Form 10-12B
We note that you have filed Form 10 to effect the spin-off transaction of DowDuPont Inc.'s material science business. Staff Legal Bulletin No. 4 states that with regard to a spin-off transaction involving a non-reporting subsidiary, "the parent provides adequate information if, by the date it spins-off the securities...Rest of the question
it gives its shareholders an information statement that describes the spin-off and the subsidiary and that substantially complies with Regulation 14A or Regulation 14C under the Exchange Act; and the subsidiary registers the spun-off securities under the Exchange Act." Please provide us with a detailed legal analysis explaining how this requirement was satisfied.
The Company respectfully acknowledges the Staff’s comment. On behalf of the Company, we advise the Staff that DowDuPont intends to mail the information statement included as Exhibit 99.1 to the Form 10 to its stockholders promptly after the Form 10 is declared effective under the Exchange Act. Please note the letter addressed to DowDuPont stockholders, included as the first page of
Exhibit 99.1, states that the information statement “is being mailed to all DowDuPont stockholders who held shares of DowDuPont common stock as of the record date for the distribution” and encourages DowDuPontRead in the reply ↗Rest of the answer
stockholders to
“carefully read the enclosed information statement.” In addition, in response to the Staff’s comment, the Company has added additional references in the lead-in to the Form 10 and to the letter to DowDuPont stockholders to reflect the fact that the information statement will be delivered to DowDuPont stockholders. The information statement, when so mailed, will substantially comply with the applicable information requirements of Regulation
14A or Regulation 14C under the Exchange Act.
We note you present pro forma operating EBIT and pro forma operating EBITDA on pages 1 and 65 without presenting the most directly comparable GAAP measure. The current presentations give greater prominence to non-GAAP financial measures and appear to be inconsistent with Question 102.10 of the updated Compliance and Disclosure Interpretations related to Non-GAAP Financial Measures issued on May 17, 2016.Rest of the question
To the extent you present non-GAAP financial measures, please also present the most directly comparable GAAP measure, pro forma net income (loss), and provide a cross-reference to related reconciliations.
The Company respectfully acknowledges the Staff’s comment and advises the Staff that in Amendment No. 1 and future amended filings of the Form 10, GAAP measures will be given equal or greater prominence to any non-GAAP financial measures that are presented.
In addition, in response to the Staff’s comment, the disclosure has been revised on pages 6–7, 67 and 92 of Amendment No.Read in the reply ↗Rest of the answer
1 to present pro forma net income (loss) alongside the references to pro forma operating EBIT and/or pro forma operating EBITDA as well as to refer the reader to the section entitled “Supplemental Pro Forma Segment Results” for a reconciliation of non-GAAP measures used in the filing to the most directly comparable GAAP measure.
Please revise to ensure that the information you include in your summary is balanced. To the extent that you cite competitive strengths in your summary, please review each one and revise as necessary to provide balanced information.Rest of the question
By way of example and not limitation, the substantial indebtedness to be incurred in connection with the spin-off and the benefits associated with DowDuPont's size, brand, reputation, and purchasing power that will be lost following the spin-off should be featured prominently
to the Staff’s comment, the disclosures within the “Information Statement
Summary” under the heading “Dow’s Competitive Strengths” and the heading “Risks Associated with Dow’s Business” have been revised to provide a more balanced description of the competitive strengths and the risks associated with Dow’s business and the separation.Read in the reply ↗Rest of the answer
The section titled “Risks Associated with Dow’s Business” has also been moved earlier in the summary and is now immediately following the section titled “Dow’s
Competitive Strengths” in order to provide greater prominence to this discussion and provide balance immediately following the discussion of Dow’s competitive strengths. Please refer to pages 9 through 10 of Amendment No. 1.
Please disclose the specific nature of the costs previously assigned to Dow AgCo and Dow SpecCo that did not meet the definition of discontinued operations in accordance with ASC 205-20 and more fully explain how and why you expect to significantly reduce these costs in the future.
