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".
Click here for the CRTC decision.
Footnotes
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.
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