Federal Government Signals Easing of Foreign Ownership Restrictions in Telecom Sector

On March 3, 2010, in the Throne Speech delivered by the Governor General, the Canadian federal government announced its intention to “open Canada’s doors further to venture capital and to foreign investment in key sectors, including the satellite and telecommunications industries.” In its 2010 Federal Budget delivered the following day, the federal government announced that it would introduce legislation to implement this policy initiative in the satellite industry, but made no reference to legislation relating to the rest of the telecom industry. The government’s stated goal is best accomplished by legislative reform of the foreign ownership rules for telecom carriers. Recent controversy surrounding new entrants to the Canadian telecom industry has illustrated the need for further clarification of the government’s policy concerning the holding of a Canadian telecom carrier’s debt and equity by a non-resident of Canada.

Compete to Win

In its June 2008 report, Compete to Win, the Competition Policy Review Panel (the Panel) made a number of recommendations to improve the competitiveness and economic performance of the Canadian economy (see Osler Update, June 26, 2008). Many of the Panel’s recommendations were affirmed in the 2009 Federal Budget by way of amendments to the Competition Act and Investment Canada Act, including by raising the general review threshold for acquisition of control transactions and eliminating the stricter review threshold for businesses engaged in the transportation, financial services and uranium industries (see  Osler Update, March 12, 2009). Among the Panel’s other recommendations was the adoption of a two-step approach to increasing foreign participation in telecom and broadcast industries by allowing foreign companies to establish new telecom businesses in Canada or acquire existing telecom companies with up to a 10% market share, followed by a review of broadcasting and cultural policies. The Panel also recommended liberalizing foreign ownership of air transport businesses and uranium activities, subject to the adoption of new national security legislation (which has since been adopted) and to the securing of market access for Canadians.

The 2010 Federal Budget notes that the removal of existing restrictions on foreign ownership of Canadian satellites is consistent with the Panel’s recommendations.

Globalive

In 2008, Globalive Communications Corp. agreed to pay $442 million for thirty wireless spectrum licenses that were auctioned to new wireless entrants. Industry Canada subsequently agreed to issue the licenses to Globalive after it conducted a Canadian ownership and control (COC) review. However, the Canadian Radio-television and Telecommunications Commission (CRTC) subsequently conducted a separate COC review of Globalive under the Telecommunications Act. On October 29, 2009, the CRTC determined that Globalive did not meet the COC requirements set out in section 16 of the Telecommunications Act. While the CRTC found that Globalive did not contravene the prohibitions against non-Canadians from owning more than 20% of a carrier’s voting shares and 33-1/3 % of a carrier’s holding company’s voting shares, it concluded that Globalive did not meet the requirement that a carrier not be “controlled in fact” by a non-Canadian. While the CRTC objected to several aspects of Globalive’s ownership structure, one of its main objections was that Orascom Telecom Holdings S.A.E., an Egyptian-based wireless communications company and principal investor in Globalive, held 99% of Globalive’s debt.

On December 11, 2009, the federal Cabinet exercised its power under the Telecommunications Act to review and reverse the CRTC’s decision, declaring that Globalive met both the legal and factual tests for Canadian ownership and control. The Cabinet noted that “[t]here are no statutory restrictions on the amount of debt that a non-Canadian entity can provide to a telecommunications common carrier.” Additionally, Cabinet noted that, while certain aspects of debt financing can be a source of influence, Orascom is not able to “control in fact either the strategic or operational decisions of Globalive.” The Cabinet was careful to state that its decision was based on the particular facts of this case and has no precedential value.

Going Forward

It remains to be seen whether Cabinet’s dramatic reversal of the CRTC’s decision in Globalive will affect the CRTC’s future application of the COC test. Commenting on its ongoing review of Public Mobile Inc., another new wireless entrant to the telecom market arising from the 2008 AWS auction, the CRTC stated that it “will apply the existing jurisprudence relating to determinations of control in fact, cognizant of the fact that in varying Telecom Decision CRTC 2009-678, the government stated that the ‘decision to vary is specific to the facts of this case.’”

The federal government has signalled its support for opening up the telecom industry to greater opportunities for foreign ownership by way of promises made in the 2010 Throne Speech as well as regulatory intervention in Globalive. As the 2010 Federal Budget contained a proposal to liberalize only the satellite industry, additional legislation easing the strict restrictions on foreign equity ownership of Canadian telecom carriers is required to fulfill the balance of the federal government’s Throne Speech promises.