Canada’s Parliament enacted legislation July 12 to remove restrictions on foreign ownership of Canadian-licensed satellite carriers. Prior to the legislation, Canada limited foreign ownership of telecommunications carriers, including satellite carriers, by requiring that at least 80 percent of the company’s voting shares be owned by Canadians and that at least 80 percent of its board of directors be Canadian. Where the operating company was owned by a holding company, non-Canadians could own up to one-third of the holding company’s voting shares. In all cases, the operating company had to be controlled, in fact, by Canadians.

Those limitations, insofar as they apply to satellite carriers, now are gone (Canada’s Investment Act continues generally to govern foreign investment). Canada, a country with a history of significant foreign investment restrictions and limitations on foreign media concentration, thus has vaulted to the vanguard of satellite-sector liberalization. (The legislation follows a 1998 lifting of restrictions on foreign ownership of fixed and mobile Earth stations). Canada also is contemplating removal of foreign ownership caps on terrestrial telecommunications carriers, both wireline and wireless.

No such removal of restrictions on broadcasters is contemplated because of national cultural content protection concerns embodied in Canada’s Broadcasting Act. These issues have developed in part owing to the overbearing proximity and availability of U.S. media content, which threatens to swamp and obscure homegrown Canadian content, and to the linguistic and cultural sensitivity of the Québec and non-Québec francophone population. These concerns carry considerable political freight in Canada, and are not likely to diminish in any foreseeable future. However, in Canada, satellite carriers, as a rule, do not hold broadcast licenses.

As industry veterans recall, Canadian foreign ownership restrictions played a role in the acquisition of Telesat Canada by Loral Space & Communications and an Ontario public pension fund as well as in the earlier joint venture between Telesat affiliate TMI Communications and Motient that formed L-band operator Mobile Satellite Ventures later known as SkyTerra and now known as LightSquared. In the case of LightSquared, in particular, the need to satisfy Canada’s regulator of competition, orbital slots and space station licenses, Industry Canada, on foreign ownership limits as well as to isolate any broadcast licenses to the satisfaction of the Canadian Radio-television Telecommunications Commission, the country’s broadcast communications licensor and regulator, led to a somewhat Byzantine transaction structure. The resulting entities had investment interests that were misaligned with legal ownership and board representation. This was compensated for by governance structures that protected minority ownership interests that represented majority investment.

These devices included corporate charters and shareholders agreements containing supermajority voting provisions and veto rights for certain corporate actions, different classes of directors, special management committees, co-managers with divided or redundant responsibilities and broadcast licenses held separately in Canadian special purpose vehicles. These devices all potentially hampered corporate flexibility and freedom to operate, and by their nature, potentially hampered the resulting company’s competitiveness. They also tended to make subsequent rounds of investment difficult to structure, as a new investor might have demands for certain rights or investment attributes that did not fit the existing structure and which would require elaborate renegotiation and restructuring, all while staying on the right side of the regulatory restrictions.

The new regime should remove the need for such elaborate structures. According to the Communications Group at Canadian law firm Blake, Cassels & Graydon LLP (www.blakes.com), non-Canadian satellite operators now will be able to apply to Industry Canada for space station and orbital slot licenses as they can for Earth station licenses. Canadian operators, in turn, will have access to foreign capital markets with no concern about diluting their ownership or board representation below hitherto permissible Canadian ownership limits.

Canada makes for an attractive investment target for a host of reasons (laws, language, costs, stability, infrastructure, foreign investment incentive programs), and although the number of telecommunications carriers is small, the pre-existing foreign ownership restrictions, coupled with a small domestic venture capital and private equity industry, mean that domestic operators may be eager to access foreign capital. In addition to telecommunications carriers, there are a host of prime and subsystem manufacturers, service providers, ground equipment and network providers, and other players that offer opportunities for strategic or financial investors and acquirers.

Owen D. Kurtin is a founder and principal of private investment firm The Vinland Group LLC
and a practising attorney in New York City. He may be reached by e-mail at [email protected].