As we reported back in November, the Federal Communications Commission (FCC or Commission) issued a Declaratory Ruling announcing that it will consider proposals for foreign investment in the parent company of a broadcast licensee in excess of section 310(b)(4)’s 25% benchmark on a case-by-case basis. This declaratory ruling potentially opens the door for media companies that are interested in exceeding the before-now de facto 25% cap on indirect foreign ownership. The ruling also may open the door for additional, and much-needed, sources of capital for the broadcast industry.
So what should media companies or interested investors expect?
We think that one good place to look is to the over 150 declaratory rulings issued by the FCC allowing telecommunications carriers to exceed the 25% indirect foreign ownership benchmark. This analogy will not be perfect. The Commission has emphasized the distinction between broadcast and common carrier facilities, and has stated that it will review broadcast investments over the 25% benchmark on a case-by-case basis and will not immediately consider comprehensive rules and policies like those that exist in the telecommunications space. And there are other considerations specific to the broadcasting service that we believe may factor into Commission judgments on proposals to exceed the 25% benchmark in radio and television licensees. Nevertheless, the telecommunications analogy is a good start. The body of rulings in the telecommunications area may serve as some guidance for media companies interested in seeking approval under section 310(b)(4) for indirect foreign ownership over 25% and may inform prospective media investors of some of the factors the FCC considers when ruling in the telecommunications space.
Factors That the FCC Has Considered in Telecommunications Petitions
The Commission has considered a number of factors in its common carrier rulings, including:
- WTO Membership: The Commission has approved indirect ownership from numerous WTO-member countries, including Anguilla, Antigua and Barbuda, Australia, Belgium, Bermuda , the British Virgin Islands, Canada, the Cayman Islands, Denmark, Fiji, France, Germany, Guernsey, Ireland, Italy, Japan, Jersey, Luxembourg, Mauritius, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Russia, Singapore, Spain, St. Kitts and Nevis, Switzerland, and the United Kingdom.
- Non-WTO Membership: The Commission has approved limited indirect ownership from non-WTO member countries as well, including the Cook Islands, the Bahamas, and the Republic of the Seychelles. However, the recent rules changes for common carrier petitions eliminate the distinction between WTO and non-WTO countries, so this factor may be less important in the broadcast area as well.
- Level of Indirect Foreign Ownership: The Commission has considered the level of indirect foreign ownership that will exist after a proposed transaction and has approved indirect foreign ownership at numerous levels, including 34.07%, 38.53%, 40.18%, 49.99%, 50%, 63.81%, 69.5%, 70%, 75.39%, 82.66%, and even 100%.
- Entity Organization/Type: The Commission has considered the type of entity applying for indirect foreign ownership. It has granted approval for a variety of entities, including corporations, general partnerships, government-owned banks, holding companies, limited liability companies, limited partnerships, proprietary limited companies, public limited companies, publicly-traded companies, and venture capital funds.
- Mechanism Employed to Determine Interests in Widely-Held, Publicly-Traded Companies: The Commission has also considered the method used to determine indirect foreign ownership and has approved publicly-traded companies that determine ownership interests by using citizenship surveys and by tabulating shareholder addresses. Information regarding the addresses of custodian banks or brokers, however, is not sufficient. This will likely be an even more important factor in the broadcast context. In 2011, the FCC reiterated, albeit in a footnote, that relying on mailing addresses is not a substitute for random surveys in the broadcast context. The FCC’s justification for refusing to recognize this substitution was simple: there are different policy concerns in the broadcast service.
- Active or Passive Investment: Lastly, the Commission has considered whether investment will be active or passive. For example, in a 2011 authorization, the FCC favorably noted that an American citizen would control and manage the day-to-day operations, and that foreign individuals would not be involved in management, hold officer positions, or be on the Board of Directors.
Our Predictions for Broadcast-Specific Considerations
In its November 2013 declaratory ruling, the Commission declined to create a standard review process or streamlined procedural mechanisms like those in the common carrier area. In doing so, the FCC echoed its characterization of broadcast as unique: “we do not believe that the historical statutory concern for foreign influence over broadcast stations has disappeared.” Broadcast stations, explained the FCC, are licensed to serve the needs and interests of U.S. communities and to offer a range of critical information services to the public; in short, broadcast stations are distinct from common carrier services. This suggests that in considering proposals to exceed the 25% indirect foreign ownership benchmark in broadcast licensees, the Commission may well look at the above-listed factors in a different manner and could consider additional factors that are uniquely applicable to broadcasting.
- Level of Foreign Ownership: The Commission could consider the proposed level of indirect foreign ownership in broadcast cases more carefully than in telecommunications cases. We believe that, at least initially, proposals that modestly exceed the 25% benchmark are likely to have a greater chance of success than those which propose a controlling or greater level of foreign ownership.
- National Identity of Foreign Investment: Given broadcast stations’ nature as content producers and originators (as opposed to telecommunications companies, which largely act as conduits for the messages of others), we would expect the FCC to closely scrutinize the nationalities of proposed foreign investors above the 25% benchmark. National security, law enforcement and other considerations could well be of more importance in broadcast cases.
- Active or Passive Investment: Again, this factor may be of greater importance in broadcast cases due to the nature of the medium. The success of a proposal involving a high level of foreign investment may rest in large part on whether the foreign owners are investing for purely economic reasons or, conversely, whether they intend to play a role in management, program selection, or other day-to-day operations of the broadcast enterprise.
- Programming Proposals: In those cases where foreign owners propose to take a significant stake and be involved in day-to-day station operation, we could foresee the Commission ruling in part on the basis of the programming proposed to be aired by the stations under the proposed ownership. Given the November 2013 declaratory ruling’s admonition that broadcast stations are licensed to serve the needs of local U.S. communities, we would anticipate that a would-be significant foreign owner of a broadcast station be prepared to show that the station will produce and air a substantial amount of locally-geared programming (as opposed to, for example, delivering large blocks of non-U.S. network programming).
- Economic Hardship: We also anticipate that the FCC may consider the need for a proposed foreign investment over the 25% benchmark. In proposing significant foreign investment, an applicant may enhance its chances of success by showing an acute need for the investment (for example, to rescue a failing or failed station) and the absence of domestic financing.
- TV Spectrum Auction: In his statement accompanying the November 2013 declaratory ruling, FCC Chairman Wheeler made it a point to note that the ruling “could unleash new capital” to help television stations invest in meeting the objectives of the projected 2015 auction of television spectrum—in particular, to invest in channel sharing arrangements or migration from the UHF to the VHF band. This suggests that proposals for foreign ownership above the 25% benchmark will have an enhanced chance of success if they can demonstrate the foreign investment will assist one or more television stations in relinquishing their spectrum to auction.
Indirect foreign ownership of broadcast holding companies above the 25% benchmark remains uncharted territory, and the above represents only our preliminary thoughts on the factors that might prove important. The success of any particular proposal will depend heavily on the facts and circumstances involved, and parties should venture into this area only after careful planning and with the assistance of communications counsel. We’d be happy to advise broadcast companies and investors who may be considering taking advantage of the FCC’s November declaratory ruling.