The News Corporation Limited
December 13, 2002
By email: email@example.com
Mr. Jonathan G. Katz
Re: Request for Comments on Proposed Rules Concerning Disclosure Required by Sections 404, 406, and 407 of the Sarbanes-Oxley Act of 2002- File No. S7-40-02.
Dear Mr. Katz:
I am writing to express our views regarding the Commission's proposal to implement Section 407 of the Sarbanes-Oxley Act, relating to financial experts (SEC Release 33-8138), as well as the rulemaking required to be undertaken by the Commission pursuant to Section 301 of the Sarbanes-Oxley Act of 2002 with respect to the composition of public company audit committees. Section 301 of the Sarbanes-Oxley Act added Section 10A(m)(3) to the Securities Exchange Act of 1934 (the "Exchange Act") to require that each member of an audit committee of the issuer shall be a member of the board of directors, and shall otherwise be independent. In order to be considered to be independent, a member of an audit committee of an issuer may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee, among other things, be an affiliated person of the issuer or any subsidiary thereof.
Although the Sarbanes-Oxley Act does not define the term "affiliated person," the Commission has indirectly addressed this issue in its proposal to implement Section 407 of the Sarbanes-Oxley Act. In its proposal, the Commission would define independence, in the context of an operating company, by reference to the definition set forth in Section 10A(m)(3) of the Exchange Act (i.e., the Sarbanes-Oxley statutory criteria.) In the context of registered investment companies, however, the Commission refers to the definition of "independent person" in Section 2(a)(19) of the Investment Company Act of 1940, which in turn incorporates the very broad definition of "affiliated person" in Section 2(a)(3) of the Investment Company Act.
We believe it is critical, both with respect to the definition of independence in the context of financial expert pursuant to Section 407 of the Sarbanes-Oxley Act, and in the context of members of an audit committee pursuant to Section 301 of the Sarbanes-Oxley Act, that the Commission adopt a definition of "affiliated person" for an operating company that does not disqualify from service persons who are officers, directors or other representatives of entities (a) that beneficially own equity securities of an issuer that in the aggregate represent less than 50% of the voting power with respect to the election of directors of the issuer at annual meetings of shareholders, (b) that do not through voting power, contract or otherwise (subject to limitations by applicable stock exchange listing rules), have the ability to designate more than 50% of the members of the board of directors of the issuer, and (c) whose officers, directors or other representatives on the board of directors of the issuer do not in fact constitute more than 50% of the members of the board of directors of the issuer (the provisions of (a), (b) and (c) being hereinafter referred to as "Non-Disqualifying Characteristics").
Without this definition in the final rules, we believe that the audit committees may not be as qualified to address fully and properly the matters that audit committees will be responsible for overseeing pursuant to the Sarbanes-Oxley Act and the current rulemaking by the Commission and the securities exchanges. Rather than being compromised, we believe that representatives of significant minority shareholders of public companies are often the most likely to be truly independent and to represent the interests of all shareholders of the public company in order to assure correct and complete financial reporting and compliance by the public company with the highest ethical standards of conduct.
The intensive knowledge of the business and operations of the public company by representatives of significant minority shareholders (and the large investment in the public company by such shareholders) often results in the representatives of the minority shareholders having a significantly more profound and detailed understanding of the financial condition of the public company than any person outside the company itself. Generally, such understanding of the financial condition of a company will derive from the financial expertise and substantial resources that the significant minority shareholder devotes to its ownership interest in the public company, and the ongoing and often intensive dialogue that representatives of the public company may have with those representatives of the minority shareholder who sit on its board.
In addition, representatives of a significant minority shareholder on the audit committee of a public company may be in a better position, because of the influence the minority shareholder can exert, to insure that the decisions of the audit committee are properly implemented by the public company. This influence is often enhanced in the case of a public company whose financial statements are required to be included in the Exchange Act reports of a significant minority shareholder pursuant to Rule 3-09 of Regulation S-X, because the minority shareholder may be subject to substantial liability of its own should it be determined that the financial statements of the investee public company were deficient or misleading.
All of the above reasons suggest that representatives of significant minority shareholders should not solely by reason of share-ownership be deemed to be an "affiliate" and deemed not independent for the purposes of audit committee membership and financial expert status of operating companies. We believe that any definition of independence that would exclude representatives of significant minority shareholders from participating as members of an audit committee in instances in which Non-Disqualifying Characteristics are present would disenfranchise the minority shareholders (and even perhaps serve as a disincentive for an entity to invest or increase its investment), without any commensurate benefit being derived by any other shareholder.
We would be pleased to address this matter further with the members of the Staff, at the convenience of the Staff.
cc: Alan L. Beller, Senior Counselor to the Commission