Canada imposes Canadian ownership and control requirements on Canadian broadcasting and telecommunications companies. These rules are complex, but, where a holding company structure is used, there are two key requirements: (1) Canadians must hold at least two-thirds of the voting shares in the holding company that will acquire the communications company, and (2) Canadians must exercise control-in-fact over the holding company and the communications company.
Although foreign investors have found ways to make sizeable investments in Canadian telecommunications companies, in the broadcasting sector foreign investors have been much less bold. They appreciated that Canada's strong commitment to ensuring Canadian control of the media meant that the likelihood of obtaining regulatory approval was far from assured. In the past six months, however, the Canadian Radio-television and Telecommunications Commission (CRTC) issued two important decisions approving the transfer of effective control of prominent Canadian broadcasting companies Alliance Atlantis and BCE. In each case, foreign investors acquired sizeable stakes despite the Canadian ownership and control rules.
The first decision occurred in December 2007. Following a lengthy review, the CRTC issued Broadcasting Decision CRTC 2007-429 approving the transfer of effective control of Alliance Atlantis Broadcasting Inc. and its 13 broadcasting properties to an acquisition company jointly owned by a subsidiary of CanWest Global Communications and investment funds controlled by Goldman Sachs. CanWest owns the Global television network in Canada and other media properties. (McCarthy Tétrault lawyers represented Goldman Sachs in the acquisition and throughout the CRTC proceedings.)
Although CanWest held voting control in the acquisition company, most of the funding for the acquisition was provided by Goldman Sachs. When the deal was first announced, Goldman Sachs intended to hold 83% of the total equity, and CanWest to hold 17%. However, by the time of closing, CanWest had substantially increased its equity stake to hold 35%, while Goldman Sachs-controlled investment funds held the remaining 65% -- the highest level ever approved by the CRTC.
The CanWest decision was the first major decision by the CRTC under recently appointed Chairman Konrad von Finckenstein involving a significant foreign investment in a Canadian broadcaster. As such, the proceeding elicited great interest as observers attempted to ascertain the CRTC's approach to foreign investment under its new leadership.
Although foreign private equity has been involved in other acquisitions, notably the 2004 Hicks, Muse, Tate & Furst Incorporated investment in Persona Communications, such transactions have been rare. Most acquisitions of Canadian broadcast undertakings have tended to involve other industry players. Where foreign investors have been involved, the transactions typically involved start-ups and the foreign equity investment was typically less than 50% of the total. Thus the Alliance Atlantis proceeding allowed the CRTC to consider the attributes of a private equity-funded acquisition, notably that a majority of the equity would be in the hands of a foreign financial house, with a large increase in debt, and the impact of those changes on the broadcaster and its responsibilities under the Broadcasting Act and related regulations.
The CRTC conducted a comprehensive review before ultimately approving the acquisition. The review focused on a number of key control-related factors, arising mainly under the shareholders agreement between the investors. As a precondition to approval, the CRTC ordered a number of changes to enhance Canadian control including strengthening Canadian participation required for a proper quorum at meetings of directors and increasing the dollar thresholds for the exercise of veto-rights by Goldman Sachs board representatives. Although the 65% foreign equity stake was a subject of considerable comment, in the end the CRTC did not raise any significant concerns. It was satisfied that CanWest still retained sufficient control over the Alliance Atlantis broadcasting business to meet the Canadian control-in-fact requirements.
The second decision concerned the takeover of BCE Inc., the country's largest communications company. BCE controls a number of telecommunications and broadcasting businesses. Although it is best known for Bell Canada and its other telecommunications holdings, the CRTC jurisdiction to review the acquisition stemmed from its broadcasting holdings, including direct-to-home satellite operator Bell ExpressVu.
On March 27, 2008, the CRTC released Broadcasting Decision CRTC 2008-69, and gave conditional approval to the transfer of effective control of BCE Inc. to a group of private equity investors, both Canadian and non-Canadian. The transaction, valued at $51.7 billion, was the largest Canadian corporate acquisition to date, and one of the largest-ever private equity deals globally.
The investor group comprised the Ontario Teachers Pension Plan Board (Teachers'), Providence Equity Partners International VI LP, Madison Dearborn Capital Partners V LP, Merrill Lynch Global Partners, Inc., and some smaller investors.
On completion of the transaction, BCE Holdco would be privately owned, with share capital consisting of Class A voting, non-participating shares (Class A shares), Class B non-voting, participating shares (Class B shares), and Class C non-voting, participating shares (Class C shares). The Class B and Class C shares would be economically equivalent and would together represent the total equity value of BCE Holdco.
A Canadian-controlled holding company (Morcague Holdings Corp.) would hold 66.7% of the Class A shares of BCE Holdco, with the balance of 33.3% held by non-Canadians, namely Providence, Madison and Merrill Lynch. The Class A shares would be subject to a voting agreement between Morcague and Teachers' Private Capital, a division of Teachers'.
The majority of the Class B shares and all of the Class C shares of BCE Holdco would be held by Canadians, with Teachers' holding the largest equity stake in the company at 51.6%. Non-Canadians would hold approximately 42% of the equity of BCE Holdco, with Providence (17.3%), Madison (9.0%) and Merrill Lynch (6.1%) being the largest non-Canadian shareholders.
In assessing control-in-fact, the CRTC looked carefully at the influence that could be exercised by Teachers' and Providence given their relative level of specialization and expertise. The CRTC observed that Teachers' does not have particular expertise in the communications field. By contrast, Providence specializes in investments in communications companies. In this respect, the BCE transaction was the reverse of the transaction in Alliance Atlantis transaction, where the Canadian investor possessed the greater industry expertise.
Also in contrast to the Alliance Atlantis case, the CRTC said nothing about the relative degree of equity held by the investors. With two-thirds of the voting shares and more than half of the overall equity in the hands of Canadian investors, and with Teachers' as the largest single equity holder, the CRTC was clearly satisfied that equity ownership by non-Canadians did not raise any particular control-in-fact concerns.
In approving the transaction, the CRTC focused on a number of governance issues arising primarily in the shareholders agreement. The CRTC required the parties to strengthen Teachers' role in making or approving board appointments, to add other provisions to ensure that Canadian directors had control over board decisions, and to increase the dollar thresholds for the exercise by Providence of veto rights over certain corporate actions.
With these two decisions, Alliance Atlantis and BCE, the CRTC has demonstrated a willingness to accept sizable foreign investment in Canadian communications companies. That said, the decisions show that the CRTC will continue to require that Canadians exercise control-in-fact, and will require parties to make changes to governance and minority investor protection provisions to ensure that the control-in-fact requirement is met. Investors looking at sizeable investments in Canadian communications companies can take comfort that there is indeed a path through the complexities of the Canadian ownership and control rules, although there may be a few turns and roundabouts between its beginning and end.
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