A. Legislation and Regulations

i) Foreign Ownership and Legislation in the Canadian Telecommunications Sector

In Canada, foreign ownership restrictions imposed on telecommunications carriers began in 1984, when the then Department of Communications issued the first national cellular operating license to Rogers Cantel Inc.[2] In this instance, a limit of 20% of voting share equity was set for foreign ownership.

While the federal government continued to impose this 20% maximum on other telecommunications companies on an ad hoc basis, it was not until the coming into force of the Telecommunications Act (1993)[3] that federal legislation placed statutory limits on the percentage of allowable foreign ownership for all telecommunications carriers. Section 16 of the Act states that eligibility for Canadian operation requires a carrier to be Canadian-owned and controlled. Section 16(3) defines this as follows:

1. not less than eighty per cent of the members of the board of directors of the corporation are individual Canadians;
2. Canadians beneficially own, directly or indirectly, in the aggregate and otherwise than by way of security only, not less than eighty per cent of the corporation’s voting shares issued and outstanding; and
3. the corporation is not otherwise controlled by persons that are not Canadians.

Parts a) and b) of the legislation are known as the quantitative test or de jure test. As part (c) of Section 16(3) states the requirement that “the corporation is not otherwise controlled by persons that are not Canadians,” this condition is known as the “control in fact” condition (or the de facto test). Furthermore, the Act also enables the Canadian Telecommunications Common Carrier Ownership and Control Regulations (1994), which sets out a framework to determine what entities can be classified as “Canadian,” and sets the minimum Canadian ownership restriction for a holding company at 66⅔% of voting shares.[4] Consequently, when taking into account all of the provisions above, the maximum permitted foreign ownership of voting shares is 46⅔% (including both direct holdings and indirect holdings through a holding company) of a Canadian telecommunications carrier.[5]

Additionally, Section 10 of the Radiocommunication Regulations (per the Radiocommunication Act) refers to the terms of the Telecommunications Act to determine the ownership eligibility criteria—significant for wireless telecommunications operators, who require radio spectrum licences in order to provide wireless services (mobile, cell phones, etc.).[6]

Comparatively, the Canadian broadcasting sector is subject to the same foreign ownership restrictions as those for the telecommunications industry. The legal history of this condition can be traced to a Cabinet Directive of 1997, which aimed to harmonize ownership regulations of both industries—in fact, the foreign ownership restrictions for broadcasters are also capped at 20% of the voting shares of a broadcasting company and up to 33.33% of a holding company.[7]

The administration and enforcement of these conditions are the responsibility of the CRTC, an independent organization that reports to Parliament through the Minister of Canadian Heritage.[8]

ii) Control In Fact (the De Facto Test)

The control in fact test involves evaluating a company’s ownership structure, management, and creditors to determine, regardless of appointment, share ownership, or jurisdiction of registration (in Canada, filing of letters patent), who actually controls the firm, and how responsible they are for its direction and day-to-day operations. If this evaluation reveals that the company in question is not, ultimately, “controlled in fact” by Canadians, it is not eligible to operate in Canada per the terms of the Telecommunications, Radiocommunication or Broadcasting acts.

With regard to determining what is and is not a Canadian company per these statutes, the issue of control in fact is not without controversy, given that it requires interpretation. Industry Canada, who manages radio spectrum, states that an “assessment of control in fact of an applicant is a complex matter.”[9] Additionally, federal government decisions in the transportation industry have also contributed to the discussion of control in fact, with a National Transportation Agency decision of 1993 stating:[10]

There is not one standard definition of control in fact but generally, it can be viewed as the ongoing power or ability, whether exercised or not, to determine or decide the strategic decision making activities of an enterprise.

In contrast, CRTC Chairman Konrad von Finckenstein provided the following opinion on this issue:[11]

“Control in fact” is a well-known concept in law. There’s ample jurisprudence on it. The leading case on this is a case involving Canadian Pacific Airlines.

iii) Bill C-9 and Foreign Ownership Restrictions for Satellite Operators

In the 2010 Speech from the Throne, the Government of Canada stated its intention to “open Canada’s doors further to venture capital and to foreign investment in key sectors, including the satellite and telecommunications industries, giving Canadian firms access to the funds and expertise they need.”[12] As part of Bill C-9 (Jobs and Economic Growth Act, 2010), the federal government proposes to amend the Telecommunications Act to remove foreign ownership restrictions for providers of satellite services.[13] If passed, the Act would allow a company to provide satellite services in Canada regardless of whether or not the provider can demonstrate Canadian ownership and control.

