By John Quale, Brian Weimer, and John Beahn

Inmarsat and the ORBIT Act. The International Maritime Satellite Organization (Inmarsat) was established in 1976 as an intergovernmental organization (IGO) for the development of a global maritime satellite system. Ownership interests in Inmarsat were held by each of the signatories to the Inmarsat treaty (typically the post, telephone, and telegraph ministries of the signatory countries). Inmarsat was transformed into a stock corporation in 1999 with the signatories becoming equity shareholders.

Responding to concerns that Inmarsat’s relationships with its signatory countries gave it an unfair competitive advantage, Congress passed the Open-Market Reorganization for the Betterment of International Telecommunications Act (ORBIT) Act in March 2000. The ORBIT Act requires Inmarsat to privatize (which it had already done by the time the ORBIT Act became law) and to implement several pro-competitive structural mechanisms as a condition to lifting certain limitations on its operations in the U.S. market. The ORBIT Act also grants the FCC authority to determine, based on statutory criteria, whether Inmarsat has fully complied with its ORBIT Act obligations.

Central to these criteria is the requirement that Inmarsat conduct an initial public offering (IPO). The ORBIT Act also requires Inmarsat to list these securities on a "major stock exchange with transparent and effective securities regulation." The purpose of the IPO requirement is two-fold: (i) to substantially dilute the aggregate equity ownership of Inmarsat’s signatory countries; and (ii) to subject Inmarsat to the regulatory oversight and disclosure obligations that come with publicly traded securities. The FCC concluded in 2001 that Inmarsat had satisfied all the requirements of the ORBIT Act except the IPO. Once Inmarsat satisfies all the requirements of the ORBIT Act, it can provide additional services in the U.S. market.

Congress has delayed the deadline for Inmarsat’s IPO (originally set for October 2000) several times. The deadline is currently set for December 31, 2004.

APAX/Permira Acquisition. On December 17, 2003, two European-based private equity firms, Apax Partners and Permira Advisers, acquired a combined 52.3 percent of Inmarsat from the existing shareholders of the company. Certain members of Inmarsat management also received a 4.75% ownership interest, resulting in 57% of Inmarsat being held by new, non-signatory shareholders. While the vast majority of the former signatories to the Inmarsat treaty no longer have any ownership interest in Inmarsat, several former shareholders (including COMSAT Investments, Telenor, and KDDI Corporation) chose to reinvest in the company and increased their respective stakes in Inmarsat. To fund this acquisition, Apax and Permira conducted a private placement of Inmarsat nonconvertible debt securities, which were subsequently listed on the Luxembourg Stock Exchange (LSE) on February 27, 2004. As a result of these transactions, Apax and Permira now control Inmarsat and the ownership of Inmarsat by former signatories – in the aggregate – has been diluted.

Inmarsat’s FCC Request. Inmarsat recently filed a letter with the FCC requesting a ruling that the private equity transaction, coupled with the listing of its debt securities on the LSE, satisfy the ORBIT Act’s IPO requirement. First, Inmarsat argues that the private equity transaction satisfies the "substantial dilution" goal behind the IPO requirement because the vast majority of former signatories to the Inmarsat treaty no longer hold shares in the company. Second, Inmarsat contends that its offering of debt securities on the LSE satisfies the goal that Inmarsat be subjected to regulatory oversight and disclosure obligations. In this regard, Inmarsat – acknowledging that many observers believe the IPO requirement mandates an offering of equity securities – notes that the ORBIT Act fails to precisely define the specific securities that must be issued by the company. Inmarsat further notes that the LSE qualifies as a "major exchange" since it has standard oversight and disclosure requirements, including the filing of semi-annual reports and audited financial statements.

Finally, Inmarsat contends that the ORBIT Act gives the FCC wide latitude in determining whether Inmarsat has satisfied its ORBIT Act obligations. Inmarsat urges the FCC to use a flexible approach to statutory interpretation and recognize that the twin goals of "substantial dilution" and "regulatory oversight" behind the IPO requirement have now been satisfied by the Apax/Permira transaction.

Opposition to Inmarsat’s Request. Several competitive satellite service providers, including SES Americom, Inc and Mobile Satellite Ventures (MSV), oppose Inmarsat’s request and maintain that Inmarsat has not complied with the central ORBIT Act IPO requirement.

These operators disagree with Inmarsat’s argument that the ORBIT Act grants the FCC wide latitude in determining whether the company has satisfied its statutory obligations. The companies maintain that this argument is a veiled attempt by Inmarsat to rewrite the clear requirements of the ORBIT Act. Even if the Commission were to apply a more flexible standard, SES Americom and MSV nonetheless assert that the Inmarsat transactions are not consistent with an IPO of equity securities. According to these companies, the private debt offering cannot be construed as an IPO since it has no dilutive effect on the ownership of Inmarsat by its former signatories. Moreover, the private equity transaction has not resulted in the broadly held and diverse public ownership of Inmarsat’s equity as contemplated by the ORBIT Act. Indeed, these parties note that the private offering has served to significantly narrow Inmarsat’s ownership.

The satellite operators further claim that the plain language of the ORBIT Act conclusively demonstrates that Congress envisioned an equity IPO. Acknowledging that the ORBIT Act does not specifically require an issuance of "stock," these opponents note that the terminology used in the ORBIT Act (e.g., "initial public offering"; "shares"; "ownership") specifically contemplates an equity IPO. To demonstrate Congress’ clear intent for an equity IPO, these operators also extensively cite the legislative history of the ORBIT Act, including various floor statements of members of Congress indicating their desire for an equity IPO.

Finally, these companies reject Inmarsat’s contention that the placement of its debt securities on the LSE satisfies its market listing obligations. Claiming that the oversight requirements are not comparable to those associated with a national stock market in the United States, they assert that the regulatory regime of the LSE is not indicative of the transparent and effective oversight envisioned by Congress. They also claim that by listing on the Luxembourg exchange, Inmarsat is deliberately evading the corporate governance requirements and standards associated with listing on a major exchange as contemplated by the ORBIT Act.

Even if the FCC agrees with Inmarsat that the twin goals of the IPO requirement have been satisfied, it remains unclear whether the express language of the ORBIT Act permits the FCC to conclude that the Apax/Permira transaction has satisfied the IPO requirement in toto. Given that Congress likely will need to address the impending December 2004 deadline for Inmarsat to conduct an IPO, the FCC may prefer to wait and see what Congress does later this year rather than act on Inmarsat’s request.

John Quale, Brian Weimer, and John Beahn are attorneys in the Washington, D.C. office of Skadden, Arps, Slate, Meagher & Flom LLP. Mr. Quale’s email address is [email protected]; Mr. Weimer’s email address is [email protected], and Mr. Beahn’s email address is [email protected].