CCA Bulletin 5/10

February 9, 2010

Is a Change in Foreign Ownership Rules for

Cultural Industries on the Horizon?

Just the facts

On 10 December 2009, the federal Cabinet overturned a CRTC decision finding that Globalive Wireless Management Corporation was ineligible to operate a wireless telephone service in Canada because it is controlled by a foreign company, Orascom.  Within days, Wind Mobile, Globalive’s subsidiary, began to offer mobile phone services in Toronto and Calgary. 

This is an extremely important decision which effectively removes any meaningful constraint on foreign ownership of telecommunication companies.  Most commentators believe the decision has an equivalent effect on all other sectors where Canada has limited foreign ownership, including broadcasting and cable.

While Cabinet maintained that its decision was not a precedent, this is perceived by many critics as hollow rhetoric.  They point out that under Chapter 11 of the North American Free Trade Agreement (NAFTA), a U.S. company would likely be able to successfully sue the Canadian government if the CRTC were to turn down a takeover of a Canadian broadcaster or cable company that was structured identically to the Globalive deal.

On January 8, 2010, Public Mobile, another new entrant to Canada's domestic wireless market, filed an application with the Federal Court for judicial review of the Cabinet decision “to seek legal clarity on telecom foreign ownership rules.”  The Communications, Energy and Paperworkers Union is applying for the right to intervene in the case in order to raise its serious cultural concerns and to protect the integrity of the existing ownership restrictions.  It is anticipated that several cultural groups will join this application.

Why are ownership restrictions culturally important?

1. Canadian owners are more likely to tell Canadian stories.  In an October 2003 report, the CCA documented how Canadian companies in the sound recording and book publishing fields are responsible for the overwhelming preponderance of Canadian works in those industries.  People who run Canadian companies share our culture.  Many have chosen to remain in Canada when they could easily have gone elsewhere, and they make this decision primarily because they want to tell Canadian stories.  

2. It is easier to regulate the production and distribution of Canadian works by Canadian companies than it is to regulate foreign companies.  In the audiovisual sector in particular, this translates into thousands of jobs for artists and creators from various disciplines. Trade agreements, such as NAFTA, have restricted our ability to implement cultural policies and provided extensive rights to non-Canadian investors and suppliers.  Unfortunately, the new UNESCO cultural diversity convention does not prevent trade agreements from restricting our cultural policies, at least in the short term.

Tell me more

The Broadcasting and the Telecommunications Acts both require that, to be eligible to hold a CRTC licence, an applicant must be owned and effectively controlled by Canadians.  To establish this, the CRTC looks at whether the technical rules are met and also whether non-Canadians have de facto control over the Canadian entity.  In the Globalive case, the Commission found that Orascom could exercise control over fundamental decisions of the Canadian company through the structure of the Board, liquidity and veto rights, their rights to influence operating and strategic decisions related to Globalive's network, and control of an important trademark.  The CRTC was also concerned since Orascom not only owns 65 percent of the equity of Globalive, but has also provided 99 percent of its debt financing.

In its 29 October 2009 Globalive decision, the Commission relied heavily on its 2007 decision in the case of Canwest Global’s takeover of the speciality television services of Alliance Atlantis Communications.  That acquisition was funded by the U.S. investment bank Goldman Sachs. The Commission required the parties to redraft significant elements of their partnership agreement in order to satisfy its concerns.  However, the Cabinet has now set aside the more significant concerns the CRTC had with Globalive.

As the distinctions between Canada’s cable and telephone companies continue to disappear, there can only be direct pressure on the cable ownership rules.  But perhaps even more importantly, the new rules would apply to Canadian broadcasting companies, since the CRTC applies similar standards in determining whether there is de facto foreign control over a Canadian broadcaster.

Interestingly enough, the February 4, 2010 edition of the National Post reported that “government sources say the Speech from the Throne on March 3 will lean heavily on the report of the Competition Review Panel.” That Report recommended a phased liberalization of ownership rules in telecommunications and broadcasting. 

More specifically, the Panel stated that, “consistent with the Telecommunications Policy Review Panel Final Report 2006, the federal government should adopt a two-phased approach to foreign participation in the telecommunications and broadcast industry. In the first phase, the Minister of Industry should seek an amendment to the Telecommunications Act to allow foreign companies to establish a new telecommunications business in Canada or to acquire an existing telecommunications company with a market share of up to 10 percent of the telecommunications market in Canada. In the second phase, following a review of broadcasting and cultural policies including foreign investment, telecommunications and broadcasting foreign investment restrictions should be liberalized in a manner that is competitively neutral for telecommunications and broadcasting companies.”