B. Previous Studies

Prior to the Committee’s study of foreign ownership in the telecommunications sector, several comprehensive studies and reports (from Parliament and federal government-appointed panels) have made various recommendations in regard to the appropriate level of foreign ownership in the telecommunications industry. The following is a selection of noteworthy reports.

i) Recommendations from the Report of the House of Commons Standing Committee on Industry, Science and Technology (2003)

In its 2003 report Opening Canadian Communications to the World, the House of Commons Standing Committee on Industry, Science and Technology recommended that the Government of Canada:[14]

• require a five-year Parliamentary review of the Telecommunications Act;
• remove the existing minimum Canadian ownership requirements for telecommunications carriers and broadcasting distribution undertakings (BDUs);
• require a Parliamentary review of the governance structure of the Canadian telecommunications and broadcasting sectors in light of technological convergence (regulation, federal department structures, and the mandate of the CRTC).

ii) Recommendations from the report of the House of Commons Standing Committee on Canadian Heritage (2003)

Conversely, in the same year as the Standing Committee on Industry, Science and Technology’s report (2003), the Standing Committee on Canadian Heritage proposed the following recommendation:[15]

The Committee recommends that the existing foreign ownership limits for broadcasting and telecommunications be maintained at current levels.

Key to this recommendation is the issue of “convergence”. The Committee felt that due to increasing technological convergence between the broadcasting and telecommunications sectors, relaxing rules on foreign ownership for either sector could have harmful effects on the Canadian broadcasting framework.[16]

iii) Recommendations from the Telecommunications Policy Review Panel

In 2005, the then Minister of Industry established the Telecommunications Policy Review Panel to undertake a review of the telecommunications framework. In 2006, the panel (whose mandate was “to study and report on three areas that must continue to evolve in order to keep pace with rapid changes in technology, consumer demand and market structure: regulation, access, and information and communications technologies (ICT) adoption”) delivered a report summarizing their findings along with a series of recommendations.[17] However, the panel also examined areas outside its original mandate which it felt affected the telecommunications framework. It hence concluded:[18]

[…] that liberalization of the restrictions on foreign investment in Canadian telecommunications common carriers would increase the competitiveness of the telecommunications industry, improve the productivity of Canadian telecommunications markets, and be generally more consistent with Canada’s open trade and investment policies.

The Panel believed this liberalization would best be achieved by considering a new, flexible system of ownership regulations which could approve of submissions beneficial to Canadians, and could deny those that were not. This new system would be a “phased-in” approach, with foreign investors initially able to own and operate firms that have less than 10% share of their market; upon further government review of the broadcasting sector, the second phase would see the removal of ownership restrictions applied to all telecommunications carriers, along with changes to broadcasting ownership policies.[19]

Additionally, the Panel addressed “convergence,” whereby, because of advances in information and communications technologies, telecommunications and broadcasting firms can both provide the same slate of services, and provided the following observation:[20]

This convergence of telecommunications and broadcasting markets brings into question the continued viability of maintaining two separate policy and regulatory frameworks, one for telecommunications common carriers like the incumbent telephone companies and one for their competitors in most of the same markets, the cable telecommunications companies.

The Panel also considered how convergence could  create complications for firms that provide both telecommunications and broadcasting distribution services, depending upon how they were first established and authorized to operate (as telecommunications carriers or broadcasters). For example, if a telecommunications company also provided broadcasting distribution services, and if foreign ownership restrictions were liberalized under the Telecommunications Act, the company may not be able to accept additional foreign investment due to restrictions in the Broadcasting Act. Thus, according to the Panel, changes to one statue would need to mirror the other, if the policy were to succeed. Moreover, the Panel further concluded that if these restrictions were removed only from the Telecommunications Act, it could be damaging to the Canadian broadcasting distribution sector.[21]

iv) Recommendations from the Competition Policy Review Panel

As part of Budget 2007, the Government of Canada established the Competition Policy Review Panel to undertake a comprehensive review of the competition and investment framework in Canada. The Panel was tasked with examining the Investment Canada Act in addition to the Competition Act, as well as reviewing foreign investment restrictions in certain sectors. The Panel’s 2008 report, Compete to Win,[22] also recommended a very similar (including reference to the Telecommunications Policy Review Panel’s report) two-phased approach to liberalizing foreign ownership restrictions, including a second stage which would seek removal of restrictions for broadcasting distribution undertakings after a review of the broadcasting industry in Canada.

