term of such leases). PwCUS and Buyer have entered into or may enter into sublease or similar arrangements for all office space that the CVC Business currently shares with other PwCUS businesses. Under these arrangements, Buyer will pay an amount not greater than the cost of such space, including related services, based on the total square footage of each facility used by the CVC Business. The sublease or similar arrangements with Buyer for each space will not extend beyond December 31, 2003.
Until the date that all of the offices of the CVC division of Buyer cease to occupy space leased by PwCUS, PwCUS and the CVC division of Buyer (i) will have separate and distinct office signage and their offices will be clearly distinguishable from one another by third parties entering the offices although they will share certain common facilities, and (ii) will take steps to ensure the confidentiality of business communications and information. Employees of the CVC division of Buyer will be clustered in an area of space within the facilities in each location rather than being interspersed among PwC employees, and the areas where CVC division employees are clustered will be clearly marked with conspicuous signs. In addition, reception areas will be clearly marked with signs showing that two separate businesses share the area, and visitors of the CVC division of Buyer will be physically escorted by CVC division employees from the reception area through to the area where Buyer employees are clustered. Conference rooms will be clearly marked with signs noting that such facilities are shared. Standard firewall and password protections will be implemented to prevent the commingling of client data between PwC and the CVC division of Buyer, and separate fax machines and printers will be dedicated to the CVC division of Buyer to avoid disclosure of confidential information. A detailed set of confidentiality procedures which Buyer and PwCUS have agreed to follow is attached to the Transitional Services Agreement as Schedule O.
Because of the nature of the CVC Business, the frequency of visits by clients to CVC Business offices has historically been very low, and PwC and Buyer anticipate that such visits will continue to be infrequent following the closing of the acquisition. The CVC Business offers highly technical advice based on analysis that is performed by CVC Business personnel at CVC Business offices with little or no physical interaction with the client. To the limited extent that the finished product is delivered to the client via a presentation (rather than by hard copy or electronically, which is much more typically the case) such presentation is almost always made at the client's offices. In connection with the preparation of this no-action request, PwCUS surveyed the partners who are the practice leaders of the CVC Business in each office concerning the frequency of client visits to the CVC Business offices, and those partners confirmed that in their experience clients tended to visit their offices on average approximately three times per year per partner. In order to mitigate any ongoing concern about client confusion on this point, Buyer has agreed to use reasonable efforts, to the extent practicable, to arrange to have client meetings occur outside of the CVC Business offices for so long as PwC and the CVC Business continue to share space in a particular location.8
- After the closing, PwCUS will continue to provide services (other than services presently offered by the CVC Business) to clients of the CVC Business whose engagements are transferred to Buyer if required to do so by the transferred engagement letters between PwCUS and such clients, and the CVC division of Buyer will continue to provide services to clients of the PwCUS business under the terms of existing engagement letters between PwCUS and such PwCUS clients.
- PwC will consent to periodic reviews by the Staff or an independent party designated by the Commission or the Staff to ascertain that PwC is complying with the conditions herein provided.
- At the closing PwCUS will cease engaging in the CVC Business, except to the extent permitted by the non-compete covenant set forth in Section 5.11 of the CVC Purchase Agreement and Exhibits A and B thereto. Notwithstanding the previous sentence, PwCUS may, after five years, provide the services that make up the CVC Business, and may provide such services to audit clients that file reports with the Commission to the extent permitted by Commission independence requirements.
In connection with its request herein, PwC hereby confirms to the Staff that:
- After the closing, PwC will continue to be subject to the independence requirements of the securities laws and the SEC's independence rules and interpretations issued thereunder to the same extent as it was so subject prior to the closing.
- PwC agrees to the above conditions and has furnished a copy of this letter (and will furnish any final agreement on this subject) to Buyer. Buyer will expressly acknowledge that it has been furnished a copy of this letter. PwC further represents to the Staff that it is not aware of any provisions of the CVC Purchase Agreement or any agreement or instrument referred to therein that is inconsistent with this no-action letter in any material respect.
- PwC has furnished the Staff with the executed CVC Purchase Agreement (as amended) and attached forms of Ancillary Agreements (including without limitation the schedules, exhibits and annexes thereto).
Based upon the foregoing representations and subject to compliance with the foregoing conditions, we hereby request that the Staff of the Securities and Exchange Commission advise that if an audit client of PwC is also a client of, enters into a business relationship with, invests in, or is invested in by Buyer or any departing CVC partner or employee, the Office of the Chief Accountant will not assert, on any of those grounds, that PwC's independence from an audit client has been impaired.
