SECURITIES AND EXCHANGE COMMISSION
PROPOSED RULE: STANDARDS RELATING TO
LISTED COMPANY AUDIT COMMITTEES
SECTION 10A (M) (1) OF THE EXCHANGE ACT
AS ADDED BY SECTION 301 OF THE
SARBANES-OXLEY ACT 2002
As directed by the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission proposed rules to implement Section 10A (m) (1) of the Exchange Act as added by Section 301 of the Sarbanes Oxley Act, instructing national securities exchanges and national securities associations to prohibit the initial and continued listing of any security of an issuer that is not in compliance with the requirements of any portion of the several standards introduced by the Sarbanes-Oxley Act regarding issuer´s Audit Committee. Such rule to become effective by April 26, 2003, and operative by the self-regulatory organizations no "later than the first anniversary of the publication of the final rule in the Federal Register".
These requirements relate to:
a) the independence of Audit Committee members;
b) the Audit Committee´s responsibility to select and oversee the issuer´s independent accountant;
c) Procedures for handling complaints regarding the issuer´s accounting practices;
d) the authority of the Audit Committee to engage advisors;
e) the funding for the independent auditor as any outside advisors engaged by the Audit Committee.
Comments on Proposed Requirements
1.- Independence Requirement of Audit Committee Members
Pursuant to the Sarbanes-Oxley Act, in order to be considered"independent", a member of an Audit Committee of a non investment company issuer may not, other than in his capacity as member of the Audit Committee, the board of directors, or any other board committee:
- Accept directly or indirectly any consulting, advisory or other compensatory fee from the issuer; or
- Be an affiliated person of the issuer or any subsidiary thereof.
a) According to Chilean Corporations Act (the "Act") as amended effective on December 20, 2000, the Directors´ Committee (analogous to an Audit Committee in the United States) shall be composed of three members, the majority of whom should be "independent", defined as those that would have been elected even if the votes cast in the director´s favor by the controlling shareholder and its related persons had not been considered. However, a majority of directors related to the majority shareholder is permissible if there is an insufficient number of independent directors.
Therefore, according to Chilean law, a director could receive compensatory fees other than director´s compensation from or be an "affiliated" person of the issuer or any subsidiary or parent company and still be considered "independent".
Pursuant to the Act, the by-laws of the company must establish whether directors should receive remuneration. The actual amount to be paid as compensation to the Board of Directors is determined annually at the Ordinary General Shareholders´ Meeting are as well as compensation for Audit Committee members.
Fees to be received by a Director for any other employment or service rendered to the issuer must be approved by the Shareholders´ Meeting, and each and all of said fees, including director´s compensation, must be set down in the annual report and financial statements, as well as expenses incurred by directors when acting on behalf of the issuer.
b) We believe that not only the term "compensatory fees" requires additional clarification from the SEC, but also the scope and structure of directors compensation in order to be considered "independent". Could a director´s compensation be composed of a fixed monthly rate fee, not dependant upon actual attendance at board meetings or number of meetings held in a month, and a percentage contingent upon any given specific circumstance or variable such as the profits of the company set down in the financial statement sheet and approved by the Shareholders´ Meeting? Chilean law does not forbid the payment of a variable compensation based on the issuer´s profits, and thus such a system would not be deemed to affect the directors´ independence.
c) The Board of Directors should be the body in charge or empowered, on behalf of the Company, to determine whether any of the Audit Committee members is "independent". Disclosure of said information should only be included in the annual report filed on Form 20-F.
d) There should not be a look-back period for the independence requirement and, in any case, such a period should not extend beyond one yearfrom the appointment of the member to the Audit Committee. Different look back periods could be determined for different relationships or parties.
e) We do not believe the additional criteria for independence, regarding the prohibition on any transaction or relationship with the Audit Committee members or an affiliate of the Audit Committee member apart from those executed in his or her capacity as a member of the board or any board committee, should be required or proposed by the SEC.
Under the Act, a corporation may enter into a contract or agreement in which a director has a direct or indirect interest (i.e., a conflicting interest transaction) with the prior approval of the Board of Directors, if the terms of the conflicting interest transaction are similar to those of an arm's length transaction (article 44 of the Chilean Corporations Act).
