Telekom Austria AG
Schwarzenbergplatz 3
1010 Wien
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington D.C. 20549
February 17, 2003
Re: File No.S7-02-03 - Standards Relating to Listed Company Audit Committees
Dear Mr. Katz:
Telekom Austria AG is the largest company in Austria whose shares are registered with the SEC and listed on the New York Stock Exchange. Our initial public offering was the largest public offering in the history of the Vienna Stock Exchange and we are the largest capitalized company on the Vienna Stock Exchange. Prior to being listed we only had two shareholders, the Austrian stateholding company Ősterreichische Industrieholding Aktiengesellschaft ("ŐIAG") which is wholly owned by the Republic of Austria owned 74.9% and a subsidiary of Telecom Italia owned the rest of our shares. We were listed on the stock exchange in November of 2000. ŐIAG currently holds 47.2% of our shares.
We are writing to comment on the proposed transition period for foreign private issuers and to comment on the proposed exemptions from the independence requirement for audit committee members (i) for a representative or designee of a foreign government or foreign governmental entity, and (ii) where the member is the beneficial owner of more than 50% of the voting common equity of the foreign private issuer.
The rule should allow a longer transition period for foreign private issuers.
The Proposed Rule requires that the new audit committee listing standards be operative by the national securities exchanges and national securities associations no later than the first anniversary of adoption of the Commission's final rules, which is expected to be in April, 2003. Therefore, issuers, including foreign private issuers such as ourselves, would need to put in place a compliant audit committee by April 2004.
We believe that one year is an inadequate transition period for foreign private issuers such as us, for whom the audit committee requirements represent a significant departure from current practices. Our supervisory board currently does not have an audit committee and no current member of our Supervisory Board meets the Commission's definition of "audit committee financial expert". To be in compliance by April 2004, we need to establish significant changes to our corporate governance structure by May of this year since our annual shareholders meeting is scheduled for June of this year. The only alternative would be to hold a time-consuming, expensive and potentially disruptive special shareholders meetings prior to April 2004 or to advance the date of our normally scheduled annual meeting in 2004. The latter would be virtually impossible, given our December 31 financial year end, in view of the need to provide printed annual reports including audited US GAAP financial statements to our shareholders a month in advance of the annual meeting.
Not only are the audit committee requirements a significant departure from the current practice in Austria, but the pool of people available in Austria that meet the requirements under the Proposed Rule and may therefore serve on audit committees of issuers with U.S. public shareholders is relatively small. It may not be feasible for us to quickly locate and attract new sets of Supervisory Board members who are both independent under the Proposed Rule and sufficiently knowledgeable about U.S. accounting and financial reporting issues and about our industry to fulfill the role envisaged by the Proposed Rule for the audit committee.
We believe that the interests of our U.S. investors are better served if we are given sufficient time to choose qualified Supervisory Board members who fulfill the new independence rules and can sufficiently perform the additional duties imposed by the Proposed Rule and the Commission's recently adopted Final Rule: Strengthening the Commission's Requirements Regarding Auditor Independence (File No. S7-49-02), rather than being compelled to put in place a new team of Supervisory Board members who may be "independent" under the Proposed Rule but who may not otherwise be the most qualified. We are particularly concerned about the small pool of candidates in Austria which could be considered "audit committee financial experts" under the Commission's recently adopted Final Rule: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002 (File No. S7-40-02). We understand that the rule requires us only to disclose whether we have such an expert or not, but we are concerned that disclosure, that we do not have one, could be negatively perceived by the financial markets.
In light of these difficulties, we urge the Commission to allow a two-year transition period for foreign private issuers. While such a period is still short and, we believe, sufficiently responsive to the issues addressed by the Sarbanes-Oxley Act, the additional time would enable us to comply with the new rules in a meaningful and productive manner, to the benefit of U.S. investors, without undue disruption to our regular corporate calendar.
The government shareholder exception to the audit committee member independence requirement should be modified to clarify that all forms of government holdings in foreign private issuers are covered.
We very much support the concept of granting an exemption from the independence requirement of audit committee members for a "representative or designee of a foreign government or foreign governmental entity that is an affiliate of the foreign private issuer." We believe that it would be helpful if the Commission could clarify that the exemption applies not only to foreign governments which hold their stakes directly, but that entities administering a state holding fall also under this exemption regardless of their legal form.
In Austria, state holdings are held either directly or indirectly through ŐIAG. The Republic of Austria exercises its ownership rights in ŐIAG through the Federal Minister of Finance. The supervisory board of ŐIAG consists of 15 members, ten of which are managers or business experts whose successors are nominated by the supervisory board members themselves to assure their independence and five of which are elected by the Austrian Chamber of Labor from the workers' council of major subsidiaries of ŐIAG and appointed by the shareholders' meeting.
