In November, the FCC changed its policy regarding the foreign ownership of broadcast stations. In its decision, about which we wrote here, it agreed to entertain applications seeking “alien ownership” exceeding the 25% limit for foreign ownership of broadcast stations that had previously been in place. In the modern communications era, with its diversity of media outlets, the Commission determined that the risk of increased foreign ownership was outweighed by the potential for new entrants into the broadcast industry, backed by new sources of capital from outside of the United States. The FCC did not adopt any blanket rules for permitting higher levels of alien ownership, but instead agreed to consider specific requests for a declaratory ruling on a case-by-case basis to show that foreign ownership of a broadcast station in excess of 25% was not contrary to the public interest. Despite the invitation to file such requests, as far as we know, none have been filed – until now, and that comes from what is perhaps an unexpected source – Pandora, which is best known as an Internet radio operator.
As we wrote several months ago, Pandora has sought to acquire an FM radio station that operates in the Rapid City, South Dakota radio market. Its application to acquire the station was opposed by ASCAP, who feared that Pandora would use its status as a broadcaster to ask for broadcaster rates negotiated by the Radio Music Licensing Committee (RMLC) for the public performance of ASCAP music. ASCAP based its opposition principally on the contention that Pandora had not proved that less than 25% of its stock was beneficially owned or controlled by foreign entities. Despite Pandora being a company founded in the US by US citizens, headquartered and operating almost exclusively in the US, and traded on the US stock exchanges, ASCAP contended that Pandora had not established that its ownership of a broadcast station would not violate the alien ownership rules. How could they make such an argument?
ASCAP did not assert that Pandora was, in fact, controlled by alien owners or even that there were foreign companies with substantial ownership interests in Pandora. Instead, it essentially argued that Pandora had not demonstrated that its alien ownership did not exceed the 25% limitation in the rules, pointing to various examples of investment funds that have foreign ownership and reported on SEC filings that they hold interests in Pandora. These ASCAP objections triggered an inquiry from the FCC as to Pandora’s foreign ownership. That FCC inquiry pointed to an FCC policy statement that provided “Suggestions” as to how public companies should analyze their alien ownership. These Suggestions had been adopted in the 1970s, and exist only as a PDF of an old type-written internal FCC memo. To demonstrate compliance with the FCC’s alien ownership rules, the Suggestions require that a public company count the number of shareholders whose citizenship the company knows to be domestic and then do a survey of the citizenship of the remainder of the company’s shareholders. Any shareholders whose citizenship cannot be determined from the survey (e.g., because the shareholders did not answer the survey) are required to be assumed to be aliens. Thus, a company must presume that the citizenship of each of its shareholders is foreign unless a shareholder’s citizenship can be demonstrated to be domestic. In today’s modern stock trading world, many (if not most) of the public companies that are not historically FCC licensees, and therefore who have not adopted special corporate provisions to track their shareholders, will have difficulty complying with the ownership restrictions using the FCC’s procedures.
Why? As set out in the petition filed by Pandora, the SEC has radically changed shareholder identification requirements since the Suggestions were first adopted by the FCC. In the intervening years, the SEC has allowed shareholders to purchase shares without revealing their identities to the companies whose shares they are purchasing. Communications between the companies and these shareholders, such as proxy statements, are handled through agents, and these agents do not reveal the identity of the shareholders to the company. Thus, the company does not have access to specific information about many or, in some cases, most of its shareholders. In addition, many shares are now held through various kinds of investment vehicles – hedge funds, private equity companies, investment funds and other entities – who hold shares in a myriad of companies and have numerous equitable owners who invest in the investment vehicles with no expectation that their identities will be released to anyone. These investment vehicles simply have no incentive to survey their investors’ citizenship on behalf of one of their portfolio companies, in which they may not even hold a significant position. As the FCC’s policies require the analysis of both a company’s voting rights and equitable ownership when the company is determining its compliance with the 25% limitation, the SEC’s shareholder privacy rules and the proliferation of investment funds, combined with the requirement in the FCC’s Suggestions that all unknown shareholders be treated as foreign, make compliance difficult—if not impossible.
Because of these factors, Pandora concluded that it could not meet the Commission’s evidentiary requirements to show that Pandora had less than 25% alien ownership. Pandora commissioned two different studies to look at its ownership, both of which used statistical analysis of documentation that was available to the company through SEC records and elsewhere. Both studies concluded that it was probable that Pandora had significantly less than 25% alien ownership, but neither was able to follow the specific procedures set out in the Suggestions. Because it could not comply with the decades-old policies set forth in the FCC’s Suggestions, Pandora was forced to use the route suggested by the Commission’s November ruling—i.e., filing a petition for declaratory ruling, rather than being able to outright convince the FCC’s Media Bureau that it complied with the 25% limitation.
Is Pandora’s petition the kind of filing that the FCC contemplated when it adopted its policy to allow alien ownership in broadcast licensees greater than 25%? It is not entirely clear. At several meetings held in Washington to discuss this new policy after it was adopted, DC lawyers have speculated about using the declaratory ruling route to deal with difficult-to-identify owners. As the financial world has become more complex, it is not only public companies that have difficulties with the alien ownership rules as they have been applied in the broadcast world. There are many funds whose beneficial ownership is not public and who have been interested in investing in companies that own broadcast stations. However, many have been concerned about entering the market because their investors generally do not readily volunteer their identities. Using the November FCC decision to allow these kinds of funds to invest in broadcast properties without disclosing passive investors seems to serve the intent of the new ruling by encouraging new investments in the broadcast media. Pandora itself has argued that its innovative approach to program content is also the kind of innovation that the FCC was seeking when it relaxed the foreign ownership restrictions.
What’s next for Pandora’s petition? The FCC will consider it and the ramifications that it has on the public interest. As stated in the Commission’s November ruling, the Executive Branch of the government will also review it to see if it poses any national security issues. Potentially, public comment will be sought on the petition. And then we will see how the Commission deals with this first petition under its new broadcast alien ownership rules, and it may give us some guidance as to how they will deal with subsequent requests under its new policies. Just as it has been an innovator in the Internet radio space, Pandora here is innovating in the world of FCC regulation of broadcasters.
In the interests of full disclosure, I represent parties involved in this transaction.