Dow Chemical 2012 Annual Report Download - page 137

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catalyst technologies; and K-Dow would assume certain related liabilities. PIC would receive a 50 percent equity interest in K-
Dow in exchange for the payment by PIC of the initial purchase price, estimated to be $7.5 billion. The purchase price was
subject to certain post-closing adjustments.
Failure to Close
On December 31, 2008, the Company received a written notice from PIC with respect to the JVFA advising the Company of
PIC's position that certain conditions to closing were not satisfied and, therefore, PIC was not obligated to close the transaction.
On January 2, 2009, PIC refused to close the K-Dow transaction in accordance with the JVFA. The Company disagreed with
the characterizations and conclusions expressed by PIC in the written notice and the Company informed PIC that it breached
the JVFA. On January 6, 2009, the Company announced that it would seek to fully enforce its rights under the terms of the
JVFA and various related agreements.
Arbitration
The Company's claims against PIC were subject to an agreement between the parties to arbitrate under the Rules of Arbitration
of the International Court of Arbitration of the International Chamber of Commerce (“ICC”). On February 18, 2009, the
Company initiated arbitration proceedings against PIC alleging that PIC breached the JVFA by failing to close the transaction
on January 2, 2009, and as a result, Dow suffered substantial damages.
On May 24, 2012, the ICC released to the parties a unanimous Partial Award in favor of the Company on both liability and
damages. A three-member arbitration Tribunal found that PIC breached the JVFA by not closing K-Dow on January 2, 2009,
and awarded the Company $2.16 billion in damages, not including pre- and post-award interest and arbitration costs.
On June 15, 2012, PIC filed an application for remand under the English Arbitration Act of 1996 (“Remand Application”)
in the High Court of Justice in London (“High Court”). In its Remand Application, PIC did not challenge the Tribunal's finding
of liability but it requested that the High Court remand the case back to the Tribunal for further consideration of the Company's
claim for consequential damages. On October 11, 2012, the High Court ruled in favor of the Company and dismissed PIC's
Remand Application; and on October 19, 2012, the High Court denied PIC's request for leave to appeal its ruling, bringing an
end to PIC's Remand Application.
The ICC is expected to issue a Final Award covering the Company's substantial claim for pre- and post-award interest and
arbitration costs in early 2013.
The Company expects to record a gain related to this matter when the uncertainty regarding the timing of collection and the
amount to be realized has been resolved.
NOTE 15 – TRANSFERS OF FINANCIAL ASSETS
Sale of Trade Accounts Receivable in North America and Europe
The Company sells trade accounts receivable of select North America entities and qualifying trade accounts receivable of select
European entities on a revolving basis to certain multi-seller commercial paper conduit entities ("conduits"). The Company
maintains servicing responsibilities and the related costs are insignificant. The proceeds received are comprised of cash and
interests in specified assets of the conduits (the receivables sold by the Company) that entitle the Company to the residual cash
flows of such specified assets in the conduits after the commercial paper has been repaid. Neither the conduits nor the investors
in those entities have recourse to other assets of the Company in the event of nonpayment by the debtors.
During the year ended December 31, 2012, the Company recognized a loss of $17 million on the sale of these receivables
($24 million loss for the year ended December 31, 2011, and $26 million loss for the year ended December 31, 2010), which is
included in “Interest expense and amortization of debt discount” in the consolidated statements of income. The Company's
interests in the conduits are carried at fair value and included in “Accounts and notes receivable – Other” in the consolidated
balance sheets. Fair value of the interests is determined by calculating the expected amount of cash to be received and is based
on unobservable inputs (a Level 3 measurement). The key input in the valuation is the percentage of anticipated credit losses in
the portfolio of receivables sold that have not yet been collected. Given the short-term nature of the underlying receivables,
discount rates and prepayments are not factors in determining the fair value of the interests.