COMPAŅIA CERVECERIAS UNIDAS S.A.
(United Breweries Company, Inc.)
COMMENTS ON SECURITIES AND EXCHANGE COMMISSION PROPOSED RULE:
DISCLOSURE REQUIRED BY SECTIONS 404, 406 AND 407
OF THE SARBANES-OXLEY ACT 2002.
The Chilean Corporations Act, as amended effective on December 20, 2000, provides for the creation of a Directors´ Committee, analogous to an Audit Committee in the United States.
There are, however, important differences, some of which impose requirements or procedures diverse to those provided for by local or home law, or might result in a Chilean corporation being unable to comply with the requirements of the Sarbanes-Oxley Act, to wit:
- According to Chilean law, the Directors´ Committee 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.
A Chilean corporation may be publicly held yet have no directors who can qualify as "independent" pursuant to the Sarbanes -Oxley Act (defined as those who have not accepted any consulting, advisory or other compensatory fee other than director´s compensation from the company, and are not an "affiliated" person of the issuer or any subsidiary).
Therefore, an "independent" director, according to Chilean law, could receive compensatory fees other than director´s compensation from the company or be an "affiliated" person of the issuer (except for the office of Director and General Manager in publicly traded companies, and Chairman of the Board and General Manager in closed corporations) or any subsidiary or parent company. 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.
- 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 Shareholder´s 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).
Recently, the NYSE approved a set of proposed corporate governance standards subject to comments by the SEC, including the possibility of granting to foreign issuers exceptions from those standards.
The proposal, which would regulate Audit Committees, represents a departure from existing law and practice, since the new legal provisions and rules will apply to both domestic and foreign issuers, with only particular exemptions.
As discussed above, the new provisions concerning the Audit Committee may not be fully complied with by Chilean corporations since the Sarbanes-Oxley Act standards differ from local or home-country law, rules and regulations. Therefore, we suggest SEC rules to provide exemptions for Chilean foreign private issuers, allowing one or more of the Committee members to be "non-independent" directors if not enough Board members qualify as such, as long as they otherwise meet all requirements established by Chilean law for the Directors´ Committee.
1.- Proposed Disclosure About Financial Experts Serving on a Company´s Audit Committee:
Section 407 requires the SEC to adopt rules (i) requiring a company to disclose whether its Audit Committee includes at least one member who is a financial expert; and (ii) defining the term "financial expert".
(i) We believe investors could benefit from disclosure of the number and names of the financial experts serving on the company´s Audit Committee, as well as the rest of the Board members.
Regarding the inclusion of said information in the proxy and information statement, Chilean law does not expressly contemplate the possibility of incorporating said disclosure in the proxy and information statement sent to shareholders since there is no prior registration period of candidates to the office of director, all nominations being made at the Shareholders´ Meeting. Additionally, the Superintendencia de Valores y Seguros ("SVS", the Chilean counterpart to the SEC), upon being consulted, stated on an informal basis that any such inclusion would probably be in breach of equal access and opportunity, unless all candidates were included, since these nominees would enjoy an unfair advantage over those proposed at the Shareholders´ Meeting.
According to Chilean law, Board members are nominated and appointed at the Shareholders´ Meeting, and the Audit Committee, in its turn, is appointed by the Board from among its members at the first meeting held after the Shareholders´ Meeting which elected a new Board.
Therefore, we suggest including the number and names of the financial experts and disclosure of whether they are "independent" or "non-independent" in Form 20-F.
(ii) Incorporation of "independence" requirement into the definition of "financial expert" could significantly limit or restrict the possibilities of an otherwise highly qualified financial expert joining the Committee, especially taking into consideration the current composition of Chilean Board of Directors as well as shareholding concentration in Chilean corporations.
(iii) We believe the SEC should address the issue of the degree of individual responsibility, obligation or liability under state or federal law of a person designated as a financial expert in order to avoid confusion and clearly state that the mere designation of a financial expert should not impose a higher degree of individual responsibility or obligation on a member of the Audit Committee. The role of the financial expert should be to assist the Audit Committee in overseeing the audit process due to his or her enhanced level of financial expertise. Therefore, said designation should impose a high level of due diligence on the financial expert but the oversight responsibility should rest upon the Committee as a whole.
