Dow Corning Corporation
February 14, 2003
via e-mail - email@example.com
Jonathan G. Katz, Secretary
RE: Proposed Rule: Standards Relating to Listed Company Audit Committees;
Dear Mr. Katz:
We are pleased to submit this letter to the Securities and Exchange Commission (the "Commission") in response to the Commission's request for comments on its proposed rules implementing standards relating to listed company audit committees, as contained in Release Nos. 33-8173; 34-47137; and IC-25885 (the "Proposing Release"). We are writing to respectfully suggest that the Commission consider modifying the exemption described in paragraph (c)(1) of proposed rule 10A-3 (the "Proposed Rule") in order to exempt unconsolidated 50% owned joint ventures with listed debt securities from the requirements of the Proposed Rule. We believe that this revision is consistent with the policies underlying the Proposed Rule and Section 301 of the Sarbanes-Oxley Act of 2002 (the "Act"). Similarly, but as a separate and independent matter, we request that the Commission consider revising the exemption described in paragraph (b)(1)(iv)(B) of the Proposed Rule to include unconsolidated 50% owned joint ventures.
If the Commission for any reason decides not to effect either of the foregoing suggestions through modifications to the Proposed Rule, we request that the Commission indicate its willingness to consider exemptive requests and add to Proposed Rule 10A-3(c) a paragraph comparable to Proposed Rule 10A-3(b)(1)(iv)(F) to provide the Commission with the flexibility to provide general exemptions from the requirements of the Proposed Rule as it determines appropriate in light of the circumstances.
We are a corporation owned jointly by two unaffiliated public companies, each holding a 50% stock ownership. Each of such companies has equity securities listed on the New York Stock Exchange and, accordingly, each of our parent companies will be subject to the requirements of the Proposed Rule. We have no listed equity securities, but, in connection with our emergence from Chapter 11 under the Bankruptcy Code, we wish to have flexibility to list debt securities on the New York Stock Exchange. Because neither of our parent companies consolidates our financial results with their financial statements, and because we are not a "majority-owned subsidiary" of either parent company, we do not come within the terms of the exemption from the Proposed Rule provided by proposed paragraph (c)(1) or the exemption from the independence requirements provided by proposed paragraph (b)(1)(iv)(B).
I. Proposed Rule 10A-3(c)(1).
A. Proposed Rule 10A-3(c)(1) is too restrictive.
The exemption provided in paragraph (c)(1) as proposed, provides that if a company is subject to the requirements of the Proposed Rule as a result of having its equity securities listed on a national exchange, its consolidated majority-owned subsidiaries with listed debt securities would not be subject to the requirements of the Proposed Rule. We believe that many of the reasons provided by the Commission for exempting listed debt securities of a consolidated majority-owned subsidiary from the requirements of the Proposed Rule, would apply as well to listed debt securities of an unconsolidated 50% owned joint venture.
Practical concerns relating to paragraph (c)(1) as proposed. First, with a private joint venture owned 100% by public companies, it appears unnecessary and operationally cumbersome for the parent companies, who each already have independent directors, to add another layer of independent directors at the joint venture level. Furthermore, the imposition of independent directors at the joint venture would be inconsistent with the ownership interests of the parties. This is especially true in a 50-50 joint venture, since the shareholders do not require independent directors to act as their fiduciaries and represent their interests. Lastly, many joint ventures may find it financially onerous and difficult to attract qualified candidates to serve as independent directors.
The effect of the Proposed Rule in this regard may be to cause private joint ventures to choose not to list debt securities rather than comply with the requirements of the Proposed Rule. Investors would then be denied the economic benefits of listing, including increased liquidity of the securities.
Investors will continue to have the necessary protection. One of the fundamental policies underlying the Act and the Proposed Rule is investor protection. Even after broadening the exemption provided in paragraph (c)(1) in this narrow respect to include unconsolidated 50% owned joint ventures, debt investors should continue to receive a level of protection similar to that which they would receive under paragraph (c)(1) as proposed. First, as discussed below, the earnings or losses of the joint venture are recognized in the financial statements of the parents and, as such, should be subject to the oversight of the independent audit committees at the respective parent company. The parent companies, as 50% owners, and their respective boards have a vested interest in insuring that the joint venture reports accurate financial statements. In addition, by issuing debt securities registered under Section 12 of the Securities Exchange Act of 1934, the joint venture would be included in the definition of "issuer" under the Act. Accordingly, the CEO and CFO of the joint venture would be required to make the certifications regarding the financial statements of the joint venture pursuant to Sections 302 and 906 of the Act.
Where an entity is jointly-owned by two parent entities, equity accounting will be required. As such, the financial statements of each parent, which will be reviewed and approved by each parent's independent audit committee, will include the financial impact of the joint venture's operations. In addition, as joint owners of a private entity, the parent companies will have access to the books and records of the joint venture company and general oversight of its financial reporting process.
