Advanced Semiconductor Engineering, Inc.
AU Optronics Corp.
Siliconware Precision Industries Corporation
United Microelectronics Corporation
February 18, 2003
Securities and Exchange Commission
Ladies and Gentlemen:
This letter is submitted jointly by Advanced Semiconductor Engineering, Inc., AU Optronics Corp., Siliconware Precision Industries Co., Ltd. and United Microelectronics (together, the "Commenting Issuers"), all incorporated under the laws of the Republic of China, also referred to as Taiwan or the ROC in this letter, and subject to reporting obligations of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). This letter is submitted in response to the request for comments in release Nos. 33-8137 and 34-47147 dated January 8, 2003 (the "Proposed Rule"), by the Securities and Exchange Commission (the "Commission"), regarding the requirement that the national securities exchanges and national securities associations prohibit the listing of any security of an issuer that is not in compliance with the audit committee requirements established by Section 301 of the Sarbanes-Oxley Act of 2002 (the "Act").
I. Purpose of this Comment Letter
We would like to thank the Commission for allowing us the opportunity to comment on the Proposed Rule. We agree with Congress' and the Commission's view that effective oversight of the financial reporting process is critical. We also agree that a supervisory body, capable of providing effective oversight of a company's financial reporting, internal controls and independent auditors, should be an important part of a listed company's corporate structure.
We believe that such a corporate structure currently exists among Taiwan public companies with securities listed on the Taiwan Stock Exchange. Moreover, in Taiwan, as in many other countries, a process of corporate governance reform is in progress. These reforms are consistent with applicable local law and regulation. We believe that the Commission's rules should recognize that foreign private issuers operate under legal regimes and are subject to legal requirements different from those in the United States, but that are often designed to address the same issues as those targeted by the Act.
As the Commission explicitly recognized in the Proposed Rule, various requirements set forth therein may conflict with legal requirements, corporate governance standards and methods for providing auditor oversight in the home countries of some foreign private issuers. Indeed, the ROC corporate governance regime, like the corporate governance regimes of other foreign jurisdictions, differs significantly from general practices among U.S. corporations. Welcomingly, the proposed exemptions for foreign private issuers implicitly acknowledge that corporate governance practices in other countries are capable of generating accurate and reliable financial reporting and encouraging investor confidence in that reporting, thereby achieving the fundamental objectives of Section 301 of the Act and of the Commission's Proposed Rule. We commend the Commission for seeking to include appropriate exemptions for foreign private issuers where corporate governance regimes differ from those applicable to U.S. corporations but where such systems are designed to provide similar protections. The proposed wording of those exemptions, however, may be too narrow to accommodate the corporate governance regime applicable to companies in Taiwan and other similar jurisdictions. We, therefore, would like to recommend to the Commission some alternative language to the requirements of the Proposed Rule.
II. The Role of Supervisors Under ROC Law
The Taiwan corporate governance structure for listed companies, limited by shares, is composed of shareholders, a board of directors, management and supervisors. This system of corporate governance was historically modeled after those of other countries, including Japan,1 which the exemption available under proposed Rule 10A-3(c)(2) contemplated.2
The ROC Company Law provides that a company limited by shares, which shares are issued to the public, shall have a board of directors, comprised of not less than three directors, and two or more supervisors. As more fully described below, supervisors are required under ROC Company Law to perform supervisory and oversight functions that are independent of the authority of the board of directors of an ROC company.
A company's supervisors are elected by the company's shareholders at a shareholders' meeting and cannot concurrently serve as directors, managers or employees of the company. However, supervisors may attend meetings held by the board of directors as nonvoting delegates who are allowed to express their opinions.
The main responsibilities of supervisors are to supervise the business operations of the company and to examine and review the accounting books, records and other related documents of the company. Supervisors do not have the authority to participate in the management of a company. With respect to the business operations of the company, a supervisor is empowered to (i) investigate the business and financial condition of the company, (ii) examine and review the company's accounting books, records and other related documents and (iii) require the board of directors or management of the company to produce reports thereon. Supervisors are also authorized to examine and review the various statements and records prepared by the board of directors, including business reports and various financial statements, for submission to the annual shareholders' meeting, and shall make a report of their findings and opinions to the same shareholders' meeting. In performing his or her duties, a supervisor may retain, on behalf of the company but without the approval of the board of directors, practicing lawyers and/or certified public accountants to examine or audit the business operations, financial results, accounting books and financial statements of the company.
