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Flash: Decision Reached in Rare Public Hearing Proceeding into the Ownership and Control of a Canadian Telecommunications Carrier

October 30, 2009

Following a rare public proceeding that included a two-day oral hearing to determine whether Globalive Wireless Management Corp. is in compliance with the ownership and control regime set out in the Telecommunications Act, the Canadian Radio-television and Telecommunications Commission has determined that Globalive is controlled in fact by Orascom Telecom, a non-Canadian, has not met the requirements of the ownership and control regime and is therefore not eligible to operate as a telecommunications common carrier and provide wireless services in Canada. This decision is useful in providing guidance for the interpretation and application of the test for control in fact under the Telecommunications Act and Broadcasting Act.

Davies acted as external counsel to the CRTC in this proceeding.

Background

In November 2007, Industry Canada issued the Policy Framework for the Auction for Spectrum Licences for Advanced Wireless Services (AWS), setting aside 40 MHz of AWS spectrum for new entrants in an effort to bring more wireless competition to Canada. At that time, the three integrated national network operators, Bell Canada, Rogers Communications Inc. and TELUS Communications Company, accounted for 94% of the national wireless market.

Globalive Wireless Management Corp. ("Globalive") bid $442,099,000 for 30 AWS spectrum licences in the auction which began on May 27, 2008 and ended on July 21, 2008. Globalive was provisionally awarded the 30 spectrum licences by Industry Canada subject to compliance with the eligibility criteria in section 10(2) of the Radiocommunication Regulations which prescribe the eligibility of persons to whom spectrum licences may be issued. On March 13, 2009, after reviewing the ownership and control documentation submitted by Globalive shortly after July 21, 2008, and after the documents went through various changes as part of the process, Industry Canada determined that Globalive satisfied the ownership and control criteria in the Radiocommunication Regulations.

However, in order to be able to operate, radiocommunication carriers must also meet the ownership and control requirements of section 16 of the Telecommunications Act (the "Act"). On December 22, 2008, prior to the Industry Canada decision, the Canadian Radio-television and Telecommunications Commission (the "CRTC"), the regulatory agency with the mandate to enforce the Act, sent a letter to Globalive, as well as to all of the other successful AWS spectrum licence bidders not already operating as common carriers, indicating that it was prepared to review Globalive's ownership prior to its commencement of operations in order to ensure that it met the Act's Canadian ownership and control requirements. The Act does not authorize the CRTC to permit a Canadian carrier to operate as a telecommunications common carrier if it is not Canadian owned and controlled. Furthermore, the Act does not provide the CRTC with authority to issue a conditional approval on the basis that the carrier undertakes to bring itself into compliance with the ownership and control requirements in the future. Globalive submitted its documentation to the CRTC for review on April 3, 2009.

The CRTC also initiated a public consultation on whether it is appropriate in some instances to conduct Canadian ownership and control reviews under the Act on a public as opposed to a confidential basis.1 In Telecom Regulatory Policy decision 2009-428, issued July 20, 2009, the CRTC established a flexible, four-type review framework for ownership and control reviews under the Act. The CRTC determined that the public interest would be served by conducting an oral, public, multi-party proceeding in exceptional circumstances where the review involves complex or novel governance structures such that its determination would hold precedential value to industry players and the general public, where the evidentiary record would be improved by third-party submissions, and where the appearance of parties would more easily allow the CRTC to complete and test the evidentiary record.

The Issues

In the Globalive matter (Telecom Notice of Consultation, CRTC 2009-429), the CRTC initiated a type 4 review of Globalive's ownership and control, involving a public, multi-party process with an oral hearing scheduled to take place on September 23-24, 2009. Incumbent telecom carriers Bell Canada, Rogers and TELUS were granted permission to participate in the oral hearing.

The ownership and control rules in the Act require a determination of both legal control (not less than 80% of the corporation's directors must be Canadians and Canadians, including "qualified corporations",2 must beneficially own, directly or indirectly, in the aggregate and otherwise than by way of security only, not less than 80% of the corporation's voting shares) and a determination of de facto control (the corporation must not otherwise be controlled by persons that are not Canadians). A similar ownership and control regime applies to broadcast undertakings under the Broadcasting Act.

Globalive's structure was specifically designed to comply with the legal requirements of the Act. 100% of Globalive's issued and outstanding voting shares are held by Globalive Investment Holdings Corp., a qualified corporation. In addition, 80% of the members of Globalive's board of directors are Canadians.