(iv) Requiring the financial expert to posses all of the attributes listed in the proposed definition by the SEC could significantly limit or restrict the possibilities of a person with vast experience as executive officer and expertise on financial matters (but with no direct experience in preparing or auditing financial statements) from being designated to and serving on the Committee. Experience on reviewing or analyzing such financial statements would certainly suffice. Therefore, the fact that a director has direct experience in preparing or auditing financial statements should not be a determining attribute for the purpose of qualifying a financial expert.
Additionally, it may occur that none of the members of the Board of a Chilean corporation is a "financial expert"; this situation is offset by the fact that the Directors´ Committee is empowered by law to retain the services of, among others, financial advisors.
(v) 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 a financial expert. Disclosure of said information should only be included in the annual report filed on Form 20-F.
(vi) The SEC Rules should provide for a transition period of no less than three months for the Board of Directors of a publicly traded company to appoint a financial expert to serve on the Audit Committee if the financial expert resigns and/or there is no member of the Board that qualifies as such according to the definition provided by the law and the SEC rules.
2.- Proposed Code of Ethics
Section 406 of the Sarbanes-Oxley Act directs the SEC to issue rules requiring a company that is subject to the reporting requirements of Section 13 (a) or 15 (d) of the Exchange Act to disclose whether or not the company has adopted a code of ethics for its senior financial officers that applies to the company´s principal financial officer and controller or principal accounting officer, or persons performing similar functions.
(i) As proposed by the SEC, rules should ensure that the company´s code of ethics extends or applies to all its executive officers and that the company adopts a code of ethics for directors. Therefore, companies should also disclose any waivers of the code for directors or executive officers.
Regarding foreign issuers, the code of ethics should only be filed once as an exhibit to the annual report on Form 20-F, as well as all further modifications, amendments or waivers. We do not believe it necessary to disclose the existence, changes and waivers of the code in Form 6-K or in the company´s proxy and information statement.
Chilean laws and regulations do not contemplate a requirement for each corporation to draw up its own code of ethics. Nevertheless, the Chilean Securities Exchange Act, the Corporations Act, its Ordinance and the SVS Rules impose upon directors and principal officers, and to the same ends, responsibilities, obligations and ethical guidelines and principles to be followed in the discharge of their duties, and determine directors and principal officers civil and criminal liabilities in case of breach of said provisions.
(ii) It would be convenient for investors if companies disclose the date of adoption of their respective code of ethics and the date of its most recent update. Since the company might not have a predetermined frequency of review of the code, and any change or waiver must be disclosed in the Form 20-F, disclosure of additional information regarding frequency of review should not be required by the SEC rules.
3.- Management Internal Controls and Procedures for Financial Reporting
Section 404 of the Sarbanes-Oxley Act directs the SEC to prescribe rules that would require each annual report that a company, other than a registered investment company, files pursuant to Section 13(a) or 15(d) of the Exchange Act to contain an internal control report: (i) stating management´s responsibilities for establishing and maintaining adequate internal control structure and procedures for financial reporting; and (ii) containing an assessment, as of the end of the company´s most recent fiscal year, of the effectiveness of the company´s internal controls and procedures for financial reporting.
(i) The SEC should include in its rules the proposed definition of internal controls and procedure for financial reporting to avoid any misinterpretation and to serve as a general guideline for companies in assessing their compliance with SEC requirements as well as the Sarbanes-Oxley Act (meaning the "controls that pertain to the preparation of financial statements for external purposes that are fairly presented in conformity with generally accepted accounting principles").
(ii) We believe that in the event of adoption of the proposal of the SEC to file both the auditor´s report and attestation on management´s assessment of internal control and procedures for financial reporting in the annual report , the effective date of the said rule should be delayed until attestation engagements standards are issued by the Public Company Accounting Oversight Board (PCAOB). Said attestation and report, if required to be filed, should adopt the form of an exhibit to the Form 20-F.
(iii) Section 404 of the Sarbanes-Oxley Act only requires the SEC to adopt rules that would compel management to annually assess the company´s internal control structure and procedures for financial reporting.
The Chilean Securities Exchange Act, the Corporations Act, its Ordinance and the SVS Rules impose upon the company the obligation to disclose, on a real time basis, a broad scope of information (beyond material or relevant facts) which it deems might have a direct effect on the market value of the company´s stock, and in the event of a breach may levy sanctions which include fines, cancellation of the company´s registration at the SVS and even the dissolution of the corporation. All such information is also reflected in due time in Form 20-F.
Specifically, the SVS rules provide that the outside auditors must report to the Board any weaknesses they may detect in the internal control structure while reviewing financial statements.
November 28, 2002