ARCHIVED - Letter

Ottawa, 26 September 2011

Email: claflamme@astral.com
Sean@maxamcapitalcorp.com

Re:Transfer of shares and change of effective control – CHHR-FM Vancouver
Application 2011-1118-7 – Denied

Ms. Laflamme, Mr. Morrison,

The Commission has examined the above-mentioned application for authority to effect a transfer of shares and change of effective control of Shore Media Group Inc. (Shore Media) to Astral Media Radio inc. (Astral Radio), pursuant to section 10(4)(a) of the Radio Regulations,1986.

Shore Media is the licensee of CHHR-FM, an English-language commercial radio programming undertaking in Vancouver. It is owned by various shareholders and is controlled by its board of directors.

The transaction

On 13 July 2010, Shore Media and Astral Radio entered into both a Put and Call Agreement and a Loan Agreement (the 2010 Agreements). The Put and Call Agreement provided Shore Media shareholders with the ability to require Astral Radio to purchase all of their shares in Shore Media. Shore Media shareholders exercised their option as per the 2010 Agreements on 14 July 2011. The Share purchase agreement between Astral Radio and Shore Media was executed on 22 July 2011 (the 2011 Agreement).

The licence trafficking policy

In Revised criteria for the application of the licence trafficking policy, Broadcasting Information Bulletin CRTC 2010-220, 19 April 2010 (the licence trafficking policy), the Commission stated thatduring the first two years following the launch of a service, any transaction involving the licence will normally be denied, except where the applicant can demonstrate the necessity of the transaction as a result of a force majeure event.

Date of the transaction

The launch of the station occurred on 1 June 2009. In light of the licence trafficking policy, the Commission examined whether the transaction occurred in 2010, within the first two years following launch, or in 2011, after the two-year period following launch.

The Commission took into consideration the applicant’s argument that the date of the transaction is 22 July 2011 and therefore meets the two-year period criterion. However, the Commission finds that the terms of the 2010 Agreements established a framework that could only have reasonably lead to the change of effective control from Shore Media to Astral Radio. The Commission notes that while there existed various potential outcomes of the 2010 Agreements, the circumstances in which they were concluded and the provisions within left no reasonable doubt as to the intended result. For example, the terms of the 2010 Agreements were drafted in such a manner that, regardless of the financial performance of the station, one of the parties to the 2010 Agreements would have exercised its rights to proceed with the transaction.

The Commission also notes that while according to the 2010 Agreements a final purchase and sale agreement remained to be concluded, most of the terms of the agreement were already determined. Terms agreed to in 2010 included a pre-determined price with adjustments and safeguards to ensure Astral Radio’s eventual purchase of Shore Media, including an exclusivity clause that prevented Shore Media from negotiating with other parties the potential sale of the station. Further, according to the terms of the 2010 Agreements, any outstanding terms in the final purchase and sale agreement were to be negotiated on commercially reasonable grounds, leaving no reasonable doubt that the 2010 Agreements would lead to the signing of an agreement to transfer effective control.

In light of the above, the Commission finds that an agreement was reached between Shore Media and Astral Radio in 2010 to transfer effective control of Shore Media to Astral Radio in 2011. The Commission is of the view that the transaction occurred in two steps. The first step of the transaction occurred in July 2010, when Astral Radio and Shore Media executed the 2010 Agreements. The second step occurred in 2011, when Shore Media shareholders exercised their rights as per the 2010 Agreements and signed the 2011 Agreement (“the Put,” or exercise of rights acquired in step one). Therefore, pursuant to the licence trafficking policy, the 2010 transaction date requires that the Commission consider the proposed transfer of shares and change of effective control as licence trafficking, unless the applicant can demonstrate the necessity of the transaction as a result of a force majeure event.

Exemption to the licence trafficking policy

The Commission considered the applicant’s argument that, in the event the Commission considers that the transaction took place within the two years following the launch of the service, it was a necessary transaction resulting from a force majeure event, namely the world economic crisis that began in 2008.

The Commission notes that the definitions of a force majeure event found in the Supreme Court of Canada decision quoted by the applicant (Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited, [1976] 1 S.C.R. 580) and in Commission Telecom decisions require, at minimum, evidence that a single event caused one party not to fulfill its legal obligations. However, while the applicant attempted to demonstrate that the economic crisis in 2008 meets the definition of a force majeure event, it also noted that the impact of the global economic crisis was not the only problem facing Shore Media. First, there was the presence of a direct competitor, which was also granted a radio broadcasting licence at the 25 February 2008 Vancouver hearing. Second, this competitor launched before CHHR-FM, securing its position and benefiting from the first-mover advantage. Third, the Canadian Broadcasting Corporation modified the format for its Radio 2 station CBU-FM Vancouver to Adult Album Alternative (Triple A), increasing competition for CHHR-FM. Finally, there are the challenges it faced as a stand-alone station versus competitors that had multiple stations benefitting from sales and promotion synergies across those stations and multiple platforms.

Furthermore, the Commission considers that while the global financial crisis was unexpected, something that was beyond reasonable human foresight and skill, the consequences of this event (such as lower revenues than expected in the business plan and difficulty in raising financing) were not of such a nature that they could not have been addressed by the applicant. The Commission notes that the decision to launch could have been delayed further until sufficient financing in the new economic environment had been secured. The Commission also notes that nothing prevented the investors in Shore Media from making greater investments in the service or seeking other financial arrangements that, while likely economically disadvantageous, would not have been unprecedented given the nature of the costs associated with a start-up in a highly competitive market. Any new licensee should have considered this possibility and prepared accordingly, especially considering the nature of the broadcasting industry and the competitiveness of the Vancouver radio market. By failing to have sufficient financial resources to operate, Shore Media is attempting to rely on a condition that it brought upon itself. Consequently, even if the Commission were to find that the economic crisis was a force majeure event, the economic crisis did not in and of itself force Shore Media to sell to Astral Radio.

In light of the above, the Commission determines that failure to comply with the licence trafficking policy was not caused by a force majeure event.

Commission decision

The Commission notes that the licence trafficking policy was established to preserve the integrity of the licensing process while ensuring greater predictability and efficiency. As noted above, the Commission finds that the transaction occurred within the two-year period following the launch of the service and that an exemption from the licence trafficking policy due to a force majeure event is not warranted. Consequently, pursuant to the licence trafficking policy and for the reasons noted above, the Commission denies the application to effect the transfer of shares and change of effective control of Shore Media Group Inc. to Astral Media Radio inc.

This letter will be made available for public examination at the Commission’s central office and will be posted on the Commission’s website.

Yours sincerely,

Originally signed by John Keogh for

Robert A. Morin
Secretary General

Date modified:

2011-09-26