At the FCC’s open meeting last week, the Commission adopted new policies for assessing and computing foreign ownership of broadcast companies – particularly such ownership in public companies. The Commission’s Report and Order on this matter is dense reading, dealing with how companies assess compliance with the rules which limit foreign ownership to 20% of a broadcast licensee and 25% of a holding company unless there is a finding by the FCC that the public interest is not harmed by a greater foreign ownership interest. The rules adopted last week were principally an outgrowth of the petition for declaratory ruling filed by Pandora which sought FCC approval, in connection with its acquisition of a radio station, for foreign ownership of greater than 25%. Pandora did not file such a petition because its foreign ownership exceeded that percentage, but instead because, based on the FCC methodology in use at the time, Pandora could not prove that it was in compliance (see our summary of the Pandora petition here). The new rules adopted last week essentially reverse the presumption to which Pandora had to comply – rather than assuming that there was a compliance issue because a company cannot prove that its foreign ownership was less than 25%, the FCC will now conclude that there is an issue only where a company, based on knowledge either that it has or should have, actually knows that there it has a foreign ownership compliance problem.

The order requires that public companies regularly take steps to assess their owners to determine if there are potential foreign ownership issues. A public company should know who certain shareholders are, either because they are insiders (e.g. officers and directors) or because they are otherwise known to the company (e.g. through proxy fights, shareholder lawsuits or because they are in some way doing business with the company). Other shareholders can be determined through an array of filings made at the SEC – including filings made when a shareholder exceeds holdings of 5% of the stock of a company, and other filings made by companies that manage more than $100 million in assets who are required to report on their stockholdings. In addition, there are other public sources of information about funds and other investment companies that buy the stock of broadcast companies, from prospectuses to Internet news stories. Public broadcast companies need to monitor all of these sources of information to see whether they potentially have a problem with foreign ownership. The FCC did not require that these companies take other measures that had been used in the past or suggested in the Notice of Proposed Rulemaking in this proceeding (about which we wrote here).

In the past, the FCC had required that public companies take surveys of their shareholders to determine if they were in compliance with the foreign ownership limits. If a shareholder did not respond to the survey, the non-responding shareholder was deemed to be foreign. In today’s world, companies know few of their shareholders as most stock is held in “street names” (e.g. in the name of banks or brokerage houses that actually purchased the shares). Consequently, the FCC decided that shareholder surveys were not practical. Even surveys of known shareholder were not deemed to have any real value in extrapolating to the overall foreign ownership of a public company. So no broad surveys of shareholders will be required.

Others had suggested that the FCC use the DTS SEG-100 program participation as a way to monitor foreign ownership. This program is a program that some corporations use to attempt to monitor and control foreign ownership for a variety of regulatory reasons. But some commenters suggested that such monitoring was not reliable, and that the whole program put significant burdens on companies with uncertain benefits. As a result, participation was not required by the FCC.

In summary, broadcast companies are required to use these more public sources of information to assess compliance – and only foreign shareholders who are known or who should be known through these reasonable sources will count toward assessing compliance with the percentage ownership limits.

The FCC notes that companies no longer need to report on foreign owners who do not have attributable interests in broadcast companies (e.g. ones with non-voting stock or with less than 5% of the voting stock in a corporation). Some press reports have indicated that these nonattributable shareholders no longer need to be counted toward assessing compliance with the 25% ownership cap. In reading the item carefully, however, it actually does not seem to say that. Instead, it only says that these nonattributable shareholders don’t need to be reported as part of a petition for declaratory ruling seeking FCC consent to exceed 25% indirect foreign ownership. It does not say that their interests do not count toward the applicable foreign ownership limits when determining compliance if their identity is in fact known by the broadcast company.

The new rules also allow foreign investors, once approved by the FCC, to increase their ownership interests without further approvals. If the investors have been disclosed and approved in a non-control position in a petition for declaratory ruling, they can then increase their interest to 49.99% without additional FCC approval. If they have been approved in a controlling position, they can go to 100% ownership without additional FCC approval. Also, once a company with foreign ownership is approved for the ownership of one broadcast station, they can acquire other stations without any special analysis of their foreign ownership. Further, the FCC newly established a process to enable publicly traded companies to secure retroactive approval of foreign ownership above 25% if the broadcaster’s foreign ownership exceeded 25% due solely to circumstances beyond its control that were not reasonably foreseeable by the broadcaster with the exercise of due diligence.

While these new rules may allow more US investment by non-US companies, the rules for the most part are geared to making it easier for public companies to deal with assessing their foreign stock ownership. Private companies generally are not affected by these new rules, though the FCC did leave the door open a bit, saying that some aspects of these rules may be applied in an appropriate situation where ownership of a private company is difficult to compute. But, in most cases, the FCC expects that private companies will know their owners, and should be able to report on them and request FCC approval, where appropriate, in cases where the foreign ownership exceeds 25% of a holding company. We’ve written here and here about the cases pending before the Commission seeking approval of foreign ownership of broadcast stations above 25%. Through these cases, FCC treatment of foreign ownership of private companies may become clearer.

Obviously, this is a very high level summary of the FCC actions. In an area this complex, there are many nuances that need to be carefully analyzed in any transaction involving foreign ownership. But the bottom line is that the FCC is moving toward a system of assessing foreign ownership more like that which it uses for non-broadcast services – one where foreign investment is more normalized and available to bring capital into the broadcast marketplace.