If the conflicting interest transaction involves a "material amount," the Board of Directors is required to produce a statement declaring in advance that it is similar in its terms to an arm's length transaction. If the Board of Directors believes that it is not possible to ascertain whether the conflicting interest transaction is similar to an arm's length transaction, it may approve or reject the conflicting interest transaction, or appoint independent advisors to make such a determination. The report prepared by the advisors is made available to the shareholders and the Board of Directors for a 20 business day period, after which the Board may approve or reject the transaction, but the Board is not required to follow the independent advisors' conclusion. The Board may treat the conflicting interest transaction and the report as confidential information. Shareholders representing at least a 5% of the voting shares of the Company may request the Board to call a Shareholders' Meeting in order to approve or reject the conflicting interest transaction by a two-thirds majority of the outstanding voting shares.
Interested directors are excluded from all decisions of the Board related to the conflicting interest transaction and all decisions adopted by the Board in this regard must be reported to the next following shareholders' meeting.
f) As proposed, the SEC rules should provide new public non-investment company issuer´s with an exemption from independence requirements, for a one (1) year period from the effective date of the issuer´s initial registration statement under Section 12 of the Exchange Act or a registration statement under the Securities Act covering an initial public offering of securities of the issuer. Such exemption should not be limited to or should extend to more than one member of the Audit Committee.
g) Given the holding company structure of most foreign issuers, we believe appropriate the SEC´s proposed exemption regarding an Audit Committee member that sits on the board of directors of both a listed issuer and its direct or indirect consolidated majority-owned subsidiary (or that sits on the board of both a listed issuer and its parent, if the listed issuer is a direct or indirect consolidated majority-owned subsidiary of the parent) if the member, except for sitting on both boards, and receiving compensation for serving as such in any board committee of the subsidiary and parent company, meets the other requirements to be considered independent under the Sarbanes-Oxley Act.
This exemption should not be limited or restrict to wholly owned subsidiaries, and such exemption should not be denied if the parent or subsidiary company maintains a listing for its own securities.
h) It would be beneficial for the issuer if the proposed rules incorporate an exemption from independence requirements based upon exceptional and limited circumstances, if the absolute majority of the board members determine that membership on the committee by the individual is required by the best interest of the corporation and its shareholders, subject to review if the circumstances taken into consideration for such an exemption change. The corporation should disclose that it has availed itself of the exemption as an exhibit on the Form 20-F.
2.- Audit Committee´s Responsibility to Select and Oversee the Issuer´s Independent Accountant.
The Sarbanes-Oxley Act provides that the Audit Committee is responsible for the appointment, compensation and oversight of the work of independent auditors.
Pursuant to the Chilean Corporations Act, the Directors´ Committee is only empowered to propose to the Board of Directors the independent accountants. Should the Board disagree with the Directors´ Committee´s proposal, the Board is entitled to make its own proposal, submitting both to the shareholders for their consideration. Therefore, the independent auditors are annually appointed by the shareholders at the Ordinary Shareholders´ Meeting and not by the Board or any of its Committees (articles 50 bis N° 2 and 56 N° 3 of the Chilean Corporations Act).
In order to prevent Chilean law from conflicting with Sarbanes-Oxley Act provisions, we believe the SEC rules should strengthen the idea that the proposed requirements under this Section N° 2 relate to the assignment of responsibility to oversee the independent auditors´ work as well as the making of the recommendation or nomination of the external auditors to the Board and/or the Shareholders´ Meeting when applicable according to home country laws, rules and regulations. Thus, the SEC rules should expressly contemplate that the requirement imposed upon the Audit Committee does not conflict with and is not affected by any provision that requires shareholders to ultimately elect, approve or ratify the selection of the issuer´s external auditors.
The Audit Committee´s responsibility should not extend to the appointment, compensation, retention and oversight of internal auditors, who currently report and should keep on being accountable to the company´s administration.
3.- Procedures for Handling Complaints
a) The Audit Committee of the issuer should be provided with flexibility in order to develop and establish, according to and consistent with the company´s individual circumstances, specific procedures for the receipt, retention and treatment of complains or for confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. Therefore, we believe it unnecessary for the SEC to prescribe or encourage specific procedures, due to the wide scope and variety of issuers listed in the USA markets.
b) We believe no disclosure requirement should be included in the SEC proposed rules regarding the procedures referred to in letter a) above or changes introduced to said procedures by the company from time to time to reflect the issuer´s current situation.