In Austria, ŐIAG's mandate with respect to the state holdings and its form of organization have changed over the years pursuant to changes in legislation and further changes are possible in the future. ŐIAG was established as a public law entity in 1946 and transformed into a stock corporation in 1970. In the late 1970's ŐIAG was also used as instrument to preserve full employment of state owned companies. Since the mid 1990's the government has mandated ŐIAG to create favorable conditions for the privatization of state holdings.
The situation in Austria is by no means unique. Generally in Europe state holdings in companies are held and administered in many different forms and has sometimes changed significantly over time. In addition to direct state holdings, governments may hold their interests in enterprises through entities with a special corporate form or in form of stock corporations, development banks and other public and private sector institutions. A few examples from three other continental European jurisdictions are as follows:
1. In Italy, the Treasury holds shares of Italian companies both directly, such as its stake in Alitalia, and indirectly through holding companies in which the Treasury holds a 100 percent interest and for which the Treasury generally appoints the boards of directors, such as its stake in the Italian State Television (RAI TV), held through Rai Holding S.p.A. For many years the states holdings in Italy were held and administered by the Istituto Per La Ricostruzione Industriale (IRI).
2. In Germany, in addition to certain direct holdings, the federal government holds shares companies indirectly through the Kreditanstalt fűr Wiederaufbau ("KfW"), a state development bank.1
Currently KfW holds interests in Deutsche Telekom Aktiengesellschaft and Deutsche Post AG.
3. In Spain state holdings are held principally through state owned "entidades publicas" or public entities, such as the Sociedad Estatal de Participaciones Industriales ("SEPI"). The Ministry of Finance generally selects the board of directors of such public entities and its approval is required prior to the undertaking of significant transactions in the shares of companies in which the state holds an interest.
Thus, sometimes state holdings are held directly by a branch of the government, sometimes by an institution organized under public law and sometimes by an entity organized as a stock corporation. In each case the mechanisms for and degree of state control will vary depending on the local legislation and the form or organization.
We do not believe that either the legal form of the entity which holds the governmental shareholdings or the precise mechanism used for state control should be controlling and that the term "governmental entity" therefore should be understood to include any kind of company, entity or other organization which is entrusted with the administration and representation of the state's holdings in a foreign private issuer. We attach as Annex A a proposed definition to the term "foreign governmental entity".
The controlling shareholder exception to the audit committee member independence requirement should be modified to conform more closely to Austrian law.
We also very much support the concept of an exemption from the independence requirement of audit committee members for one shareholder or a representative of a shareholder or group that controls the foreign private issuer, so long as this representative has only non-voting observer status on the audit committee and is not an executive officer of the issuer. The Proposed Rule explains that "...controlling shareholders have traditionally played a more prominent role in corporate governance [than in the U.S.]. In jurisdictions providing for audit committees, representation of controlling shareholders on these committees is common."
However, we believe that using as the measure of control the ownership of 50% of the outstanding voting securities of a foreign private issuer may inadvertently narrow the scope of the intended exemption, in that it fails to take into account an important difference between the corporate law systems and corporate governance practices in the United States, Austria and in the rest of Europe. Because of these differences, a shareholder can clearly be, and is considered, a controlling shareholder in Austria and in many other European jurisdictions at ownership levels below 50% of outstanding shares.
Generally speaking, in the United States, beneficial ownership of 50% of outstanding shares of a corporation is of fundamental importance in a number of corporate control situations. State corporation laws generally specify voting majorities for important issues based on shares outstanding. For example, the General Delaware Corporation Law requires a majority of the outstanding voting shares for every amendment to the certificate of incorporation, the adoption of a merger agreement and for shareholders resolution taken by written consent. Likewise under New York's Business Corporation Law, an amendment to the certificate of incorporation requires a majority of the shares outstanding, the adoption of a merger agreement requires a two-thirds majority of the shares outstanding and an action taken by written consent requires a simple majority of the outstanding voting securities.
In contrast under Austrian corporate law like in many other European jurisdictions, majorities are based on shares represented at the shareholders meeting. Resolutions at the shareholders meeting are passed with a simple majority of the votes cast, unless the law requires a qualified majority, but even then that qualified majority is based on shares present and voting, rather than on the shares outstanding.2
A number of factors contribute to this difference in approach to shareholder majorities between the United States and Europe.
- Traditionally, most of the shares issued in Europe have been bearer shares, whereas in the United States state corporation laws favor shares issued in registered form.
- Under state corporate law systems in the United States, corporations can use their shareholders' list to communicate with their shareholders and to determine who is entitled to vote. In Europe, issuers give notice by publication and by sending materials to financial institutions. Due to the absence of shareholders lists in the case of bearer shares, shareholders usually have to register to attend a shareholders meeting at least three days prior to the meeting and deposit with the issuer or a financial institution the certificates evidencing the shares they wish to vote directly.
