On September 30, 2016, the FCC adopted an order designed to liberalize and streamline the foreign ownership review process for broadcast licensees (the “Broadcast Liberalization Order”). Section 310(b) of the Communications Act caps at 25 percent the amount of indirect foreign investment permissible in a U.S. broadcast, common carrier, or aeronautical fixed or en route radio licensee without obtaining FCC approval. Prior to 2013, the long-standing presumption among FCC practitioners was that the FCC simply would not allow indirect foreign ownership of a U.S. broadcast licensee in excess of the 25% benchmark in the Communications Act, even though the Act expressly contemplated such investments so long as they were blessed by the FCC. The Commission issued an Order in 2013 clarifying that the 25% foreign investment mark served only as a trigger requiring the FCC to review applications on a case-by-case basis, not an automatic bar to such investment. Foreign investment in broadcast licensees above 25% required prior express consent, based on an evaluation of public interest and national security considerations. Also in 2013, the FCC streamlined the process for reviewing foreign ownership amounts in excess of 25% for common carrier and aeronautical radio licensees. The recent Broadcast Liberalization Order largely extended these same rules and procedures to broadcast licensees, with certain exceptions and modifications.
However, one of the most challenging issues presented by foreign investment in a U.S. broadcast licensee remains unanswered even after issuance of the Broadcast Liberalization Order – namely, national security review by Team Telecom and the Committee on Foreign Investment in the U.S. (CFIUS). The FCC will still refer to Team Telecom and CFIUS the review of national security concerns presented by foreign investment in U.S. broadcast licensees. Unlike the FCC, it is highly unlikely Team Telecom or CFIUS will release rules or guidance designed to clarify their national security review process (which essentially operates in a black box environment). Still, the broadcast industry must celebrate victories whenever they come, and this action by the FCC appears to be a long-awaited “win” for broadcasters.
The Broadcast Liberalization Order adopted several specific proposals as follows:
- A broadcast licensee may file a petition for declaratory ruling under Section 310(b)(4) of the Commission’s rules to seek approval for up to and including 100% aggregate foreign ownership of its controlling U.S. parent entity;
- A broadcast licensee filing a petition seeking approval for a proposed controlling (but less than 100%) interest may also request advanced approval to increase its equity and/or voting interests up to 100% at some future time without filing a new petition;
- Similarly, a broadcast licensee can seek advance approval in its Section 310(b)(4) petition to allow a foreign investor named in the petition to increase its non-controlling equity and/or voting interests at some future time up to and including 49.99%;
- Broadcast licensees must use the broadcast attribution and insulation criteria in Part 73 of the Commission’s rules to determine U.S. and foreign interests that must be disclosed in a petition; and
- Specific approval is required only for foreign individuals or entities with a greater than 5% ownership interest (or 10% for certain institutional investors).
To ensure their compliance with the foreign ownership rules, U.S. public companies may rely on ownership information that is “known or reasonably should be known” by the company. Information that public companies are presumed to know includes:
- The identity of shareholders that report their beneficial ownership or identify as holding a pecuniary interest in the company’s equity securities (as required by Section 13(d) of the Securities Exchange Act of 1934);
- The identity of shareholders that report the acquisition of beneficial ownership of more than 5 percent of a class of equity securities to the SEC (as required by Exchange Act Rule 13d-1);
- Any ownership information actually known by the company;
- Ownership information for shares registered with the company;
- Ownership information for shares held by officers and directors;
- Citizenship information for at least some of the company’s non-publicly-traded securities – e.g., securities held by pre-IPO company founders; and
Citizenship information for shares whose ownership has been identified through shareholder litigation, financing transactions, or proxy voting.
Publicly traded broadcasters are therefore obligated to check the beneficial ownership reports (Schedules 13D and 13G, filed with the SEC) along with any “widely available sources of information about institutional ownership,” specifically the information derived from SEC Form 13F reports (which is generally available in the 10Q and 10K reports of the company issuing the security). They are also encouraged to check ownership information available from Internet-based news sources and from paid data services that compile information about ownership of publicly traded companies.
This new standard focuses on foreign interest holders that are likely to have the ability to influence company policies and operations. It eliminates the need for publicly-traded broadcasters to try to ascertain the identity and citizenship of individual stockholders and other “de minimis interest holders” (which can be a burdensome, expensive process that often entails conducting random samplings of their shares and applying citizenship presumptions to calculate the likely foreign ownership).
The Order also sets out guidelines for how to determine the citizenship of an interest holder. The citizenship of non-identifiable interest holders can be gleaned from the same types of publicly-available information used to determine ownership of shares; however, the citizenship of identifiable interest holders, if unknown and unavailable through publicly-available sources, has to be ascertained through direct inquiry. Identifiable interests are classified as “foreign” where the beneficial owner (or one of the beneficial owners, if there are multiple) is a foreign-organized entity, or where there is a foreign-owned entity in the beneficial owner’s vertical chain of control, unless the licensee can establish a “reasonable basis” for concluding that the ultimate beneficiaries of the shares are U.S. citizens or U.S.-organized entities controlled by U.S. citizens.
These rule changes should enable broadcasters to better compete for foreign capital in a highly competitive media market.