The Company respectfully acknowledges the Staff’s comment, and advises the Staff that the costs previously assigned to Dow AgCo and Dow
SpecCo that did not meet the definition of discontinued operations in accordance with ASC 205-20 primarily consist of leveraged services provided through service centers and other corporate overhead costs that, in each case, will not continue to be utilized by Dow AgCo and Dow SpecCo following the separation and distribution.Read in the reply ↗Rest of the answer
The following functions account for the most significant amount of these costs: (a) Information Technology
(“I/T”), (b) Finance, (c) Manufacturing, (d) Research & Development, (e) Sales & Marketing, (f) Supply Chain, (g) Human Resources, (h) Sourcing & Logistics, (i) Legal, and
(j) Communications/Public Affairs/Government Affairs.
Currently, these functions provide leveraged services that are staffed and organized to provide cost effective and efficient support services for Historical Dow. The costs are pooled and then allocated based on a product conversion ratio. As these costs are an allocation and not clearly identifiable to Dow AgCo or Dow
SpecCo, they did not meet the definition of discontinued operations in accordance with ASC 205-20.
Following the separation and distribution, including the distribution of Dow AgCo and Dow SpecCo as part of the Internal Reorganization and
Business Realignment, these services will no longer be procured from, or provided to, Dow AgCo or Dow SpecCo on a long-term basis. As a result, in connection with the separation and distribution, the Historical Dow management team has been working with each function to identify and track initiatives and to remove or mitigate such costs. It is expected that a significant portion of the costs may be eliminated due to headcount and employment reorganization activities, and reductions following the separation. Additional cost reductions are anticipated to be achieved through reduced I/T costs, lower professional fees and contractor services, corporate facilities and office space reductions, and the right-sizing of other corporate activities. Although Historical Dow management continues to work to identify further actions to remove the remaining costs from its cost structure, Historical Dow management anticipates that currently identified initiatives and mitigation activities will permit the elimination of more than half of these stranded costs.
In addition, in response to the Staff’s comment, the disclosure has been revised on pages 57 and 90 of Amendment No. 1 to provide additional detail regarding the nature of the costs that were not classified as discontinued operations as well as Dow’s expectations for reducing a significant portion of these costs.
In prior correspondence you indicated that historical financial statements of ECP would not be required under Rule 3-05 of Regulation S-X based on the level of ECP's significance. Please tell us how you determined ECP's significance.Rest of the question
To the extent you determined significance without adjusting Dow's historical financial statements for the pending disposals that will be presented as discontinued operations, please explain how and why you believe your determination is appropriate. 3. Adjustments to Pro Forma Statements of Income, page 60
The Company respectfully acknowledges the Staff’s comment.
The Company respectfully advises the Staff that it determined historical financial statements of ECP would not be required under Rule 3-05 of Regulation S-X based on the level of ECP’s significance as of December 31, 2017.
The significance of ECP was determined based on the significant subsidiary definition outlined in Rule
2-10 of Regulation S-X (210.1-02(w)). The Company performed the significance test using three measures: (a) Income from continuing operations before income taxes, (b) Total assets, and (c) Investment.Read in the reply ↗Rest of the answer
The predecessor for the purpose of the Form 10 is Historical Dow. As such, the significance of ECP was first measured against the financial statements of
Historical Dow. Using Historical Dow’s financial information in the denominator, the results of the significance test were as follows:
Income Test:
4.8 percent
Asset Test:
8.0 percent
Investment Test:
7.7 percent
In addition, the Company further evaluated the significance of ECP using the financial statements of
Historical Dow adjusted for the pending disposals that will be presented as discontinued operations. The results of such analysis were as follows:
7.9 percent
10.7 percent
10.3 percent
Because income from continuing operations before income taxes for the year ended December 31, 2017 was more than ten percent lower than the average of the five prior years in both of the above scenarios, the five-year average rule was applied for both sets of tests discussed above.
Based on these results, the ECP probable acquisition is less than 50 percent significant and therefore such financial statements are not required in the Form 10. In addition, the acquisition of ECP is expected to be less than 20 percent significant when consummated and therefore such financial statements would not be required to be disclosed by Dow in a Current Report on Form 8-K following the separation and distribution.
In regard to Adjustment A, please expand your footnote to quantify and clarify the specific costs being eliminated and explain how you determined these costs are directly attributable to the transactions being reflected in the pro forma financial statements.
to the Staff’s comment, the disclosure contained in Adjustment A to Note 3 has been expanded to include the explanation and quantify the associated costs. Please refer to page 61 of Amendment No. 1. Read in the reply ↗
In regard to Adjustment A, please expand your footnote to quantify the costs associated with change in control provisions and severance for certain employee agreements and explain how you determined these costs are directly attributable to the transactions being reflected in the pro forma financial statements.