- Like the U.S. practice, the European systems also grant shareholders the right to assign to another the power to vote their shares. However, rules differ as to the conditions under which financial institutions must forward proxy materials to shareholders and in some jurisdictions it has not been possible to grant proxies to management or employees of the issuer, so that the number of outstanding shares actually voted is usually much smaller.
For these reasons the attendance at shareholders meetings is usually much lower than in the US. Many national takeover laws have reflected this reality in the percentages required for a shareholder to have deemed control of a corporation.3
We do not advocate setting such a lower percentage as the threshold for control. However, considering the European approach to basing majorities for decisions by shareholders meetings on the number of shares represented at the meeting rather than on the numbers of shares outstanding and the other factors cited above, we suggest the SEC retain the 50% test as a bright line rule, but apply it to the number of shares represented at the last shareholders meeting of the company in question and propose that Rule 10 3(b)(1)(iv)(D) be changed as attached in Annex B. We believe that this change will more closely reflect the corporate law systems in Austria and is thus more appropriate to carry out the Commission's intention of allowing foreign private issuers to continue allow the current practice of the representation of controlling shareholders on their audit committees.
Finally we would like to express our appreciation that the Commission has been very amendable to the concerns of foreign private issuers so far. For us the exemption for employee representatives from the independence requirement of audit committees and the possibility for the shareholders meeting to continue to higher and fire the auditors upon a recommendation of the audit committee were crucial to our ability to remain listed in the United States, since we otherwise would have been violating imperative provisions of Austrian corporate law.
If you have any questions please contact Marielouise Gregory (tel.: ++43 590 59114201).
Best regards,
Heinz Sundt
Annex A:
We suggest that the definition of a "governmental entity" of the listing standards relating to audit committees pursuant to Rule 10A-3(b)(1)(iv)(E) of the Exchange Act or an explanatory vote with respect thereto should read as follows:
"For purposes of the determination by the board of directors under this Rule 10A-3(b)(1)(iv)(E), "governmental entity" means any entity (however organized, whether by specific legislation, under home country corporate law, public law or otherwise) which holds the state's ownership interest in a company ("state holding") and (i) is entrusted with the privatization of the state holding in such companies; or (ii) administers a state holding in any such company pursuant to a mandate under special legislation, incorporating document or contract."
Annex B
We suggest that the exemption from the independence requirement in Rule 10A-3(b)(1)(iv)(D) should be modified as follows (modifications in bold):
"(1) The member is a beneficial owner of more than 50% of the voting common equity of the foreign private issuer represented at the last shareholders meeting of the issuer or is a representative or designee of such an owner or a group of owners that collectively are the beneficial owner of more than 50% of the voting common equity of the foreign private issuer represented at the last shareholders meeting of the issuer;
(2) The member has only observer status on, and is not a voting member or the chair of, the audit committee; and
(3) The member is a not an executive officer of the foreign private issuer."
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| 1 | KfW is owned 80% by the Federal Republic of Germany and 20% by German federal states. KfW is a public law institution serving public policy objectives of the German Federal Government organized under the Law Concerning the Kreditanstalt fűr Wiederaufbau (the "KfW Law").
| | 2 | Under the Austrian Stock Corporation Act certain matters such as the amendment of the business purpose, increase of the share capital, mergers, spin-offs and the transfer of all of the company's assets require a majority of 75% of the votes represented at the shareholders meeting rather than a majority based on the number of shares outstanding. Likewise under the German Stock Corporation Act and German Restructuring Act, the amendment of the business purpose, increase of the share capital, mergers, spin-offs and the transfer of all of the company's assets requires a majority of 75% of the votes represented at the shareholders meeting.
In France, under the French Commercial Code any modification of the articles of a stock corporation and the adoption of a merger agreement requires a two-thirds majority vote of the shareholders assembled at a special shareholders meeting.
In Italy, under the Italian Civil Code, any modification of the articles of a stock corporation of a listed company and the adoption of a merger agreement by a listed company require a two-third majority of the shareholders assembled at a special shareholder meeting.
In the United Kingdom, the Companies Act 1985 requires certain matters, such as amendment to the articles of the corporation and the reduction of the corporations to be adopted by a special resolution in a shareholders meeting by a 75% majority of the votes present at a general shareholders meeting.
In Spain, under the Spanish Corporate Law Statute, the resolutions adopted at a special shareholders meeting related to the amendment of articles, the approval of a merger agreement and the issuing of securities require two thirds of the votes, measured as against the votes present and cast at the meeting.
| | 3 | The German takeover regulation, the Act on Acquisition of Securities and Takeovers adopted in 2002 defined "control" as the holding of at least 30% of the voting rights. This presumption of control at a 30 or 33-1/3% is common to many European takeover statutes which require a shareholder who passes this threshold to make a "mandatory offer" to all other shareholders. See, for example the London City Code on Takeovers and Mergers (30%), French Tender Offer Rules (33-1/3%), Austria's Takeover Law (30%) and Spanish Takeover Law (25%).
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