In the latest chapter in the ongoing saga of the eligibility of foreign-backed telecommunications carriers to operate in Canada, the Federal Court of Canada has quashed a decision of the federal cabinet that found that Globalive Wireless Management Corp. (Globalive) met Canadian ownership requirements under the Telecommunications Act.

The Court’s decision in the case of Public Mobile v. Attorney General of Canada et al threatens the ability of a new wireless entrant to operate in Canada, effectively lowers the amount of foreign investment that is acceptable under Canadian ownership rules for telecom carriers and offers new guidance respecting the scope of the federal cabinet to overturn the decision of an administrative tribunal.

The cabinet decision in question had itself overturned a CRTC decision that found that Globalive, which provides wireless service in Canada under the Wind Mobile brand, was effectively controlled by a non-Canadian (Orascom Telecom Holding (Canada) Limited (Orascom) -- an Egyptian-controlled company) and was therefore ineligible to operate in Canada. That CRTC decision was at odds with the government’s issuance to Globalive of a spectrum licence, since holders of such licences must meet the same Canadian ownership requirements.

The Telecommunications Act provides that telecommunications common carriers must meet Canadian ownership requirements to be eligible to operate in Canada. In order to be so eligible, at least 80% of the members of a corporation’s board must be Canadian, at least 80% of its voting shares must be held by Canadians and the corporation may not be otherwise controlled by non-Canadians. Each of the CRTC’s decision and the Federal Court decision focused on Globalive’s compliance with the latter criterion.

The CRTC had found that a number of factors combined to indicate that Globalive was controlled in fact by a non-Canadian. The Commission noted that Orascom held 2/3 of Globalive’s overall equity, was the principle source of its technical expertise, owned and controlled the Wind trademark under which Globalive offered service and, significantly, held 99% of Globalive’s debt. The federal cabinet disagreed with the CRTC, finding that these factors did not support the conclusion that the company was controlled by a non-Canadian, and suggesting that the Canadian ownership and control requirements “should be interpreted in a way that ensures that access to foreign capital, technology and experience is encouraged.”

The federal cabinet (formally, the Governor in Council) is empowered by s. 12 of the Telecommunications Act to vary, rescind or refer back for reconsideration any CRTC decisions under that Act, although the section provides no guidance on the factors to be taken into account by the cabinet in making such a decision.

In quashing the cabinet decision, the Court found that the cabinet had misdirected itself in law in two important respects. First, it found that the cabinet misdirected itself in suggesting that the ownership requirements should be interpreted in a way that ensures access to foreign capital, noting that there is no policy objective in the Telecommunications Act that encourages foreign investment. In this regard, the Court referenced earlier case law requiring a decision-maker such as the cabinet not only to take into consideration the relevant statutory scheme, but also to exclude irrelevant criteria. Next, the court found that the cabinet went outside the legal parameters of the Act in stating that its decision applied only to Globalive, since the interpretation must also necessarily apply to others who may find themselves in similar circumstances.

This decision is important to telecommunications providers and potential investors as it effectively lowers the degree of foreign investment and control that will meet Canadian ownership requirements. The “control in fact” test is often at issue in acquisitions of Canadian broadcasters and telecom carriers that include investments by foreign companies.

The decision is also important in that it confirms that the federal cabinet’s power to vary CRTC decisions is strictly constrained by the overall scheme of the Telecommunications Act and, in particular, by the telecommunications policy objectives found therein. The federal cabinet may not vary CRTC decisions based on new factors or objectives that are not set out in the Act. This raises some uncertainty with respect to the cabinet’s ability to vary other CRTC decisions, such as its recently announced intention to overturn the CRTC’s decision on usage-based billing.

The court stayed its decision for a period of forty-five days, to allow Globalive and any other relevant person to pursue an appeal to the Federal Court of Appeal. The decision will almost certainly be appealed; however, the quashing of the CRTC decision will also increase the pressure on the government to amend the Telecommunications Act so as to liberalize foreign ownership restrictions for telecommunications carriers, an initiative that the government indicated last year it was considering.