The Company respectfully acknowledges the Staff’s comment and advises the Staff that the change-in-control related costs all arose in connection with or as a result of the Merger and are therefore directly attributable to the transactions being reflected in the pro forma financial statements.
In addition, in response to the Staff’s comment, Adjustment A of Note 3 has been expanded to include this explanation and to Read in the reply ↗
In regard to Adjustment E, please clarify the specific nature of the other income and expense related to the Dow Divested Assets.
The Company respectfully acknowledges the Staff’s comment and advises the Staff that the other income and expense of $227 million represents the amount of the pre-tax gain on the divestiture of the EAA business. In response to the Staff’s comment, the Company has revised footnote
Adjustment C to Note 3 on page 62 of Amendment No. 1 to clarify the nature of the income. In addition, to provide greater clarity to the presentation of the notes and related adjustments, the references within Note 3 have been reordered. Read in the reply ↗
Due to the acquisition of ECP during 2017, please explain why no pro forma adjustments to record additional depreciation and amortization related to the step-up in basis of property and intangible assets are required for the year ended December 31, 2017.
to the Staff’s comment and to provide greater clarity, the Company has revised the pro forma income statement to move these adjustments from the “Receipt of ECP” column to the “Pro Forma Adj.” column, and has added a corresponding Adjustment E to Note 3. Please refer to page 60 of Amendment
No. 1 for the revised pro forma income statement and to page 62 of Amendment No. 1 for the new disclosure under Adjustment E. Read in the reply ↗
To the extent that you present multiple items in a single pro forma adjustment, please revise your footnotes to the pro forma combined statements of income to reconcile each of the components comprising the adjustment to the adjustment reflected in the pro forma financial statement.
The Company respectfully acknowledges the Staff’s comment. In response to the Staff’s comment, the Company has added a tabular summary at the end of Note 3 to the unaudited pro forma combined financial statements that identifies (for each line of the pro forma income statements) the amount of the adjustment made for each component identified in the “Pro Forma
Adj.” column. The table also reconciles the adjustments to the net amount appearing in the “Pro Forma Adj.” column. Please refer to page 63 of Amendment No. 1. Read in the reply ↗
Please include disclosure regarding the sources and availability of raw materials required by your business. Please see Item 101(c)(iii) of Regulation S-K.
to the
Staff’s comment, the disclosure has been revised on page 80 of Amendment No. 1. Read in the reply ↗
Please tell us why you believe a roll-forward of claims data associated with the breast implant liability is not required.
The Company acknowledges the Staff’s comment and respectfully refers the Staff to the
June 5, 2017, response letter filed by The Dow Chemical Company in response to the Staff’s May 24, 2017 comment letter. Relevant portions of that response letter are summarized below:
Dow Silicones breast implant and other implant product liability claims are administered by an independent claims office, established by the bankruptcy court-approved Joint Plan of Reorganization (the “Plan”), known as the Settlement Facility.Read in the reply ↗Rest of the answer
Pursuant to the Settlement Facility
Agreement which is part of a court-approved Plan, the claim information generated and prepared by the Settlement Facility is not and cannot be disclosed in a public filing because of a confidentiality provision in the Plan. These confidentiality restrictions include data regarding claim filing levels of the type that is suggested Dow disclose. Because of these restrictions, Dow Silicones does not receive individual claim status or settlement data; the Settlement Facility provides Dow Silicones only with aggregate claim and settlement information. With this in mind, the Company respectfully requests that this information not be provided in publicly available materials, including the public financial filings made with the SEC for The Dow Chemical Company and Dow Holdings Inc., as the liability is not material.
