Forget Something? Overlooking FCC Licenses in Your M&A Could Cost You
We have reminded you before of the importance of obtaining authorization from the Federal Communications Commission (FCC) for the transfer of control, or assignment, of FCC licenses prior to closing in M&A transactions, and the risks of failing to do so. A consent decree recently entered into by Marriott Vacations Worldwide Corporation (MVW) serves as another reminder of the importance of paying careful attention during M&A due diligence to the target's FCC licenses, and of submitting timely assignment or transfer of control applications to the FCC.
As MVW and others before it have learned, failure to do so can result in not just a delay of closing ... but significantly worse consequences.
Businesses of all types—not just telecommunications companies—hold a variety of FCC-issued licenses (e.g., Private Land Mobile Radio Service licenses) covering private radio and telecommunications facilities used in their daily operations. Energy companies, manufacturers, construction companies, retailers, transportation and shipping companies, hospitals, universities and, as in the Marriott Vacations case, operators of hotels, resorts and similar recreational and hospitality businesses utilize fixed and mobile communications facilities for voice communications, employee dispatch and management, equipment and systems monitoring, data collection, transport and analytics, supply chain management, safety and security, and more.
Unauthorized Transfers of Control of Radio Licenses Are Illegal
These business radio systems—whether simple two-way hand-held radios or more sophisticated networks—must be licensed by the FCC, those licenses must be renewed and updated as systems evolve and expand, and generally they may not be materially modified without prior FCC approval. It also is illegal to transfer ownership or control of, or assign, the licenses for such facilities, directly or indirectly, to another person without prior FCC approval and a finding, under Section 310(d) of the Communications Act, 47 U.S.C. § 310(d), 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 significantly 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 could delay closing, expose the transaction parties 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 Marriott Vacations Worldwide Case
In September 2018, global vacation ownership company MVW completed the acquisition of ILG, Inc., a "provider of premier vacation experiences with over 40 properties and more than 250,000 owners in its Sheraton Vacation Club, Westin Vacation Club and other vacation ownership portfolios," for a combined implied equity value of approximately $4.7 billion. Not long after the deal closed, in February 2019, MVW voluntarily disclosed to the FCC that it and several acquired entities had participated in seven corporate acquisitions between 2007 and 2018 that involved transfers of control or assignments of 69 private radio wireless licenses without obtaining FCC consent.
MVW acknowledged FCC consent should have been obtained prior to the transfer of control of the licenses and that its actions and those of its predecessors violated the Communications Act and FCC rules. MVW entered into a Consent Decree to resolve the FCC Enforcement Bureau's investigation.
The decree includes not only a $70,000 civil penalty—which pales in comparison to the $1,200,000 penalty imposed in the unauthorized transfer of control enforcement action about which we previously reported—but also burdensome behavioral requirements imposed for a three-year period, including the following:
- Adoption of a comprehensive compliance plan designed to ensure compliance with the communications laws and with the terms and conditions of the Consent Decree.
- Implementation of operating procedures;
- Adoption of a compliance manual;
- Compliance training;
- Submission of annual reports to the FCC; and
- Appointment of a senior manager to serve as the company's compliance officer.
The penalties, compliance costs, business disruption, and legal costs that can result from unauthorized operation, modification or transfer of business radio facilities can be substantial. Companies should exercise diligence to ensure that their facilities are properly licensed at all times.
In the M&A context, parties to acquisitions sometimes 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 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 continued operation of the business being acquired. As too many companies have learned the hard way, failure to conduct careful due diligence regarding the existence and status of FCC 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.
Consequently, it is in the interest of both buyers and sellers to conduct effective due diligence geared to identifying all radio and telecommunications facilities operated by the target and determine whether:
- The seller has all required FCC licenses for those facilities;
- The licenses are in good standing;
- There were any past enforcement proceedings concerning the licenses and the licensed facilities;
- There were any prior unauthorized transfers of control, or assignment, of the licenses;
- Any regulatory fees are unpaid or other red flags exist;
- Renewal applications have been or need to be filed prior to expiration; and
- The transaction will result in a de facto or de jure transfer of control of, or assignment, of the licenses.
With these facts fully investigated, the 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 (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.