Canadian ownership and control requirements no longer apply to a broad range of telecom entities operating in Canada and do not apply to the increasing number of broadcasting entities that deliver programming in Canada via mobile devices or the Internet. Canadian ownership and control requirements do remain in place, however, for traditional Canadian broadcasters. In addition, non-Canadians wishing to establish some new telecom or broadcasting businesses in Canada or to take control of such businesses in certain circumstances need to be mindful of the provisions of the Investment Canada Act.
Since 2012, the foreign ownership restrictions under the Telecommunications Act apply only to carriers with more than a 10 per cent market share based upon total Canadian telecom revenues, as determined by the CRTC. Under those restrictions, the voting shares of the carrier must be 80 per cent owned by Canadians, Canadians must comprise at least 80 per cent of the board of directors and the carrier cannot be controlled in fact by non-Canadians. A corporate shareholder of a carrier qualifies as Canadian if Canadians own at least 66 ⅔ per cent of the voting shares and if the corporate shareholder is not controlled in fact by non-Canadians.
The CRTC determined in its most recent Communications Monitoring Report that total Canadian telecom revenues in 2017 amounted to $48.7 billion, so any carrier with annual Canadian telecom revenues of less than $4.87 billion is not subject to the foreign ownership restrictions under the Telecommunications Act. There may in fact only be three carriers in Canada that remain subject to such foreign ownership restrictions on the sole basis of their telecom revenues.
Canadian ownership and control requirements continue to apply to broadcasters who hold licences issued under the Broadcasting Act and to most broadcasters who have been exempted from licensing under the Act. These requirements are similar, but not identical, to those that apply under the Telecommunications Act: the voting shares and votes of the broadcaster must be 80 per cent owned by Canadians, Canadians must comprise at least 80 per cent of the board of directors, the CEO must be Canadian, and the broadcaster cannot be controlled in fact by non-Canadians. A corporate shareholder of a broadcaster qualifies as Canadian if Canadians own at least 66 ⅔ per cent of the voting shares and if the corporate shareholder is not controlled in fact by non-Canadians.
There are numerous telecom carriers with integrated broadcasting operations that are subject to the Canadian ownership and control requirements under the Broadcasting Act even though their Canadian telecom revenues are below the $4.87 billion threshold and thus are not subject to such requirements under the Telecommunications Act.
Canadian ownership and control requirements do not apply to broadcasters that distribute programming only over the Internet or via mobile devices (commonly referred to as over-the-top or OTT) and that operate under the CRTC's Exemption order for digital media broadcasting undertakings. Since the number of such broadcasters increases every day as the broadcasting system evolves to the use of OTT in preference to over-the-air, cable and satellite delivery, an increasing percentage of broadcasters in Canada are not subject to such ownership and control requirements.
Notwithstanding that Canadian ownership and control requirements imposed under the Telecommunications Act and the Broadcasting Act do not have as extensive application as they once did, non-Canadians wishing to establish new telecom or broadcasting businesses in Canada, or take control of such businesses, need to be mindful of the provisions of the Investment Canada Act (the ICA).
The ICA provides that a non-Canadian that proposes to establish a new Canadian business or to acquire an existing Canadian business must file a notification. In certain circumstances, such as where monetary thresholds are exceeded, the non-Canadian must also file an application for review of the investment. Where the investment is reviewable, the non-Canadian must demonstrate that the investment is of "net benefit to Canada."
Normally, the filing of a notification of investment in respect of the establishment of a new Canadian business is a mere formality under the ICA. However, if the new business falls within a prescribed type of business activity that, in the opinion of the federal Cabinet, is related to Canada's cultural heritage or national identity (a "Cultural Business"), the federal Cabinet may subject the investment to a full "net benefit to Canada" review under the ICA. Many activities relating to broadcasting, including the production, distribution, sale or exhibition of "film or video products" as well as "audio or video music recordings" fall within the ambit of a Cultural Business.
With respect to the acquisition of an existing Canadian business, the investment will generally be reviewable only if the enterprise value or, in some cases, asset value of the Canadian business exceeds specified thresholds.
For example, the current threshold for investors whose country of ultimate control is a member of the World Trade Organization (WTO) and that are not state-owned enterprises (SOEs) is $1 billion. The current threshold for investors whose country of ultimate control is a party to a specified trade agreement with Canada (including NAFTA and CETA) and that are not SOEs is $1.5 billion. For SOEs that are WTO investors, the current threshold for WTO SOEs is $398 million. Acquisitions of control by non-WTO investors and acquisitions of control of a Cultural Business by any non-Canadian are subject to much lower thresholds: $5 million for direct investments and $50 million for indirect investments.
Regardless of whether or not an investment relates to a Cultural Business or exceeds the specified thresholds, the ICA provides that an investment is reviewable if the federal Cabinet determines that the investment could be injurious to national security. There are at least two instances in which acquisitions of control of Canadian businesses in the telecom or related industries have been denied approval on the grounds of national security. It is noteworthy that neither of these investments would have required that the acquired entity comply with the Canadian ownership and control requirements under the Telecommunications Act.
If an investor is required to demonstrate net benefit to Canada, the investor may offer formal written undertakings to Canada to support representations made in this respect. The investor has an obligation under the ICA to submit information as required from time to time to allow the Canadian government to determine whether the investment is being carried out in accordance with the application for review filed by the investor and with any representations made or undertakings given in relation to the investment.
The ICA sets out the possible remedies for non-compliance with any undertakings that were given, including a ministerial demand for compliance and the issuance of a Court order which could require divestiture of the Canadian business or impose a monetary penalty.
The requirements of the ICA may well be more significant than the Canadian ownership and control requirements in the Telecommunications Act and the Broadcasting Act for future establishments of new telecom and broadcasting businesses by non-Canadians or for the acquisition by non-Canadians of existing Canadian telecom and broadcasting businesses.
Stephen Whitehead is a counsel with the Fasken Ottawa office who practices extensively in communications and business law. He is currently the executive editor of Capital Perspectives.
To read the full Capital Perspectives: Ottawa Newsletter, please click here.