Additionally, the claim data reported by the Settlement Facility is not directly correlated to the estimated liability in several respects. A portion of the current accrual is for projected future administrative expenses, which are not directly correlated to claim filings or resolution values. Other portions of the accrual not calculated based on claim filings or resolution values include stale checks, litigation facility payments and investment income. The liability recorded by Dow Silicones is also based primarily on the level of projected future claim filings and resolution values for the remaining three years left in the Plan, including a projected spike in claim filing activity in the last year of the 15-year claim filing period established by the Plan. The final claim filing deadline is June 2019. Providing a roll-forward of historical claim activity without providing information on the basis of the future claim projections and other assumptions would not be meaningful. In addition, the projection of a claim filing surge near the filing deadline makes historical filing activity not predictive of future filing activity. Finally, for implant-related claims under the Plan, there are many sub-categories of claims, with varied and complex processing, documentation and valuation rules. For some of the claimant classes, the Plan establishes complex rules regarding whether claimants who have obtained payments for one type or degree of claim may later seek additional payments.
We note that you intend to have six business units that will be included in three operating segments. Please more fully explain to us how you determined that the six business units are not operating segments or how you determined it is appropriate to aggregate the six business units into three segments.Rest of the question
In this regard, it appears to us that the Coatings & Performance Monomers and Consumer Solutions business units were in separate reportable segments in the Historical Dow Chemical financial statements prior to the merger. To the extent operating segments will be aggregated, please explain how you meet the criteria under ASC 280-10-50-11.
The Company respectfully acknowledges the Staff’s comment. Prior to the Merger, Historical Dow had five operating segments: Agricultural
Sciences, Consumer Solutions, Infrastructure Solutions, Performance Materials & Chemicals and Performance Plastics. Post-Merger, DowDuPont defined the following operating segments, all of which include components of Historical Dow’s former operating segment structure: Agriculture, Performance Materials & Coatings, Industrial Intermediates & Infrastructure, Packaging & Specialty Plastics, Electronics & Imaging, Nutrition &
Biosciences, Transportation &Read in the reply ↗Rest of the answer
Advanced Polymers and Safety & Construction.
After the separation and distribution, Dow will have the following operating segments, which are consistent with the operating segments used today for DowDuPont and which form DowDuPont’s materials science business division: Performance Materials & Coatings, Industrial Intermediates & Infrastructure, and
Packaging & Specialty Plastics. These operating segments reflect the level at which discrete financial information is reviewed by the DowDuPont Chief Operating Decision Maker (the “CODM”) and is expected to be reviewed by the Dow
CODM after the separation and distribution. Currently, on a monthly basis, or more frequently as needed, the DowDuPont CODM meets with the CFO and the Chief Operating Officers (“COO”) of each business division (collectively, the
“operating team”) to provide an update on operating performance against key metrics (segment sales, segment pro forma sales, segment operating EBITDA and segment pro forma operating EBITDA), which is used to evaluate DowDuPont and its operating segments’ performance. These metrics are used and reviewed consistently across all operating segments. A similar format is expected to continue after the separation and distribution at which time Dow’s CODM is expected to be an
Executive Committee which will include Dow’s Chief Executive Officer (“CEO”), Dow’s President & Chief Financial Officer (“CFO”), and Dow’s General Counsel and Corporate Secretary. Jim Fitterling, CEO of
Dow and current COO of the materials science business division, is also expected to continue in his capacity as the segment manager of each of Dow’s three operating segments.
The current segments for DowDuPont, and the proposed segments for Dow, were determined based on the identification of the level at which profit objectives and strategic plans are set and presented to the CODM. This is the level at which operating decisions are made and assessment of performance occurs. In addition, the operating segments represent the level at which the CODM allocates resources, including research and development budgets and capital expenditure authorizations. Segment management has and will continue to have discretion on the allocation of these resources to the business groups that exist below the respective operating segment. This structure is akin to a management approach. The operating segments reflect the way the business activity is managed based on both DowDuPont’s current and Dow’s post-separation and distribution organizational structure. The following speech given by Dan Murdock, Deputy Chief Accountant at the SEC at the AICPA conference on December 8, 2014, was considered when establishing the DowDuPont and Dow post-separation and distribution operating segments.
“ASC 280 employs a management approach to the identification of operating segments, which means it is based on the way that management organizes the segments within the entity for the purpose of making operating decisions and assessing performance. Consequently, segments will often be evident from the structure of an entity’s internal organization. Some of you may interpret this to mean that simply looking at the entity’s organizational chart will be sufficient. While this may be a good data point, let me caution you that the organizational chart is simply a data point – the underlying principle requires consideration of the nature and extent of information that is reported to the CODM by each of the positions you identify on that chart.”
