FCC Licenses: The Forgotten Stepchildren of M & A
Parties to acquisitions often find themselves in the position of the McCallisters in "Home Alone," dashing out of the house and arriving in Paris only to discover that they’ve left little Macaulay Culkin (aka Kevin) behind. Like the McCallisters, buyers and sellers, and even their counsel, in their frenzy to get a deal done, sometimes overlook the need to obtain prior FCC authorization for transfer of control, or assignment, of licenses for private radio and telecommunications facilities that are important, and possibly essential, to the business being acquired. A recent order of the Federal Communications Commission Enforcement Bureau stands as a pointed reminder that failure to conduct careful due diligence regarding the existence and status of such licenses, and obtain pre-closing FCC authorization for their transfer, can not only delay deal consummation but also result in imposition of significant penalties and compliance conditions.
Private radio and telecommunications. All sorts of non-telecommunications companies – energy providers, railroads, interstate trucking lines, toll-road operators, airlines, manufacturers, retailers, and numerous others -- rely upon radio and telecommunications facilities in the operation of their businesses. Those facilities may be used for voice communications, equipment and systems monitoring, or data collection, transport and analytics. Eschewing third party and common carrier services, many companies instead utilize their own private radio and telecom facilities to support their mainstay businesses.
Because the operation of most such facilities is regulated, and subject to licensing by the Federal Communications Commission, generally they may not be operated, or materially modified, without prior FCC approval. Nor may ownership or control of the licenses for such facilities be transferred or assigned, directly or indirectly, to another person without prior FCC approval and a finding, under Section 310(d) of the Communications Act, that transfer or assignment will serve the public interest, convenience and necessity. Even pro forma reorganizations, and certain debt transactions, may trigger a requirement of FCC consent. In the M & A context, this means that applications for assignment, or transfer of control, must be filed with the FCC sufficiently in advance of closing on an acquisition of all of, or a controlling interest in, a business that holds FCC licenses. Failure to obtain advance FCC approval can delay closing, expose the parties to an acquisition to stiff FCC penalties, result in license conditions or denial, and give rise to disputes between the parties that may lead to post-closing adjustments or even litigation.
The FCC Order and Consent Decree. Canadian Pacific Railway Company and various of its subsidiaries (the “Railway”) learned the hard way the consequences of overlooking the need to obtain FCC approval prior to transferring control of FCC wireless radio licenses, and operating other facilities without any license at all. In late 2008, the Railway acquired two smaller rail carriers, but failed in the course of due diligence to uncover the fact that both of the acquired carriers held FCC licenses for wireless radio facilities. Seven years later, the Railway discovered not only that the prior transactions were consummated without securing FCC approval of transfer of the licenses, but that the Railway subsequently had constructed, operated, modified and relocated other wireless facilities without FCC approval – leading to it having more than 100 unauthorized facilities by the time of its disclosure to the FCC.
Despite the fact that the Railway voluntarily disclosed its violations and cooperated with the FCC during the ensuing investigation, and that the FCC found that the company’s actions were taken in support of the safe operation of its facilities and that no harmful interference was caused by the unlicensed facilities, the FCC nonetheless imposed a $1,210,000 fine. In addition, the FCC mandated stringent compliance obligations for a period of three years, including:
- development of a comprehensive compliance plan;
- implementation of operating procedures;
- adoption of a compliance manual;
- compliance training;
- reporting to the FCC; and
- appointment of a senior manager to serve as the company’s compliance officer.
The Commission remarked that the penalty and conditions imposed were intended not only to sanction the Railway for its unlawful actions – the scope and duration of which the FCC characterized as “substantial” -- but generally to deter the unlicensed operation of radio facilities and to stop the unauthorized transfer of radio licenses to potentially unqualified persons.
Lesson Learned. Failure to comply, in M&As and other transactions, with the regulatory requirements governing assignment or transfer of control of FCC licenses can exact a heavy toll. Consequently, it is in the interest of both buyers and sellers to facilitate effective due diligence geared to identifying all radio and telecommunications facilities operated by the target and determining:
- whether the seller has all required FCC licenses for those facilities;
- whether the licenses are in good standing;
- whether there were any past enforcement proceedings concerning the licenses and the licensed facilities;
- whether any regulatory fees are unpaid or other red flags exist;
- when the licenses will expire and whether renewal applications have been or need to be filed; and
- whether the transaction will result in a de facto or de jure transfer of control of, or assignment, of licenses.
With these facts established, the applicable FCC approval process should be identified, and a timeline developed for (1) resolution of any outstanding issues concerning the licenses, (2) acquisition of timely pre-closing action by the FCC on applications for transfer of control, or assignment, of the licenses, and (3) timely filing of any required post-closing notices to the FCC. In addition – and this is important – the buyer needs to ensure that, once the transaction is consummated, management continues to diligently comply with all regulatory responsibilities concerning the licenses and the licensed facilities. These prudential steps will help ensure that the parties to an acquisition involving FCC licenses don’t discover that they’ve left Kevin – or the FCC licenses – behind.