Opportunities For Non-Canadians In Canadian Broadcasting

Investment
Foreign Ownership Liberalization
Trademark, Brand and Programme Supply Agreements
Eligible Satellite Services Lists
New Media Programming and Distribution Services

Canada considers broadcasting and broadcast distribution (eg, cable, direct-to-home, direct broadcast satellite and Multichannel Multipoint Distribution Service) to be among its key cultural industries. Consequently, Canada has developed a formal ownership and control policy that limits the extent of possible investment in and control exercised by non-Canadians over licensed Canadian broadcasting undertakings.

However, despite the limitations created by the foreign ownership rules, there are a variety of excellent opportunities available to non-Canadians to participate in the Canadian broadcasting market, either independently or pursuant to relationships with Canadian broadcast licensees. This update explains the nature and scope of these opportunities.

Investment

Direct and indirect investments in licensed Canadian broadcasting services by non-Canadians are limited. Notwithstanding such limitations, significant minority shareholder rights and protections can be negotiated, and other business relationships with Canadian broadcast licensees can be entered into at the same time to increase the involvement of non-Canadians in a licensed Canadian service.

The foreign ownership and control rules administered by Canada's broadcasting regulator (the Canadian Radio-television and Telecommunications Commission (CRTC)) which apply to licensed programming and distribution undertakings provide that only Canadians may hold broadcasting licences. Over-the-air television and radio services, specialty and pay television services, video-on-demand services, cable, direct-to-home, direct broadcast satellite and Multichannel Multipoint Distribution Service undertakings, among others, are subject to the foreign ownership and control rules because they are licensed services in Canada.

Certain conditions apply in order for a corporation to be qualified to hold a Canadian broadcasting licence, namely:

• no less than 80% of its voting equity and votes must be held by Canadians;

• no less than 80% of its directors must be Canadian;

• it must be incorporated or continued under the laws of Canada; and

• it must have a Canadian chief executive officer.
  

Where the licensee is a subsidiary, its parent company may have somewhat broader foreign ownership: up to 33% of the parent company's voting shares and votes may be held by non-Canadians. However, where foreign ownership at the parent company level exceeds 20%, a programming committee that is independent of the parent company's board must make all programming decisions of the licensee.

Finally, in order to be licensed, the CRTC must be satisfied that a broadcasting undertaking is not controlled in fact by non-Canadians.

Notwithstanding ownership and control limitations, the terms of joint venture agreements governing non-Canadian investments can be negotiated to include change of law provisions to enable non-Canadians to maximize their interest and influence as laws and policies permit. They can also be drafted to include significant and extensive minority shareholder protections for non-Canadian investors, as well as consultation rights and rights to nominate management candidates, subject to approval of the Canadian-controlled board of directors.

Foreign Ownership Liberalization

Because Canada treats broadcasting as a cultural industry, liberalization of foreign ownership in this sector is likely to occur some time later than liberalization in the telecommunications sector - which is also governed by the CRTC and is subject to essentially the same rules.

Currently, there is a growing recognition that the Canadian telecommunications and broadcast distribution industries require broader access to foreign capital to maintain their success.

Liberalization of the foreign ownership and control rules could occur in several contexts, including developments pursuant to the National Broadband Task Force report and the current round of General Agreement on Trade in Services negotiations.

Liberalization of the rules would be likely to occur first with respect to telecommunications undertakings and broadcast distribution undertakings. Calls for liberalization in both sectors will probably occur as a result of competition between these sectors in Canada for the provision of high-speed internet access as well as other media cross-ownership issues. Liberalization of foreign ownership and control rules with respect to programming undertakings is likely to be undertaken last, again driven by media cross-ownership issues.

There are varying degrees of support for the liberalization of the broadcast foreign ownership and control rules. While some industry players foresee liberalization as benefiting their own expansion plans, others remain concerned that liberalization would expose them to loss of control of their undertakings.

Trademark, Brand and Programme Supply Agreements

While direct and indirect ownership in licensed Canadian broadcasting undertakings is formally limited, non-Canadians can advance their presence in Canada by licensing their trademarks, brands and programming to licensed Canadian broadcasters. Generally, the CRTC does not scrutinize the business contracts of licensees. Nevertheless, to the extent that the agreements are entered into by new licence applicants seeking to launch a 'Canadianized' brand of a popular foreign programming service, or become relevant in the context of a transfer of ownership application by a Canadian licensee, the CRTC can and will review them. As a result, these agreements must be drafted to ensure that control in fact by non-Canadians will not be inferred from them.

If carefully negotiated and drafted, such agreements (as well as consulting agreements between a non-Canadian party and a licensed Canadian broadcaster) can result in good financial returns to non-Canadians as well as the extension of their brands into the Canadian market.

Eligible Satellite Services Lists

Other than certain over-the-air networks that may be captured off-air by Canadian cable companies and distributed to Canadian subscribers, Canadian broadcasting distribution undertakings may only deliver to subscribers non-Canadian services which the CRTC has authorized for carriage by inclusion on the Eligible Satellite Services Lists. The function of these lists is to provide enhanced programming choice to Canadians.

Historically, inclusion on the lists has entitled non-Canadian services to analogue delivery. In the future, it seems that new inclusions will be on a digital-only list due to the lack of analogue channel capacity.

Non-Canadian services will be added to the lists where a Canadian sponsor requests their addition and where it is demonstrated that the service does not compete with any licensed Canadian specialty or pay-television service. In addition, inclusion will only be approved where the non-Canadian service provides a statement that it will have all necessary rights to deliver the service in Canada and an undertaking by the non-Canadian service that it will not take exclusive Canadian licences to programming. Once listed, a non-Canadian service may strike affiliation agreements with licensed Canadian distributors. However, the service may not 'Canadianize' its service for delivery in Canada, nor sell advertising in Canada.

Inclusion on the lists is a means for non-Canadian programming services to participate in and earn revenue from the Canadian broadcasting market, and to advance the international uptake of the brand.

New Media Programming and Distribution Services

Finally, while the CRTC has asserted its jurisdiction over broadcasting which occurs over the Internet, it has exempted such services from licensing and foreign ownership requirements for now. From a purely regulatory perspective this means that a non-Canadian programming service could be streamed over the Internet into Canadian homes. It also means that non-Canadians acquire Canadian new media content and distribution services (subject to the Investment Canada Act, which governs certain acquisitions of controlling interests in Canadian enterprises).

For further information on this topic please contact Lorne H Abugov, Cynthia A Rathwell or Kevin J Goldstein at Osler, Hoskin & Harcourt LLP by telephone (+1 613 235 7234) or by fax (+1 613 235 2867) or by e-mail ([email protected], [email protected] or [email protected]).