Public Notice CRTC 1999-196
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Ottawa, 10 December 1999
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Policy regarding use of trust arrangements
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Summary
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This document sets out the Commission’s policy with respect to trust arrangements. Such arrangements, which require the prior approval of the Commission, are generally used when parties acquire shares of publicly-traded companies in advance of seeking the Commission’s approval to finalize the transactions.
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In this Notice, the Commission sets out a number of guidelines for licensees seeking to use trust arrangements. It expects that these guidelines will assist licensees in developing trust arrangements and in preparing applications to use them. This should, in turn, allow the Commission to deal with such applications in a timely manner.
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Introduction
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1. The Commission issued Public Notice 1999-60, Call for comments on the use of trust arrangements on 13 April 1999. The notice asked parties to identify the circumstances under which trust arrangements, rather than conditional purchase and sale agreements, would be acceptable, and whether there are particular criteria that applicants should meet in order to obtain prior approval of such arrangements.
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2. Pursuant to the Broadcasting Act and its regulations, a licensee must obtain the Commission’s prior approval of transfers of ownership or control of broadcasting undertakings.
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3. Trust arrangements have been used, on a case-by-case basis, generally when parties are acquiring shares of publicly-traded companies, in advance of seeking the Commission’s approval to effect the transactions. Such arrangements are necessary to ensure compliance with applicable securities law requirements while still maintaining the integrity of the Commission’s regulatory process. However, in recent cases, the Commission has been asked to approve trust arrangements after a transfer of ownership requiring prior Commission approval has been effected, and for transfers that did not involve publicly-traded companies.
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4. Trust arrangements permit beneficial ownership of shares to vest clearly with the purchaser, while ensuring that voting rights associated with the shares (and hence control) are exercised by an independent, arm’s length trustee, pending the Commission’s consideration of the proposed change of ownership or control. The trustee has the obligation to continue the broadcasting undertaking(s) in question in the ordinary course of business pending the Commission’s determination. Under the provisions of the trust arrangement, if the Commission denies the application, or requires some form of divestiture, the trustee agrees to sell the shares to an independent third party.
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Comments
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5. The Commission received comments from Shaw Communications Inc. (Shaw); Rogers Communication Inc. (Rogers); Global Television Network (Global); Alliance Atlantis (Alliance); and Fundy Communications (Fundy).
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6. Several parties would prefer that the Commission continue its practice of reviewing proposed trust arrangements on a case-by-case basis, rather than setting particular criteria to be met for their approval. They also submitted that trust arrangements should be permitted in some situations other than these involving public take-over bids. As an example, they pointed to tax-driven reorganizations which sometimes require that beneficial ownership of broadcasting assets be transferred to realize tax advantages. The use of trust arrangements would permit such transfers, while conditional purchase and sale agreements would not.
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7. One party suggested that beyond transactions involving the shares of a publicly-traded company, trust arrangements should only be implemented in very exceptional circumstances, as parties should be able to delay the closing until the Commission’s prior approval has been granted.
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8. Several parties emphasized that prior Commission approval of any trust arrangements should also be a requirement. Further, it was suggested that discussions with the Commission regarding the possible use of trust arrangements should begin as early as possible, preferably at the same time as the execution of a term sheet or a letter of intent. (A term sheet is a memorandum of understanding outlining the broad guidelines under which an agreement has been reached and under which the legal document will be drawn up.) This would allow the matter to be resolved well in advance of the execution of any definitive agreements in respect of the transfer of ownership or control.
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9. The parties also noted that, given the pace of change in the communications sector, it is important that the Commission's procedures for dealing with ownership transfers, including trust arrangements, remain flexible and timely.
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The Commission's policy regarding trust arrangements
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10. In light of the importance of the prior approval regime, purchase and sale agreements conditional on the Commission's prior approval of the transfer of ownership or control will be required in every case involving transfers of ownership or control of broadcasting undertakings, except where the vendor can clearly demonstrate to the Commission that trust arrangements are necessary to satisfy the requirements of securities legislation.
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11. While the Commission agrees that it would not be appropriate to set detailed and rigid criteria governing the approval of trust arrangements, it is of the view that the general guidelines set out below should be observed by licensees seeking to use trust arrangements. The Commission remains committed to processing applications for approval of transfers of ownership or control and applications for approval of trust arrangements in a timely manner. Adherence by licensees to the general guidelines set out below will assist in this regard.
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12. The Commission reminds licensees of the regulatory requirement that the Commission's prior approval be obtained for transfers of ownership or control of broadcasting undertakings. The Commission emphasizes that, as it does not solicit competing applications for transfers of ownership or control, the onus is on the licensee to demonstrate that the application is the best possible proposal under the circumstances. Accordingly, prospective vendors have the responsibility to consider the appropriateness of the prospective buyer in light of regulatory concerns. Such concerns include for example, financial viability, concentration of ownership (vertical and horizontal integration), foreign ownership, and benefits. These considerations may not take on the same importance for the vendor when a sale can be finalized and the assets or shares placed in trust before Commission approval.
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13. In addition, licensees seeking approval for trust arrangements should observe the following guidelines:
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(i) Discussions with Commission staff regarding trust arrangements should be initiated as early as possible, preferably at the same time as the execution of a term sheet or letter of intent. At a minimum, discussions should be initiated no less than three weeks in advance of any public bid.
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(ii) A formal application for approval of trust arrangements should be filed with the Commission at least one week in advance of any public bid.
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(iii) With respect to (i) and (ii), above, the Commission notes that the application and the Commission’s ruling thereon would generally be in confidence until such time as the bid is publicly announced.
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(iv) The applicant should propose a trustee who is independent and at arm’s length from the parties and their affiliates and related companies. The trustee should possess appropriate experience and expertise, and applicants should include the proposed trustee’s curriculum vitae with the application, as well as an attestation in affidavit form as to the trustee’s independence.
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(v) The applicant should include a proposed form of trust agreement with its application that provides, at a minimum, for the following:
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• A clear and detailed description of the transaction(s)and of the shares that would be subject to the trust;
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• Possession at all times during the term of the trust of the deposited shares by the trustee;
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• All voting rights attached to the deposited shares remain with the trustee during the term of the trust;
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• Continuation of the broadcasting undertaking(s) by the trustee in the ordinary course of business;
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• The trustee may only elect or appoint directors to the Board of Directors who are independent and at arm’s-length from the parties and their affiliates and related companies; and
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• Mechanisms for the disposition of the deposited shares (in whole or in part) in the event of a denial, or a conditional approval requiring some form of divestiture, by the Commission of the proposed transfer of ownership or control.
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(vi) In addition, applicants should consult existing precedents, and provide argument in support of any departures from the standard trust arrangement provisions.
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(vii) The application(s) regarding the proposed transfer of ownership and control should be filed in a timely manner, and no later than 4 months from the placement of the shares in trust.
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14. The approval of a trust arrangement by the Commission is not to be interpreted in any way as an indication that the Commission is predisposed to approve the application for a change of control or ownership. If the application for a change of control or ownership is not approved the trustee will be required to dispose of the interests in a manner consistent with the requirements of the Commission.
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15. The Commission notes that this policy is prospective in nature, and accordingly, does not affect existing trust arrangements or applications for trust arrangements currently before the Commission.
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Secretary General
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This notice is available in alternative format upon request, and may also be viewed at the following Internet site: http://www.crtc.gc.ca
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