Given that the audit committees of the parents are required to comply with the Proposed Rule, the benefits of such compliance will flow through to the joint venture and its debt investors. In addition, each parent is required to provide certifications under Sections 302 and 906 of the Act, which will also indirectly inure to the benefit of the joint venture and its debt investors. As such, while it is true that a majority owned subsidiary may be subject to consolidation, that fact alone should not necessarily provide greater assurance or protection to the debt investors or the marketplace than a situation of a 50% owned entity whose results are reflected under the equity method of accounting.
Lastly, we note that the additional exemption being suggested is very narrow. It would apply only in situations where there is a 50% owner and only when debt securities are the only securities being listed.
B. Suggested modification to Proposed Rule 10A-3(c)(1).
We recommend that that Proposed Rule 10A-3(c)(1) be modified to read as follows:
II. Proposed Rule 10A-3(b)(1)(iv)(B).
A. Proposed Rule 10A-3(b)(1)(iv)(B) is too restrictive.
The Commission states in the Proposing Release, "If an audit committee member of the parent is otherwise independent, merely serving also on the board of a controlled subsidiary should not adversely affect the board member's independence, assuming that the board member also would be considered independent of the subsidiary except for the member's seat on the parent's board." The same rationale applies to an audit committee member of the parent who is otherwise independent, serving also on the board of a 50% owned joint venture. The relationship between parent companies and a 50-50 joint venture is more likely to resemble the relationship between a parent and a subsidiary, than the relationship between a minority investor and the entity in which it passively holds stock. Parent companies with a 50-50 joint venture are typically actively involved in the joint venture and do not act passively as would a minority investor.
The Commission, in the Proposing Release, asks, "Should the exemption be limited only to wholly owned subsidiaries or other specified level of ownership?" Our answer to that question is the exemption should not be limited to majority owned subsidiaries, but should also include unconsolidated 50% owned joint ventures. In the example of our company, the independence of an audit committee member of either parent would not be adversely affected by also serving of the board of the joint venture. The only interest that the "independent" audit committee member would have is in accurate financial reporting. By rule, such a person could not receive from either company compensation other than as a director or a committee member.
The discussion above regarding paragraph (c)(1) concerning the practical implications, investor protection and equity based accounting all apply to support modifying paragraph (b)(1)(iv)(B) as well. In addition, the Proposed Rule requires that any issuer availing itself of any exemption from the independence standards contained in paragraph (b)(1)(iv) must disclose its reliance on such exemption. Accordingly, investors will be fully informed and will not incorrectly assume that the directors on the parent's audit committee would not be on the audit committee of the 50% owned joint venture.
B. Suggested modification to Proposed Rule 10A-3(b)(1)(iv)(B).
We recommend that that Proposed Rule 10A-3(b)(1)(iv)(B) be modified to read as follows:
III. New Proposed Rule 10A-3(c)(6).
A. The importance of general exemptive relief.
We are not unique in being a joint venture 50% owned by each of two public companies. Other joint ventures must have the same concerns we express in this letter. Accordingly, appropriate relief, we believe, is best addressed through a change in the rule, rather than through no-action relief on a case-by-case basis. Although we hope that the Commission will be persuaded to adopt the suggested modifications to Proposed Rule 10A-3(c)(1) and 10A-3(b)(1)(iv)(B), if the Commission decides for any reason not to make such revisions, we would urge that the Commission be receptive to entertaining requests for exemption and that broad flexibility be given to the Commission to consider appropriate requests.
In the Proposing Release, the Staff specifically asked whether the Commission should entertain requests. We believe that the Proposed Rules can have unintended and, in certain instances, unfair consequences and, as such, feel that the failure to consider such requests will not be in the best interests of investors or the investing marketplace. In light of this, we request that the Commission consider adding to 10A-3(c) a paragraph comparable to 10A-3(b)(1)(iv)(F) to provide that the Commission may provide general exemptions from the requirements of the Proposed Rules, not just from the affiliation provisions, as it determines appropriate in light of the circumstances - i.e., when the burdens outweigh the benefits. Such an exemption can easily be accommodated by the SRO's since changes to their rules are still pending and will not be finalized before the Proposed Rules are finalized.
B. Suggested added Proposed Rule 10A-3(c)(6).
In such event, we recommend that a new Proposed Rule 10A-3(c)(6) be added as follows:
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We appreciate this opportunity to comment on the Commission's proposal, and would be most pleased to discuss any questions the Commission or its Staff may have with respect to this letter. Any such questions may be directed to the undersigned at (989) 496-5020.
In addition, because of the importance of this matter to Dow Corning and its parent companies, we would appreciate the opportunity to meet with members of the Staff should the Staff have any concerns with these comments.