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— Industry Insight —
As a worldwide economic leader, the U.S. is not a stranger to foreign investment, a practice encouraged by our country's model to embrace free trade. However, this model has surprisingly not been adopted in the telecommunications industry. Unlike other industries where foreign investment has prevailed, the telecommunications industry has lagged behind and remained relatively free of foreign investment largely as a result of the Federal Communications Commission regulation on foreign investment. Specifically, 47 U.S.C. § 310(b) outlines the restrictions to foreign investments in U.S. broadcast licenses, and it generally provides that no "broadcast or common carrier or aeronautical en route or aeronautical fixed radio station license" may be held by (1) any alien; (2) any foreign corporation; (3) any corporation of which more than one-fifth of the capital stock is owned of record or voted by aliens or by a foreign government or by a foreign corporation; or (4) any corporation directly or indirectly controlled by any other corporation of which more than one-fourth of the capital stock is owned of record or voted by aliens, or by a foreign government or by a foreign corporation, if the FCC finds that the public interest will be served by the refusal or revocation of such license. Regulation of radio communication originally stemmed from a concern for national security. In an effort to prevent the transmission of foreign messages during wartime, foreign ownership restrictions of broadcast entities were initially enacted in the Radio Act of 1912. This law limited radio licenses to U.S. citizens or corporations. The Radio Act of 1927 further limited foreign control of licenses, prohibiting foreign ownership where more than one-fifth of the capital stock may be voted by aliens. Lingering national security concerns arising from World War I prompted Congress to pass the Communications Act in 1934. Section 310(b) of the Communications Act, which outlines the foreign ownership restrictions, was aimed at preventing foreign control of broadcast entities. Those foreign ownership restrictions have remained essentially the same -- more than 70 years later.
Within the § 310(b) restrictions, there are some significant distinctions between §§ 310(b)(3) and 310(b)(4). First, § 310(b)(3) restricts direct ownership of the licensee while § 310(b)(4) restricts ownership of a parent company that has an ownership interest in the licensee. Thus, investors who hold an interest directly in a licensee are governed by § 310(b)(3), while § 310(b)(4) governs interests held in a parent company of a licensee. Second, §§ 310(b)(3) and 310(b)(4) have different investment benchmarks: § 310(b)(3) permits up to a 20% direct ownership interest, while § 310(b)(4) permits up to a 25% indirect ownership interest. In addition, § 310(b)(4) also permits foreigners to occupy up to one-fourth of the board of directors of the parent company of a licensee. Lastly, § 310(b)(4) provides the FCC with discretion to waive the restriction in order to serve the public interest, a discretion that is unavailable under § 310(b)(3); however, this waiver is rarely used. Thus, it is generally more desirable for foreign investors to hold their interest in a broadcast license through a holding company structure. The ultimate structure for foreign investment in a radio license should be driven by the objective of the investment -- is the objective to maximize (a) the foreign ownership interest (and control), or (b) the amount of foreign capital invested (through more passive arrangements)? Foreign investors can maximize their ownership interest, directly and/or indirectly, in a radio licensee through any one, or a combination of more than one, of the following structures. Concurrent ownership of parent and licensee. The FCC has interpreted §§ 310(b)(3) and 310(b)(4) as noncumulative. Thus, foreigners can concurrently own 20% of the licensee and 25% of the parent company that has the remaining 80% interest in the licensee (which is effectively a 40% interest in the licensee and yet is within the benchmarks of both subsections). Use of a multiplier. The FCC has established a multiplier in order to determine if the maximum benchmarks have been reached when there are successive layers of minority ownership. For example, if an alien holds a 30% ownership interest in Company A and Company A has a 40% ownership interest in the licensee, the alien's ownership interest would be reduced to 12% (30% x 40%) after the multiplier is applied. However, the multiplier is not applied when the ownership interest in a parent company exceeds 50%, except in the case of insulated limited partnerships and nonvoting stock. Thus, foreign investors can maximize their investment by using insulated limited partnerships (as opposed to corporations). For example, a foreign investor can own 80% of an insulated limited partnership, which the partnership owns, in turn, 30% of the parent of a licensee, and the total foreign investment in the parent of the licensee would be less than the 25% benchmark (80% x 30% = 24%). Bifurcation of assets into two entities. Foreigners can create separate entities for "restricted" assets (those assets that are essential to the operation of the licensee, for example, the radio license itself) and "nonrestricted" assets (those that are not essential to the licensee's operation). By separating the assets, an investor could hold up to 25% of the parent of the "restricted" entity and 100% of the "nonrestricted" entity and not run afoul of the restrictions because the separate entity does not fall under the purview of the statute. Licensees can maximize the amount of foreign capital invested in such licensees by using any one, or a combination of more than one, of the following structures. Preferred stock. By issuing preferred stock to foreign investors, the licensee or the parent company of a licensee can charge a premium for such shares and obtain more capital. In exchange, the foreign investors are able to enjoy certain privileges such as receiving profits prior to other shareholders and/or larger dividends. In addition, if the stock is nonvoting, the foreign investor may use the multiplier described above to maximize its passive investment by owning, for example, 80% of Company A (solely through nonvoting stock), which in turn owns 30% of the parent of the licensee. Put options. Foreign investors can also incorporate a "put option" into their shares of capital stock, giving them the right but not the obligation to sell such stock at a specified price for a period of time. This option minimizes the risk of the investment, offers increased liquidity and, like preferred stock, permits the investor to invest more foreign capital into the licensee or parent company since a premium can be charged for such option. Debt. Investment through debt instruments (including debt convertible into stock) is not considered ownership for purposes of § 310(b); thus, a licensee or parent company can increase foreign funds beyond the § 310(b) benchmarks by issuing debt. However, in order to prevent a finding of de facto control by the FCC, convertible debt must be carefully structured with proper safeguards. In addition to limiting alien ownership of broadcast entities, the FCC interprets § 310(b) to limit de facto foreign control. Generally, in order to comply with § 310(b), it is important that foreign investors not have control over the day-to-day operations of the company. Thus, the FCC may determine that a licensee is under the de facto control of foreigners when any of the arrangements described in this article are used, even when the foreign investment is below the required benchmarks. Certain safeguards, designed to ensure compliance with § 310(b), however, may be incorporated into these structures in order to reduce the risk of a finding of de facto control, such as an explicit agreement by the foreign investor not to own more than the permitted amounts of stock without prior FCC approval (including the conversion of debt into a percentage of stock that exceeds the applicable benchmark), or a call right pursuant to which the licensee or parent would have the right to redeem a foreign investor's stock to the extent it ever exceeds the benchmarks. By structuring foreign investment using one or more of the mechanisms described herein, it is possible to maximize the amount of foreign investment and/or foreign involvement in the holder of a U.S. broadcast license while complying with the restrictions to foreign ownership set forth in the FCC regulations. Joanna E. Iglesias is a partner in Bilzin Sumberg Baena Price & Axelrod LLP's corporate and securities group. Zonia Medina of Bilzin Sumberg contributed to this article. |
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