The real issue under consideration by the CRTC during the public proceeding was whether Globalive is "controlled in fact" by non-Canadians. Globalive is beneficially owned by AAL Telecom Holdings Incorporated ("AAL"), controlled by Canadian entrepreneur Anthony Lacavera (34.25%); Orascom Telecom Holding S.A.E., controlled by Weather Investments S.p.A., a holding company controlled by Egyptian billionaire Naguib Sawiris (65.08%); and Mojo Investments Corp., controlled by Michael O'Connor (0.67%).

The CRTC Hearing

During the public hearing that took place in Ottawa on September 23, 24 and October 1, the CRTC expressed concerns with respect to Globalive's corporate governance arrangements, shareholder liquidity and voting rights, commercial arrangements with Orascom (the non-Canadian shareholder), financing arrangements and the relative economic participation of the shareholders. In response to these concerns, Globalive made several changes to its corporate structure and governance and financing arrangements. These changes, which are reflected in further revised documents filed by Globalive on September 29 and October 2, include:

  • removing one of two holding companies from the corporate structure;
  • giving AAL appointed directors better representation on the board of Globalive and the holding company;
  • appointing Mr. Lacavera chairman of Globalive and the holding company;
  • revising Orascom's liquidity rights including its drag-along right to compel AAL to sell its stake in the venture in the event that Orascom decided to dispose of its holdings;
  • removing AAL's right to withdraw from the venture within the first year and extract the non-wireless business;
  • revising upward the financial thresholds connected to Orascom's ability to exercise a veto over certain corporate decisions;
  • including an ordinary course of business exception to some of Orascom's veto rights;
  • removing covenants on the loans from Orascom, valued at approximately $508 million, and extending the term of the loans by 36 months to August 2014; and
  • giving Globalive a unilateral right to terminate the agreement under which Orascom provides technical services and expertise to Globalive.

The Decision

Despite the numerous changes made to Globalive's corporate structure and governance and financing arrangements, the CRTC determined that Globalive did not go far enough in addressing the concerns with respect to the control in fact of Globalive by Orascom. Orascom, a non-Canadian, holds 65% of Globalive's equity, is the principal source of technical expertise, provides Globalive with access to an established wireless trademark and provides the vast majority of Globalive's debt financing. The CRTC considered that, "[w]hile disparate points of influence may not individually result in control, when combined they can translate into the ability to control in fact". Given the combination of factors in this case, the CRTC found that "it cannot conclude that Globalive is not controlled in fact by a non-Canadian".

It is clear from the decision that the CRTC was particularly concerned with the significant concentration of debt, representing the vast majority of Globalive's enterprise value, which is held by the same non-Canadian entity that holds 65% of Globalive's equity. The concerns in this regard are consistent with the submissions made by stakeholders from the outset.

The CRTC notes in its decision that "control in fact is only established where influence is dominant or determining. In particular, the issue is whether there is an ongoing power or ability, whether exercised or not, to determine the strategic decision-making activities of a corporation or to dominate the ability to manage and run its day-to-day operations". The CRTC found that "Orascom has the ongoing ability to determine Globalive's strategic, decision-making activities" and concluded that "Globalive is controlled in fact by Orascom, a non-Canadian".

Significance

The Globalive decision provides guidance for all players in the Canadian telecom and broadcasting sectors who are seeking foreign partners. Indeed, some stakeholders had cautioned the CRTC on the precedential effect of this decision in these sectors. Practically speaking, there is little difference in how the provisions of the Telecommunications Act and the Broadcasting Act with respect to control in fact are to be interpreted. A determination of control in fact involves careful consideration of the facts of each case and past decisions are not binding or determinative. However, as the CRTC notes in this case, past decisions "are useful in providing guidance for the interpretation and application of the test for control in fact".

View the CRTC decision.


1Telecom Notice of Consultation, CRTC 2009-303.

2A qualified corporation is defined to mean a corporation in which those of its shareholders who are Canadians beneficially own, and control, not less than 66 2/3% of the issued and outstanding voting shares and which is not otherwise controlled by non-Canadians.

If you have any questions regarding the foregoing, please contact George Addy (416.863.5588), Elisa Kearney (416.367.7450) or Jim Dinning (416.367.7462) in our Toronto office.

Davies Ward Phillips & Vineberg LLP, with over 240 lawyers, practises nationally and internationally from offices in Toronto, Montréal and New York and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.

The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.

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