Although the Coatings & Performance Monomers and Consumer Solutions businesses were in different segments of Historical Dow pre-Merger, their alignment was consistent with Historical Dow’s pre-Merger management structure (i.e., each segment had a segment manager that that was accountable for the segment results and reviewed segment performance with the CODM). Post-Merger, the business groups that made up Historical Dow were split up among the three business divisions of DowDuPont—Agriculture, Materials Science and Specialty
Products. The business groups that remained with the materials science business division were aligned to an operating segment, as noted below:
Business
DowDuPont Segment
Approach
Coatings & Performance Monomers
Performance Materials & Coatings
Technology platform (i.e., acrylics, cellulosics, silicones)
Consumer Solutions
Industrial Solutions
Industrial Intermediates & Infrastructure
Ethylene oxide and propylene oxide derivatives
Polyurethanes & CAV
Packaging and Specialty Plastics
Packaging & Specialty Plastics
Ethylene-to-polyethylene chain integration
Hydrocarbons & Energy
With respect to ASC 280-10-50-11, Dow does not consider the above business groups to represent individual operating segments. DowDuPont’s and Dow’s operating segments have been defined based on the criteria outlined in ASC 280-10-50-1 – each operating segment engages in business activities that generate revenues and incur expenses, each operating segment’s results are regularly reviewed by the CODM and used to assess performance and allocate resources, and discrete financial information is available for each operating segment. In addition, a segment manager is responsible for and held accountable for the results of each operating segment. Accordingly, Dow has concluded there was no aggregation of operating segments in the segment structure defined for Dow.
Please reconcile your tabular presentations of Adjusted Significant Items disclosed here with related amounts disclosed and discussed in MD&A.
The Company respectfully acknowledges the Staff’s comment and advises the Staff that the Company does not believe that the information contained within the “Adjusted Significant Items” is material to DowDuPont stockholders nor would the provision of a reconciliation provide material additional information to DowDuPont stockholders. Read in the reply ↗
Please revise your risk factors section to discuss the risks related to your intended exclusive forum clause.
to the Staff’s comment, the disclosure has been revised on page 43 of Amendment
No. 1. Read in the reply ↗
We note that Dow Chemical is now a wholly-owned subsidiary of DowDuPont. Please explain how you determined that no additional costs are required to be allocated to the historical financial statements of Dow Chemical based on the provisions of SAB Topic 1:B.
The Company respectfully acknowledges the Staff’s comment. As disclosed in the Form 10, in connection with the signing of the merger agreement and completion of the Merger, DowDuPont announced its intention to pursue, subject to the receipt of approval of the DowDuPont Board of Directors, the separation of the combined company’s agriculture, materials science and specialty products businesses into three independent, publicly traded companies through one or more tax-efficient transactions (the “Intended Business Separations”).
Because of the Intended Business Separations, DowDuPont,Read in the reply ↗Rest of the answer
Historical Dow and Historical DuPont have structured their activities such that only limited financial activity has been transacted by DowDuPont, and the operating expenses of DowDuPont are shared between Historical Dow and Historical DuPont. In addition, all DowDuPont officers remain employees of either Historical Dow or Historical
DuPont. Any required financial activity by DowDuPont, such as dividend payments, stock buy-backs and immaterial governance expenses (e.g., SEC filing fees) are jointly funded by Historical Dow and
Historical DuPont. As a result of this structure, there are no additional costs to be allocated from DowDuPont to Historical Dow and Historical DuPont, as its subsidiaries, or their respective financial statements.
Refer to Note 13. We note you recorded a goodwill impairment charge for the Coatings & Performance Monomers reporting unit of $1,491 million in the fourth quarter of 2017. Please more fully disclose and discuss the specific facts and circumstances that resulted in the impairment, including the differences between the significant assumptions and estimates you used to determine the estimated fair value of thisRest of the question
reporting unit in your 2017 and 2016 annual reviews. Tell us if you performed any interim impairment tests between your 2016 and 2017 annual impairment tests and explain why or why not.
The Company respectfully acknowledges the Staff’s comment and provides the following response to the
Staff.