4.- Authority to Engage Advisors.
The proposed rules state that each Audit Committee must have the authority to engage independent counsel and other advisers, as determines necessary to carry out its duty.
It would be convenient for investors, in order to avoid misinterpretations, that the proposed SEC rules define the term "independent" counsel, as independent from the company. The power to engage independent counsel should not preclude the Committee´s access to advise from the company´s internal counsel or regular outside counsel.
5.- Funding for the Independent Auditor and Outside Advisors Engaged by the Audit Committee.
According to Chilean Corporation Act, (art. 50 bis) the budget of the Audit Committee and those of its advisors is determined by shareholders at the Ordinary General Shareholders´ Meeting and not by the Audit Committee itself (as provided by the Sarbanes-Oxley Act). Therefore, the Audit Committee is allowed to recruit professionals for the fulfillment of its duties within the limits imposed by the budget. We do not believe that the Audit Committee´s authority to engage independent advisor or its ability to perform objectively its duty or even the role of the independent advisor would be hindered by such a circumstance, since compensation of said advisors and budget determination does not rely on management, but on shareholders, to whom Audit Committee members are ultimately answerable to.
(Audit Committee members´ compensation is also established annually by shareholders, taking into consideration the duties that the Audit Committee members perform.)
Application and Implementation of the Proposed Standards.
1.- Multiple Listing
As proposed by the SEC, we believe of great convenience (in order to avoid duplicative and administrative burdens to issuers and self-regulatory organizations) the incorporation of the general exemption that at any time, when an issuer has a class of common equity securities (or similar securities) that is listed on a national securities exchange or national securities association subject to the requirements of Section 10A (m) (1) of the Exchange Act, listing of other classes of securities of the issuer, and other classes of securities of a direct or indirect consolidated majority-own subsidiary of the issuer (except classes of equity securities, other than non-convertible, non participating preferred securities, of the majority-own subsidiary), is not subject to the requirements of said Section.
2.- Foreign Issuers
In order to prevent conflict with legal requirements or corporate governance standards, or being inconsistent or inappropriate in a significant way with foreign corporate governance arrangements, we deem necessary the special accommodations for foreign issuers with controlling shareholders structures or foreign government representations proposed by the SEC.
Regarding the exemption contemplated for controlling shareholders or shareholders groups, that is to say, the fact that one member of the Audit Committee of a foreign private issuer may be exempted from the requirement of not being an affiliated person of the issuer or any subsidiary thereof, it should be limited only to the requirement that (a) the member is a beneficial owner of more than 50% of the voting common equity of the foreign private issuer or is a representative or designee of such an owner or a group of owners that collectively are beneficial owners of more than 50% of the voting common equity of the private issuer; and (b) the member is not an executive officer of the foreign private issuer.
The limitation to observer status of such member should be eliminated. According to Chilean Corporations Act, the Audit Committee is composed of only three members, the majority of whom should be "independent" (as defined in Section 1 (a)) unless there is an insufficient number of independent directors, in which case, a majority of directors related to the majority shareholder is permissible. Furthermore, since the Committee is composed of only three members, if one is limited to an observer status, quorums and the making of decisions would be significantly affected. Therefore, we believe that the controlling shareholder or shareholders´ group representative or designee should be entitled to voting rights and eventually the right to chair the Audit Committee.
3.- Disclosure Changes Regarding Audit Committees
As proposed by the SEC, issuers availing themselves of the multiple listing exemption should be excluded from the disclosure requirements relating to their use of that exemption, since the issuer, or controlling parent company, would be required to comply with the proposed Audit Committee requirements due to a separate listing. Such an exemption would not adversely affect investors as requirements would have to be met by the issuer and the costs and administrative burden imposed upon the issuer would be significantly reduced.
All other exemptions (i.e. Identification disclosure) should be disclosed on the Form 20-F, regarding foreign issuers.
Compañía Cervecerías Unidas S.A (United Breweries Company, Inc.)
February 17, 2003