Like directors, supervisors owe a fiduciary duty under ROC law to the company, and are obligated to exercise the due care of a good administrator in performing their duties to the company. They may each exercise their powers and fulfill their responsibilities as individuals, rather than act in concert. Supervisors also have certain oversight duties with respect to the internal control systems of public companies. For example, a public company is required to provide its supervisors with audit reports on the internal control of the company and any related or follow-up reports for their review. The internal auditing staff of the company is also required to periodically report to the supervisors on the status of internal auditing and to immediately report to, and notify, the supervisors if such staff discovers: (i) any material violation of any internal control or auditing rules, or (ii) any situation where the company would be materially impaired. Therefore, under ROC law, the supervisors are granted broad powers to supervise and oversee the business operations and financial reporting obligations of an ROC company.
III. The Rule 10A-3(c)(2) Exemption From the Audit Committee Requirements Should Be Drafted More Broadly to Enable ROC Companies with Supervisors to Reply on It
Due to the statutory requirement of supervisors and their role within the corporate governance structure of ROC companies, we believe that the ROC supervisors should be deemed "statutory auditors" for purposes of the Proposed Rule.
Proposed Rule 10A-3(c)(2) exempts a U.S.-listed foreign private issuer from the requirements of independence and responsibilities relating to public accounting firms set forth in paragraphs (b)(1) and (b)(2) of the rule if the foreign private issuer meets a set of six conditions. As discussed below, the Commenting Issuers believe that they currently satisfy Conditions (A) through (D) and (F) and can comply with Condition (E), if drafted more broadly in accordance with our proposal.
(A) The securities of the foreign private issuer are also listed or quoted on a securities exchange or inter-dealer quotation system outside the United States.
All of the Commenting Issuers have shares of their common stock listed and traded on the Taiwan Stock Exchange. Some also have debt securities listed and traded on the Luxembourg Stock Exchange or other foreign exchanges.
(B) The foreign private issuer has a board of auditors (or similar body), or has statutory auditors, separate from the board of directors that are established and selected pursuant to home country legal or listing provisions requiring or permitting such a board or similar body.
As described in the previous section, an ROC public company is required to have at least two supervisors who are statutorily mandated and separate from the board of directors, performing supervisory functions over the accounting and business operations of the company. The supervisors are elected by the shareholders of the company pursuant to the ROC Company Law. Their removal and replacement are also governed by the ROC Company Law.
(C) The board or body, or statutory auditors, are not elected by management of such issuer and no executive officer of the foreign private issuer is a member of such board or body, or statutory auditors.
Pursuant to Article 216 of the ROC Company Law, the supervisors must be appointed by the shareholders at a shareholders' meeting. Management of an ROC company is not authorized or permitted by law to elect or appoint supervisors. According to Article 222 of the ROC Company Law, no executive officer of any ROC company can concurrently serve as the company's supervisor.
(D) Home country legal or listing provisions set forth standards for the independence of such board or body, or statutory auditors, from the foreign private issuer or the management of such issuer.
Since the initial enactment of the ROC Company Law in the late 1920's, ROC law has set forth requirements for the independence of the supervisors from the management. For example, the ROC Company Law prohibits management from serving as, or appointing, supervisors. A company's supervisors are also elected by the company's shareholders at a shareholders' meeting and cannot concurrently serve as directors, managers or employees of the company.3
In addition, the Taiwan Stock Exchange listing rules were recently amended to specifically require all ROC companies that applied for listing after February 22, 2002 to have at least two "independent"4 directors and one "independent" supervisor. All Commenting Issuers became listed companies on the Taiwan Stock Exchange prior to such amendment, and are therefore exempt from such independence requirements. As a result, some of the Commenting Issuers have no supervisors who qualify as "independent" under the new requirements of the Taiwan Stock Exchange listing rules. The Taiwan Stock Exchange has indicated, however, that the requirements will be extended to all ROC listed companies in the future, subject to the amendment of relevant laws and regulations.
(E) Such board or body, or statutory auditors, are directly responsible, in accordance with standards prescribed by home country legal or listing provisions, for the oversight of the work of any registered public accounting firm engaged (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services for the issuer.
Even though the supervisors have been granted by law a broad power to supervise the business operations of the company and to examine and review the accounting books, records and other related documents of the company, such legally prescribed supervisory powers and responsibilities are intended to be exercised over the company and not directly over the independent auditor of such company. Under the common business practice of ROC companies, the supervisors typically fulfill their supervisory functions relating to the business operations of the company or the preparation of the company's financial statements through management and the board of directors, rather than exercise direct oversight of the work of the independent auditor, such as resolution of disagreements between management and the auditor regarding financial reporting. However, the supervisors do play an important role in an ROC company's corporate governance and they do conduct independent evaluations of the financial statements of the company, as audited by the independent auditor and approved by the board of directors, for the purpose of their final adoption by a company's shareholders. As the Commission noted in the Proposed Rule, boards of statutory auditors or similar bodies provide independent oversight even though they may not have all of the responsibilities set forth in the Proposed Rule. Therefore, as the current ROC corporate practice does not fall clearly within the requirement set forth in Condition (E) of proposed Rule 10A-3(c)(2)(i), we have proposed a modification to Condition (E) in the next section in order to enable the Commenting Issuers and other ROC companies with supervisors to rely on this exemption.
