In the latest chapter of the attempt by Internet streaming music provider Pandora to acquire a South Dakota radio station, the Federal Communications Commission (FCC) has asked for comments on the petition for declaratory ruling that Pandora filed in late June. The petition, as we explained previously, is the first one filed by an entity seeking to exceed the 25% benchmark for foreign investment in broadcast licensee parent companies imposed by Section 310(b)(4) of the Communications Act. The FCC had previously applied a de facto rule prohibiting such investment, but in November of last year clarified that it would consider, on a case-by-case basis, proposals to exceed the 25% benchmark in the broadcast context.
As the FCC Public Notice requesting comment explains, Pandora’s petition states that although it has reason to believe its level of foreign ownership is less than 25%, it cannot demonstrate compliance in accordance with the guidelines set out by the FCC’s Audio Division in connection with Pandora’s application. Those guidelines are derived from a 1974 internal FCC staff memo and require applicants seeking to demonstrate that they have foreign ownership of less than 25% to engage in a complex, multi-step analysis. Among other things, an applicant with widely held shares must first ascertain the citizenship of as many of its shareholders as possible, and then conduct a statistically valid survey to determine the citizenship of the remaining shareholders. If a shareholder does not respond to the survey or provides information that does not allow the applicant to determine with certainty that the shareholder is domestic, then the applicant must assume that the shareholder is foreign.
As Pandora explained in its petition, due to changes in the rules of the Securities and Exchange Commission (SEC) since the FCC guidelines were developed forty years ago, it is now difficult (if not impossible) for many publicly traded companies to demonstrate compliance with the foreign ownership benchmark under the standards the FCC has set forth. In Pandora’s case, for example, SEC shareholder privacy regulations precluded it from ascertaining the identity—and therefore the citizenship—of the beneficial owners of more than half of its outstanding shares. This is because many of Pandora’s shares are held in “street name,” which means that a broker or bank holds legal title to the shares on behalf of the beneficial owner. SEC regulations also permit shareholders to designate themselves as “objecting beneficial owners” or “OBOs.” SEC rules effectively prevent companies from determining the identities of or communicating directly with these OBOs, and Pandora, like many other publicly traded companies, has many shareholders that fall into this category.
Pandora has therefore sought a declaratory ruling requesting that the FCC allow foreign investors to hold up to a 49.99% voting interest and 100% equity interest in the company. In the alternative, Pandora requests that the FCC, consistent with its practice in the common carrier context, permit up to 100% foreign voting and equity control without prior Commission approval, provided that no foreign investor that is not named in the petition increases its equity or voting interest in Pandora to 5% (or 10% for certain institutional investors). Pandora proposes to monitor its foreign voting levels using SEC schedules 13D and 13G, which must be filed whenever a shareholder acquires a 5% or greater voting share in Pandora’s outstanding stock. Pandora explains that such reports will enable it to ensure that foreign entities do not acquire voting control over the company without Commission approval.
So what started out as a seemingly straightforward application by Pandora to enter the terrestrial radio business has now turned into the first test of the FCC’s case-by-case approach to foreign investment in the broadcast context. The FCC’s request for comment provides an opportunity for parties to weigh in regarding how the agency should conduct its case-by-case analysis of requests to exceed the 25% foreign ownership benchmark in the broadcast context, particularly in situations involving publicly-traded companies that face hurdles similar to the ones that Pandora identifies in its petition. Comments are due by August 28, 2014, and reply comments are due by September 29, 2014.