2016 Review
During the fourth quarter of 2016, Historical Dow conducted quantitative impairment testing for its Dow Coating Materials and Performance
Monomers reporting units, including sensitivity analyses, as disclosed in Historical Dow’s Annual Report on Form 10-K for the year ended December 31, 2016.Read in the reply ↗Rest of the answer
Following testing in the fourth quarter of 2016 through the completion of the Merger, Historical Dow continued to monitor the performance of its Dow Coating Materials and Performance Monomers reporting units. The monitoring activities included:
•
Comparing actual results against the long-term financial plans for the reporting units; and
Evaluating industry and company-specific circumstances, such as customer consolidation, changes in demand growth in certain end-markets, fluctuations in sales growth in emerging geographies and results of new product launches.
Historical Dow’s interim monitoring activities did not indicate that the fair values of the Dow Coating Materials and Performance
Monomers reporting units had more likely than not been reduced below their respective carrying values.
Reporting Unit Consolidation and Change in Circumstances
Effective with the completion of the Merger on August 31, 2017, Historical Dow combined its Dow
Coating Materials and Performance Monomers reporting units into a single reporting unit—Coatings & Performance Monomers. No impairment indicators were identified as a result of this change. Moreover, Historical Dow’s monitoring activities had not indicated that the fair value of the Coatings & Performance Monomers reporting unit had more likely than not been reduced below its carrying value and therefore an interim impairment test was not performed. Historical Dow did, however, observe continued weakening in certain markets, the appearance of further commoditization of certain products, and the potential for expanded captive use of certain products. Historical Dow’s evaluation of this information resulted in a determination that the “reasonably possible” threshold for disclosing a potential change in estimate in the near term had been met. As a result, Historical Dow disclosed in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 that, if the Coatings & Performance Monomers reporting unit did not achieve its expected financial performance, then it was reasonably possible that a goodwill impairment may result. Historical Dow also disclosed that impairment testing would be completed in the fourth quarter of 2017. This disclosure was reflected in Note 10 to the Consolidated Financial Statements, as well as in the segment results discussion for the Performance Materials & Coatings reportable segment and the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Differences Between 2016 & 2017 Assumptions
Discounted cash flow methodologies were used in the 2016 and 2017 annual impairment tests. As compared with the 2016 annual impairment test performed for Historical Dow’s Coating Materials and Performance Monomers reporting units, the 2017 annual impairment test for the Coatings & Performance Monomers reporting unit reflected a reduction in projected revenue growth rates, primarily driven by modified sales volume and pricing assumptions, revised estimates of future growth rates, and lower profitability assumptions. These changes were an outcome of inconsistent results achieved by the reporting unit in comparison to expected financial performance targets, primarily driven by increasing market commoditization in coatings markets, increased competition and customer consolidation in end markets.
Refer to Note 25. Based on the planned transactions, it is not clear to us how you determined you operate in one segment. It appears to us it would be meaningful to shareholders to provide segment disclosures based on product groups.
Prior to the closing of the Merger, Historical Dow evaluated its post-Merger segment structure in accordance with ASC 280. Please find below an overview of the analysis undertaken by Historical Dow in connection with the determination that Historical Dow operates in one segment as a wholly owned subsidiary of DowDuPont.
The starting point of Historical Dow’s analysis was the anticipated governance structure of DowDuPont, which became the parent company of
Historical Dow upon completion of the Merger.Read in the reply ↗Rest of the answer
Among the governance factors considered by Historical Dow, were the following components of the post-Merger governance structure:
Executive Officers: Andrew N. Liveris, the Chairman and CEO of Historical Dow, became Executive Chairman;
Edward D. Breen, the Chair and CEO of Historical DuPont became DowDuPont’s CEO; and Howard Ungerleider, the CFO of Historical Dow, became DowDuPont’s CFO. Messrs. Liveris and Breen both reported to the DowDuPont board of directors.
Board of Directors: The DowDuPont Board of Directors was to consist of 16 directors, comprised of eight
Historical Dow directors and eight Historical DuPont directors.
