David Elder and Gregory Kane -

Telecommunications and broadcasting in Canada have long been subject to Canadian ownership requirements that have mandated Canadian ownership and control; however, the Canadian government has recently placed reform of these requirements on the public policy agenda.

The Speech from the Throne, delivered on March 3, 2010, raised expectations by revealing the federal government's 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." Combined with subsequent comments made by Industry Minister Tony Clement, it appeared that the government was finally ready to take steps to liberalize Canada's foreign ownership restrictions in the telecom sector.

Indeed, with respect to the satellite industry, the government subsequently enacted, on July 12, 2010, amendments to the Telecommunications Act that had the effect of exempting the ownership and operation of satellites from the existing Canadian ownership requirements.  Accordingly, there are currently no restrictions on full foreign ownership of Canadian satellite operators.

In June 2010, the government also issued a consultation paper, entitled Opening Canada’s Doors to Foreign Investment in Telecommunication: Options for Reform, which focused on policy reform for undertakings other than satellite providers.  That paper proposed three possible scenarios for reform of Canadian ownership requirements:

1. Increasing to 49% (from 20%) the direct limit for the percentage of voting shares in broadcasting and telecommunications that may be held by non-Canadians;
2. Exempting start-up telecommunications companies and existing small industry players (i.e. those with annual telecommunications revenues that amount to less than 10% of total telecommunications market revenues) from the existing restrictions, which would remain for all other carriers;
3. Removing Canadian ownership restrictions entirely for all telecommunications providers, but leave existing restrictions in place for all broadcasting undertakings, where the government feels that allowing foreign ownership of such undertakings would be contrary to national cultural interests.

The consultation paper sought comments from interested stakeholders with respect to these reform proposals and their implications for consumers of telecommunications services and the competition, innovation and investment in the telecommunications industry, as well as the productivity of the Canadian economy as a whole.  The comment period closed at the end of July.

Since that time, there have been no further statements from the Minister of Industry or the government with respect to foreign ownership policy reform.  Accordingly, we continue to await details about the government's specific plans for liberalization.

At present, foreign ownership rules for telecom carriers may be summarized as follows:

• at least 80% of the members of the board of directors of the carrier are Canadian;
• non-Canadians may not beneficially own, directly or indirectly, more than 20% of the carrier's voting shares;
• non-Canadians may not beneficially own directly or indirectly more than 33 1/3% of the voting shares of the carrier's holding company; and
•  the carrier or the holding company may not otherwise be controlled by non-Canadians (i.e., "control in fact").

Since the focus of these requirements is voting shares, foreign investors often seek to maximize ownership through non-voting securities. So long as the 20% limit at the carrier level and 33 1/3% limit at the holding company level for Canadian ownership of voting shares is respected, the question of compliance shifts to whether the carrier's ownership structure satisfies the highly fact-specific (and, as the recent case involving Globalive showed, potentially controversial) "control in fact" test.

For further information, please contact your Stikeman Elliott representative, the author(s) listed above or any member of our Telecommunications Group listed at www.stikeman.com.