Seventy-eight per cent Canadian is a comfortable number in almost every Canadian statute. In the Direction that governs who may hold a broadcasting licence, it is a failing one.
At a glance
A Canadian media fund was acquiring four commercial FM licences in secondary markets — $19 million of revenue, equity value $34 million. It had done three previous deals in Canadian media, none licensed. The acquiring entity’s cap table was 78 per cent Canadian limited partners and 22 per cent one American public pension plan, the fund’s anchor investor and a participant in every vehicle it had raised. Its board was five directors, four Canadian, with a Canadian chief executive officer.
The board satisfied the test exactly: four of five directors is 80 per cent, and the chief executive officer was Canadian. The cap table did not. The requirement is not a majority, not two-thirds, not control in fact — it is not less than 80 per cent of the voting shares and not less than 80 per cent of the votes, held by Canadians. Seventy-eight is not eighty, and nothing lets a two-point shortfall be argued away because the American investor is passive. The consequence is not a condition on the licence; the licence cannot be issued, amended or renewed at all.
Three numbers decided it, at three different levels.
Eighty per cent at the licensee — Canadian ownership of the voting shares and of the votes. At 78 per cent the entity was not a qualified corporation, and so not a Canadian.
Sixty-six and two-thirds per cent at the parent. Where the licensee is a subsidiary, its parent is tested at 66 2/3 per cent of voting shares and votes — materially looser, which is why a two-tier structure is the standard answer.
Eighty per cent again, at the parent, as a switch. The programming-influence condition is not free-standing: it applies where Canadians hold less than 80 per cent of the parent’s voting shares and votes, or its chief executive officer is a non-Canadian, or fewer than 80 per cent of its directors are Canadian. A parent at 78 per cent trips the first. The looser ownership test is bought at the price of a hard prohibition on the parent and its directors influencing programming — which for a media fund is the point of owning the asset.
The structure adopted took a fourth number from the test itself. Paragraph (b) counts voting shares and votes, so the American stake in the licensee-holding entity was capped at 19.9 per cent of voting shares and votes, the balance in non-voting shares — within the test rather than around it. Compare a money services business that was only a registration, where the federal 20 per cent threshold is written in terms of the entity or the shares of the entity and counts non-voting shares in full. Same restructuring, opposite result: which words the threshold uses is the mechanic.
The authority is Broadcasting Act s.26(1)(c), empowering the Governor in Council to direct the Commission “respecting the classes of applicants to whom licences may not be issued” or to whom amendments or renewals may not be granted. The direction issued under it is the Direction to the CRTC (Ineligibility of Non-Canadians), SOR/97-192, whose s.2 is one sentence: the Commission “is hereby directed that no broadcasting licence may be issued, and no amendments or renewals thereof may be granted, to an applicant that is a non-Canadian”.
“Canadian” is defined by a list, one entry being a qualified corporation — incorporated or continued in Canada or a province, where at paragraph (a) the chief executive officer and “not less than 80 per cent of the directors are Canadians”, and at paragraph (b) “Canadians beneficially own and control, directly or indirectly, in the aggregate and otherwise than by way of security only, not less than 80 per cent of all the issued and outstanding voting shares of the corporation and not less than 80 per cent of the votes”.
Paragraph (c) adds the subsidiary tier: the parent must be incorporated or continued in Canada and Canadians must own and control “not less than 66 2/3 per cent of all of the issued and outstanding voting shares of the parent corporation and not less than 66 2/3 per cent of the votes”. Then, at (c)(iii), “the parent corporation or its directors do not exercise control or influence over any programming decisions of the subsidiary corporation where” one of three things is true — the first being that Canadians hold “less than 80 per cent of the issued and outstanding voting shares of the parent corporation and less than 80 per cent of the votes”.
That conditional structure matters: (c)(iii) is easy to misread as an unconditional ban on parent-level programming influence. It is not. It switches on exactly when the parent falls below 80 per cent on ownership, on its chief executive officer, or on its board — so a structure using the 66 2/3 per cent allowance always carries it, and one whose parent sits at 85 per cent Canadian does not.
Arithmetic is not the whole test. Section 3 deems an applicant non-Canadian where the Commission “determines that an applicant is controlled by a non-Canadian, whether on the basis of personal, financial, contractual or business relations” or any other relevant consideration, and control means “control in any manner that results in control in fact, whether directly through the ownership of securities or indirectly through a trust, an agreement or arrangement” or otherwise. A limited partnership agreement is an agreement.
Separately, the transaction needs approval. Under the Radio Regulations, 1986 s.11(4) a licensee “shall obtain the prior approval of the Commission in respect of any act, agreement or transaction that directly or indirectly would result in” — among other things — “a change by whatever means of the effective control of its undertaking”, plus crossings of 30 per cent of the voting interests and 50 per cent of the common shares. Section 11(3) includes within effective control situations where “a person has the ability to cause the licensee or its board of directors to undertake a course of action”.
The American investor took 19.9 per cent of the voting shares and votes in the licensee-holding entity, the remainder of its economic interest in non-voting shares. No parent tier was interposed, so the 66 2/3 per cent allowance and its programming condition never arose. The limited partnership agreement was amended too. The anchor investor held consent rights over the annual budget and over senior hires, and senior hires included the group programme director; given s.3, a foreign investor with a veto over who decides what goes on air invites a control-in-fact finding whatever the share count. That consent went, and the budget consent was carved out of programming lines. Closing was conditional on prior approval of the change of effective control — see a foreign buyer facing a national security review, a different federal gate on the same kind of deal.
The exposure is not a penalty; it is the asset. The Direction bars issuance, amendment and renewal to a non-Canadian applicant, so four FM licences held by an entity that is not a qualified corporation cannot be renewed at term. The 22 per cent structure also forecloses the growth path: every subsequent acquisition of a licensed undertaking, and every amendment to an existing licence, runs through the same test. Two points, and a permanent constraint on the platform rather than a closing problem to be papered over.
The tell was the fund’s standard vehicle, used without modification. Three previous deals were in unlicensed media — production, out-of-home, digital — where the cap table is a commercial matter. In a licensed sector it is a condition of the asset existing.
The second tell was the word “passive”. Paragraph (b) does not ask whether an investor is passive; it counts shares and votes. Where passivity does matter — control in fact under s.3 — it is measured by rights in an agreement, and this agreement gave the passive investor a veto over the programme director.
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