In its Speech from the Throne on March 3, 2010, the federal government committed to review the foreign ownership restrictions applicable to Canada's telecommunications sector with a view to relaxing foreign investment restrictions and thereby to allowing Canadian firms greater access to the funding needed to develop the sector. At present, a facilities-based common carrier is subject to the foreign ownership limitations set out in section 16 of the Telecommunications Act and the virtually identical provisions of section 10 of the Radiocommunication Regulations (collectively the "Radiocom Rules"). These rules require that a carrier be a Canadian owned and controlled corporation, meaning (a) not less than 80% of the board of directors are Canadian; (b) Canadians beneficially own, directly or indirectly, not less than 80% of the voting shares and (c) the corporation is not otherwise controlled by persons that are not Canadians. The limitation on voting shares is frequently expressed as a limit of 46.7% which is comprised of the maximum 20% direct ownership in the carrier and an indirect ownership of one-third of a holding company (i.e. 20% plus 33% x 80% = 46.7%). This regulatory practice of aggregating voting percentages in two different companies is somewhat unfamiliar and confusing to corporate lawyers. There is no expressly fixed limit on the extent of equity or economic interest which a foreign investor may hold. Consistent with the throne speech announcement, in June of this year Industry Canada released a Consultation Paper entitled Opening Canada's Doors to Foreign Investment in Telecommunications: Options for Reform (see Industry Canada Consultation Paper). The paper invited submissions and comments on the following three options for the liberalization of the current foreign investment restrictions: Increase the direct foreign ownership limit to 49%; Remove foreign ownership restrictions completely for smaller telecom players (i.e. those with less than 10% market share); or Remove foreign investment restrictions across the board. By the close of the comment period on July 31, 45 full submissions had been received from a wide variety of industry participants and several hundred comments had been delivered by individuals. While the Consultation Paper was quite clear that it was solely focused on telecommunications infrastructure, which is akin to a utility and not the more culturally sensitive broadcasting/content sector, the government will have to deal with the reality of "convergence" as many of the major telecom players also control broadcasting assets. The primary focus of the consultation, and particularly the responses from the new wireless entrants, is on the need to access foreign capital in order to finance the build out of new networks, recognizing that the Canadian financial marketplace simply does not have the capacity to provide the massive amounts of debt and equity which are necessary to support this endeavour. The large incumbents argue that the new entrants or small entities should not be allowed preferred access to foreign capital, as this will create an unlevel playing field (i.e. option 2 v. option 3). However, the current restrictions do not appear to impact evenly on all players. As Telus' CFO recently noted, (see news article October 18, 2010) there is to be no shortage of capital available in the international debt markets for established operators and debt financing at this level does not even engage the current foreign ownership restrictions. In July, Telus raised $1B in 10-year unsecured notes with a 5.05% coupon, and the CFO stated that the company could have easily doubled the issue. These are amounts and terms which new entrants could only dream of. At present there is no indication of when new legislation will be presented or how quickly it may be implemented. However, until these new rules are announced and in place, the telecom sector will likely be in a holding pattern.
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