(F) Such board or body, or statutory auditors, are responsible, to the extent permitted by law, for the appointment and retention of any registered public accounting firm engaged by the issuer. Such responsibility may be vested in such board or body, or statutory auditors, in any manner, including without limitation by law or listing provision or delegation.
Under Articles 20, 29 and 202 of the ROC Company Law, the right to appoint and retain an ROC company's independent auditor is vested exclusively in the company's board of directors. We have been advised by counsel that the board of directors cannot delegate this responsibility to anyone else, including the supervisors. However, as the Commission stated in the proposed Instructions to Section 240.10A-3, this requirement does not conflict with "any requirement in a company's home jurisdiction that prohibits the full board of directors from delegating the responsibility to select the company's auditor. In that case, the audit committee, or body performing similar functions, must be granted advisory and other powers with respect to such matters to the extent permitted by law, including submitting nominations or recommendations to the full board." We have been advised by counsel that ROC law does not prohibit the boards of directors of ROC companies from granting powers to the supervisors to assess the qualifications of the accounting firms and make nominations or recommendations of independent auditors for appointment by the board of directors. Therefore, we intend to comply with this Condition (F) in accordance with Instructions to Section 240.10A-3, if we otherwise qualify under this exemption.
IV. Proposed Revision to Condition (E) of Rule 10A-3(c)(2)(i)
As discussed above, we believe that U.S.-listed ROC companies may not be able to satisfy Condition (E) as currently drafted. As we believe that it is the Commission's intent to ensure that foreign private issuers with statutory auditors or board of auditors similar to our supervisors be able to rely on this exemption in order to avoid establishing an audit committee with duplicative functions, undue cost, inefficiencies and possible conflicts of powers and duties, we propose a revised version of Condition (E) as follows:
(E) Home country legal or listing provisions require that such board or body, or statutory auditors, provide independent evaluation of an issuer's financial statements as audited by a registered public accounting firm, or provide independent oversight of the work of a registered public accounting firm engaged for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services for the issuer.
V. Proposed Revision to Rule 10A-3(c)(2)(i) and (ii)
We would also recommend that the Commission make two additional changes in the first sentence of paragraph (c)(1)(i) and in paragraph (c)(2)(ii) of the proposed Rule 10A-3. The intent of these paragraphs is to clarify that, having met the conditions set forth in paragraph (c)(2)(i) of this exemption, the statutory auditors would: (1) not be subject to the requirements of paragraphs (b)(1) and (b)(2) of proposed Rule 10A-3, which address "Independence" and "Responsibilities relating to registered public accounting firms," respectively; but (2) would still be subject to the requirements set forth in paragraphs (b)(3), (b)(4) and (b)(5) of proposed Rule 10A-3, which address "Complaints," "Authority to engage advisers" and "Funding," respectively.
As paragraph (b)(5)(i) deals with funding for payment of "compensation to any registered public accounting firm engaged for the purpose of rendering or issuing an audit report or related work or performing other audit, review or attest services for the listed issuer," it should not be applicable to statutory auditors who have met the conditions set forth in paragraph (c)(2)(i) as proposed, because they would no longer be responsible for the compensation of such registered public accounting firm pursuant to paragraph (b)(2).
Therefore, we propose that:
We believe that the Commission intended to provide exemptions to foreign private issuers whose home countries' legal systems provide an effective oversight function of certain corporate affairs (in particular, accounting record preparation and accountant supervision), consistent with the Commission's long-standing position that corporate governance standards of foreign private issuers should be respected. We believe the clarifying changes we have suggested are consistent with the intent of Section 301 of the Act to protect the financial interest of investors, as well as the intent of the Commission to exempt companies from certain of the requirements for audit committees where there are other statutory bodies that may generate possible conflicts of powers and duties, but where such bodies operate under legal or listing provisions intended to provide oversight of financial reporting, independent of management.
Therefore, we respectfully ask that the Commission consider promulgating the Proposed Rule with the appropriate clarifications that would take into account the role and responsibilities of supervisors under Taiwan's corporate governance regime.