The Canadian Government stunned the telecom sector last Friday when it overturned the CRTC’s October 2009 ruling that Globalive Wireless Management Corp. was not Canadian-owned and controlled as required by section 16 of the Telecommunications Act. The variance is effective immediately which means that it’s now clear sailing for Globalive’s entry into the Canadian wireless telecommunications market.

The Government’s Decision to “vary” (read: reject) the CRTC’s Decision followed a “perfect storm” of regulatory and policy developments in the Federal telecom sector over the preceding 18 months. In 2007, the then Minister of Industry announced the terms of the Advanced Wireless Services (AWS) auction, which set aside spectrum exclusively for new entrants. In 2008 Globalive won thirty licences for which it paid the Government $442 million. After a full ownership review of Globalive’s financial and ownership arrangements with the Egyptian telecom carrier Orascom, the Government concluded that Globalive was Canadian-owned and controlled and it issued spectrum licences to the company in March of 2009.

But this was only one stop along the road. The CRTC also enjoys independent jurisdiction to conduct ownership reviews under section 16 of the Telecommunications Act. Historically, the CRTC has conducted reviews of new entrant operators, including wireless carries such as Globalive, in camera and on a relatively informal basis. However, that changed when the CRTC issued a new framework for assessing ownership compliance in July of 2009. The new framework is far more rigorous, with four types of procedures to address compliance, the most intensive (Type 4) being a full written public process and oral hearing. The CRTC established a Type 4 review for Globalive.

Following its Globalive review, the CRTC rocked the industry when it reversed Industry Canada’s previous ruling. While both Industry Canada and the CRTC agreed that Globalive had met the “legal” test of ownership, the CRTC decided that Orascom nevertheless exercised control "in fact" over Globalive. The CRTC’s concerns were fourfold: corporate governance, shareholder rights, commercial arrangements with Orascom and Orascom’s economic interest in Globalive.

Clearly the Industry Canada and CRTC processes are not in comity, given that both authorities rely on the identical statutory test in assessing ownership compliance. The Government Order-in-Council to vary the CRTC Decision emphasized that its ruling was limited “to the facts in this case” and that it was “not removing, reducing, bending or creating an exception to Canadian ownership and control requirements in the telecommunications and broadcasting industries.”
The reference to the broadcasting industry is interesting, given that the ownership requirements in issue were limited to the eligibility of facilities based telecommunications common carriers to operate in Canada-perhaps a tacit acknowledgment that one cannot unscramble the omelette of ownership rules for companies such as Rogers who are involved in broadcasting distribution as well as telecommunications services using the same coaxial facilities.

Many have suggested that the Government’s decision to overrule the CRTC is the effective “nullification” of the current regime. At the very least, the fact that the Government vacated the CRTC’s Decision suggests that short term industrial policy goals have overridden the specific balance that has been previously struck under the ownership rules, one that encourages non-Canadian capital inflows while at the same time preserving de facto operational control in the hands of Canadians. In hindsight, the willingness of the Minister of Industry to bless Globalive's ownership structure (and to subsequently use his discretionary review power to vacate the CRTC’s Decision last week) even in the face of the significant control levers exercised by Orascom should clearly have been seen as a sign that the Government has decided that the benefits outweigh the costs in this case.

Is this the end of the foreign ownership rules as we know them? Perhaps not. In the flurry of comments on this issue declaring that the current regime is dead, three key factors have been lost in all the noise.

First, let’s remember the circumstances at play in this particular case. Globalive had clearly relied on the previous favourable ownership ruling from Industry Canada that it was in compliance with the rules. Globalive had paid the Government nearly half a billion dollars in spectrum fees and had over the last eighteen months incurred significant costs in hiring employees and making capital and other investments in anticipation of entering the market.

Second, in reality the “control in fact” test has never been a bright line test. It is a subjective assessment and is capable of spitting out opposite rulings in very similar fact situations. In fact, the wording of the December 11th Order-in-Council relies on this very flexibility to conclude that the issue was simply a difference of interpretation of the rules, rather than a repudiation of the rules.

Finally, the fact that the rules are under great scrutiny should not be a surprise to anyone. The Government has been sitting on two key public policy reports issued in the last three years. Both the Report of the Telecommunications Policy Review Panel and the Competition Policy Review Panel have recommended significant changes to the current telecommunications ownership rules. The Government has had months and even years to study these recommendations. The recent controversy over Globalive may cause the Government to re-read these reports to see if they propose a better balance between the sometimes competing objectives of Canadian control and capital formation in this key sector.

Perhaps we have finally arrived at a new world in the telecom sector. On the other hand, “Plus ca change….”….etc.