Advisory Committees: The DowDuPont board of directors established three Advisory Committees to oversee the combined company’s three business divisions (agriculture; materials science; and specialty products). The Agriculture Advisory Committee was to be comprised of Mr. Breen (Chair), Mr. Liveris and former members of the Historical DuPont
Board of Directors. The Specialty Products Advisory Committee was to be comprised of Mr. Breen (Chair), Mr. Liveris and certain additional directors that were to be jointly selected by Messrs. Breen and Liveris. The Materials Science
Advisory Committee was to be comprised of Mr. Liveris (Chair), Mr. Breen and former members of the Historical Dow Board of Directors.
Historical Dow further considered the anticipated reporting and operational structure of DowDuPont, including:
Business Division Heads: Each of DowDuPont’s three business divisions would be led by a COO who would report to the Advisory Committee for his respective business as well as to the CODM. Prior to the completion of the Intended Business Separations, each COO would legally remain an employee of their pre-Merger employer (i.e., Historical Dow or Historical DuPont); however, they each had control and functional responsibilities over the entirety of their respective business divisions (i.e., both the Historical Dow and Historical DuPont components of the Agriculture, Materials Science and Specialty Products businesses, respectively).
Role of the CODM: The CODM for DowDuPont is defined as a group comprised of the Executive Chairman and the
CEO. They are responsible for assessing the performance of each of DowDuPont’s reportable segments and allocating resources among those segments. The CODM reviews discrete financial information prepared at the segment level. In such role, the
CODM receives and reviews information for each of DowDuPont’s segments.
Each of Historical Dow and Historical DuPont also has a CODM. However, in such role, the respective CODM uses and reviews information solely as it relates to the subsidiary in its entirety. For example, Historical Dow’s post-Merger CODM was determined to be its CEO. In such role, the CEO uses and reviews information as it relates to Historical Dow in its entirety. As noted, the Historical Dow CEO is also a part of the CODM of DowDuPont. In such a role, the CEO receives and reviews information for the DowDuPont segments. However, to the extent a segment includes both
Historical Dow and Historical DuPont subsidiary results, the CODM of Historical Dow would not receive or review results at the subsidiary level (e.g., the Historical Dow CODM will not receive results for Dow AgroSciences’ separate from receiving those results on a combined basis with Historical DuPont’s Agriculture results as part of the Agriculture segment). Moreover, although some segments are fully aligned with Historical Dow (e.g., Performance Materials &
Coatings and Industrial Intermediates & Infrastructure), those segments are not managed at the standalone subsidiary (i.e., Historical Dow or Historical DuPont) level, but rather are managed on a combined basis for DowDuPont.
It is also important to note that the CODM of Historical Dow does not have sole authority for any of the following activities, which primarily relate to the operation of DowDuPont’s three business divisions and for which responsibility resides with the DowDuPont board of directors and/or the applicable Advisory Committee:
○
Hiring / firing of the COOs (i.e., segment management), which is the responsibility of the DowDuPont Board; and
Establishing and monitoring annual strategic plans for DowDuPont’s materials science business division
(which is the responsibility of the DowDuPont Executive Chairman) or Agriculture and Specialty Products business divisions (which are the responsibility of the DowDuPont CEO).
Performance Review and Resource Allocation: Upon completion of the Merger, Historical Dow’s business activities would become components of DowDuPont’s business operations. Moreover, Historical Dow’s business activities, including the assessment of performance and allocation of resources, are reviewed and managed by DowDuPont.
While Historical Dow continues to engage in business activities post-Merger (e.g., business sales and marketing activities, research and development function, manufacturing activities, etc.), the operating results of those activities are not reviewed by the Historical Dow CODM at a level lower than Historical Dow in its entirety. Historical Dow’s operating results, combined with the operating results of the business activities of Historical DuPont, are reviewed by the CODM of DowDuPont in order to make decisions about resources to be allocated to each DowDuPont operating segment and to assess performance of each DowDuPont operating segment. No business results are reviewed for Historical Dow as a standalone subsidiary that are used to make performance and resource decisions for Historical Dow alone.
Following its consideration of the above factors, in particular that there is no Historical
Dow business-specific reporting that would be provided to or reviewed by the Historical Dow CODM, Historical Dow’s management concluded that Historical Dow has one operating segment post-Merger. Moreover, the DowDuPont governance structure was preserved after the retirement of Andrew N. Liveris, with Jeff Fettig, Co-Lead Independent Director for DowDuPont and a former member of the Historical Dow board of directors, being appointed to serve as a non-employee Executive Chairman, effective April 1, 2018. Historical Dow’s analysis and assessment also has not been altered by certain changes in members of the DowDuPont Board and Materials Science
Advisory Committee in connection with the discontinuation of service of certain former Historical Dow directors.