* * * * *
Certain matters described above have not yet been publicly announced. Accordingly, pursuant to 17 C.F.R. § 200.81(b), we hereby request confidential treatment of the contents of our communications with the Staff with respect to all issues relating to this letter, including the transaction documentation and the materials furnished to you in connection with this letter (collectively, the "Confidential Material") until a date 120 days after release of your response to us, or such earlier date as the Staff is advised by us that all of the information contained in the Confidential Material has been made public. However, we understand and agree that the letter itself and the text of your response to the letter may be made public immediately.
If for any reason you do not concur with the views expressed in this letter, we respectfully request an opportunity to discuss this matter with the Staff prior to any written response to our letter. If you have any questions or need any additional information concerning the foregoing, please do not hesitate to call me at 646-471-6770, or Marc S. Rosenberg of Cravath, Swaine & Moore at 212-474-1676, or Robert E. Curry, Jr., of Heller Ehrman White & McAuliffe, LLP at 212-906-8710, PwC's outside counsel in this matter.
Lawrence W. Keeshan
copy to: Marc S. Rosenberg, Esq.
Cravath, Swaine & Moore
Robert E. Curry, Jr., Esq.
Heller Ehrman White & McAuliffe, LLP
Scott L. Bennett, Esq.
The McGraw-Hill Companies, Inc.
Elliott V. Stein, Esq.
Wachtel, Lipton, Rosen & Katz
POSSIBLE PAYMENTS UNDER THE AGREEMENTS
CVC Purchase Agreement (Section 2.4)
The Purchase Price will be adjusted, dollar for dollar, by a post-closing purchase price adjustment, in the event that net assets (defined as receivables plus work in process less adequate reserves) are greater or less than an agreed upon amount.
The timing of the purchase price adjustment in Section 2.4 of the APA works as follows: within 90 days after the closing date, PwCUS will deliver a statement of net assets to Buyer. Buyer will have 60 days thereafter to review and object. If Buyer does not object within the 60 days, the closing statement will be final and binding. If Buyer does object and the objections are not resolved mutually within 30 days after PwCUS' receipt of the objections, then within 5 days thereafter the parties will appoint a mutually acceptable arbitrator, or if they cannot agree, an arbitrator will be selected by the AAA. The arbitrator will have 30 days after appointment to resolve the parties' differences, and his decision will be final and binding. Any adjustment to the purchase price will be made within 5 business days after the date the net assets are finally determined in accordance with the foregoing.
CVC Purchase Agreement (Article 8)
Customary cross-indemnity provisions for breaches of representations, warranties and covenants. PwCUS may be required to make liquidated damages payments for certain infringement and other claims.
PwCUS may be required to indemnify Buyer for certain claims.
Transitional Services Agreement (Article 3)
Buyer will make payments to PwCUS for the provision of certain services and facilities during the transition period.
Transitional Services Agreement (Section 2.1)
Buyer may be required to make liquidated damages payments to PwCUS upon breach of the Transitional Services Agreement.
Transitional Services Agreement (Article 6)
Customary cross-indemnity provisions for certain breaches.
License Agreement (Section 7)
Customary cross-indemnity provisions for certain infringement claims.
1 See, e.g., 15 U.S.C. 77aa(25), (26), 15 U.S.C. 781, 78q, and 78m, 15 U.S.C. 79e(b), 79j, 79n, 15 U.S.C. 80a-8, 80a-29, 15 U.S.C. 80b-3(c)(1).
2 See 15 U.S.C. 77s(a), 15 U.S.C. 78c(b), 15 U.S.C. 79t(a), and 15 U.S.C. 80a-37(a).
3 Rule 2-01 has recently been amended. See Revision of the Commission's Auditor Independence Requirements, Exchange Act Release No. 43602, Fed. Sec. L. Rep. (CCH) ¶ 86,406. (Nov. 21, 2000) (effective Feb. 5, 2001).
4 17 C.F.R. 210.2-01(b) (2001). Under Rule 2-01, the term "accountant" includes "any accounting firm with which the certified public accountant or public accountant is affiliated." Id. § 210.2-01(f).
5 Id. § 2.10.2-01 (para. 2 of Preliminary Note).
6 See id.
7 Codification of Financial Reporting Policies, Section 600-Matters Relating to Independent Accountants, reprinted in Fed. Sec. L. Rep. (CCH) ¶73,251, et. seq.
8 As set forth in the Transitional Services Agreement, of the 13 locations to be shared by PwCUS and the CVC Business of Buyer, one location will be vacated by Buyer on December 31, 2002, five locations will be vacated by Buyer on June 30, 2003 and the remaining seven locations will be vacated by Buyer on December 31, 2003.