This panel also addressed the issue of convergence, indicating that it was becoming more difficult to distinguish between telecommunications and broadcasting distribution, and how future policy reviews would have to take this into consideration.[23]

The Internet and other information and communications technologies have changed the business landscape for these industries. In essence, with convergence, it is increasingly difficult to define distinct “telecommunications” and “broadcasting” industries or sectors, particularly when it comes to delivery or distribution networks.

In summary, between 2003 and 2008, four prominent reports proposed recommendations regarding foreign ownership restrictions in the Canadian telecommunications sector, as follows:

• two of the four reports recommended a two-step (or phased) approach to removal of the restrictions;
• one report recommended complete removal of restrictions for telecommunications common carriers and broadcasting distribution undertakings; and
• one report recommended no removal of restrictions.

C. The Globalive Case

Currently, a company interested in providing wireless telephony service in Canada must meet two (amongst several) key regulatory requirements:

• successfully bid on radio spectrum via the Industry Canada auction;[24] and
• prove it is Canadian in terms of ownership and control.

Per convention, Industry Canada can issue a license to a successful bidder on the provision the firm meets the Canadian ownership and control requirements.

In 2008, Industry Canada auctioned advanced wireless services (AWS) spectrum licences; Globalive Wireless successfully bid $442 million for 30 of them. Globalive Wireless was part of Globalive Investment Holdings Corp. (GIHC), which in turn, was owned by the three following companies (see Figure 1):[25]

• AAL Holdings Corporation (66.68%);
• Orascom Telecom Holding (Canada) Limited (32.02%)
• Mojo (1.30%).

It is important to note that while AAL Holdings owned two-thirds of GIHC (Globalive’s Parent Company) voting interest, when the combined value of voting and non-voting shares was included, Orascom (an Egyptian-based company) was evaluated as controlling 65.1% of Globalive’s equity. Furthermore, the Orascom loan agreements were worth approximately $500 million, making it the holder of the vast majority of Globalive’s debt.

Figure 1—Globalive Ownership Structure[26]

Source: Parliamentary Information and Research Service, with data from CRTC.

Though Industry Canada issued Globalive a provisional license, in its decision of October 29, 2009, the CRTC concluded that Globalive was controlled in fact by Orascom, a non-Canadian entity, and therefore was not eligible to operate as a telecommunications common carrier in Canada.[27] Here are some of the factors the Commission cited in their decision:[28]

• the high level and value of Globalive debt held by Orascom;
• that Orascom is the principle source of Globalive’s technical expertise; and
• that Orascom has the ongoing ability to determine Globalive’s strategic decision-making activities.

On December 10, 2009, via Order-in-Council PC 2009-2008, the Governor-in-Council varied the CRTC decision, thus allowing Globalive to operate in Canada.[29] (The Telecommunications Act allows for this per Section 12).

It should be noted that both the Cabinet and the CRTC determined that Globalive met the quantitative Canadian ownership requirements (in terms of voting shares). Additionally, both agreed the company met the terms of the 80% rule for board composition. Therefore, both bodies agreed that Globalive met the de jure requirements for Canadian ownership.

Where the Cabinet did not agree with the CRTC was with regard to the control in fact test as applied to Globalive (the de facto test of control). In its 2009 variance to the CRTC decision, the Cabinet concluded that Globalive did meet the Canadian control in fact requirements under relevant legislation, and was thus entitled to operate in Canadian markets. Currently, Globalive is offering mobile telephony service in Canada under the brand “Wind Mobile.”[30]

Finally, it should be noted that Public Mobile has applied to the Federal Court of Canada for a judicial review of the Governor-in-Council variance of the CRTC decision on Globalive.[31] Public Mobile CEO Alek Krstajic aims to clarify if this variance represents “a change in the law” that would “see all wireless companies receive the same access to foreign capital.”[32] The case is still before the Court.

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