We note your response to prior comment 14; however, please revise your table of Adjusted Significant Items to include footnote references similar to DowDuPont's presentation in Note 24 of its Form 10-K for the fiscal year ended December 31, 2017.Rest of the question
Please also explain differences between amounts presented in the table and other disclosures in the filing, for example, we assume differences related to the gain from the Dow Silicones ownership restructure are due to a portion of the gain being allocated to the discontinued businesses.
to the Staff’s comment, the Company has revised the tables under the section entitled
“Supplemental Pro Forma Segment Results for Dow” to include footnote references similar to DowDuPont’s presentation in Note 24 of its Form 10-K for the fiscal year ended December 31, 2017.
Please refer to pages 92 and 93 of Amendment No.Read in the reply ↗Rest of the answer
2.
In addition, please find below a reconciliation of the “Adjusted Significant
Items” referenced in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations for Historical Dow” to those included in the section entitled “Supplemental Pro Forma Segment
Results for Dow,” including footnote disclosures explaining the differences between the amounts in the respective tables:
In millions
Amounts in
MD&A
Distribution of Dow
AgCo and
Dow
SpecCo
Receipt of
ECP
Pro Forma
Adj
Other
Adjusted
Significant
Items
Table
Nine Months Ended September 30, 2018
Integration and separation costs
$
(711
)
—
(88
(729
Restructuring and asset related charges—net 1
(371
202
(7
(153
Year
Ended December 31, 2017
(786
(98
150
(716
Restructuring, goodwill impairment and asset related charges—net
(3,100
376
(18
(2,742
Ended December 31, 2016
Impact of Dow Silicones ownership restructure 2
2,445
(828
(228
1,389
Litigation related charges, awards and adjustments 3
(1,208
(11
(1,219
(349
Restructuring and asset related charges—net 4
(595
(20
(599
Transaction costs and productivity actions 5
(41
(154
(195
The $371 million shown in “Amounts in MD&A” agrees to the historical Dow financial statements and includes $19 million of charges unrelated to the DowDuPont Cost Synergy Program that were not separately discussed in the MD&A.
We note your response to prior comment 18. In light of the fact that you will reflect the businesses to be divested as discontinued operations in conjunction with the proposed spin-off, it appears segment disclosures would enable shareholders to better evaluate the operations to be retained relative to the operations to be divested. Please tell us if or how you considered this in your assessment.
“Amounts in MD&A” reflects the impact recorded and discussed in the “Sundry Income
(Expense)—Net” section of the MD&A. “Other” reflects expenses associated with a $213 million charge related to the fair value step-up in Dow Silicones inventories recorded in
“Cost of Sales” (excluding $104 million related to the distribution of Dow SpecCo) and $15 million for charges related to the early redemption of debt incurred by Dow Silicones recorded in “Equity in earnings of nonconsolidated affiliates” (excluding $7 million related to the distribution of Dow SpecCo). Read in the reply ↗
We note that the forum selection provision in your bylaws identifies the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation, including any “derivative action.” Please disclose whether this provision applies to actions arising under the Securities Act or Exchange Act.Rest of the question
In that regard, we note that Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. If the provision applies to Securities Act claims, please also revise your registration statement to disclose this information and to state that there is uncertainty as to whether a court would enforce such provision, and to state that stockholders will not be deemed to have waived the company’s compliance with the federal securities laws and the rules and regulations thereunder. If this provision does not apply to actions arising under the Securities Act or Exchange Act, please also ensure that the exclusive forum provision in the governing documents states this clearly
The Company respectfully acknowledges the Staff’s comment. In response to the Staff’s comment, the Company has revised the disclosure on pages 45 and 187 of Amendment No. 4. In addition, the Company is filing as Exhibit 3.2 to Amendment No. 4 a revised form of the Company’s amended and restated bylaws, as will be in effect at the time of the distribution, to clarify the Company’s exclusive forum provision. Read in the reply ↗
Also in this review: company letter, 2019-03-11, closing letter, 2019-03-12