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TRANSCRIPTION DES AUDIENCES DEVANT
LE CONSEIL DE LA RADIODIFFUSION
ET DES TÉLÉCOMMUNICATIONS CANADIENNES
Instance visant à vérifier si Globalive répond aux critères en matière de propriété et de contrôle
Salon Réal Therrien
1, Promenade du Portage
le 1er octobre 2009
Afin de rencontrer les exigences de la Loi sur les langues
officielles, les procès-verbaux pour le Conseil seront
bilingues en ce qui a trait à la page couverture, la liste des
membres et du personnel du CRTC participant à l'audience
publique ainsi que la table des matières.
Toutefois, la publication susmentionnée est un compte rendu
textuel des délibérations et, en tant que tel, est enregistrée
et transcrite dans l'une ou l'autre des deux langues
officielles, compte tenu de la langue utilisée par le
participant à l'audience publique.
Conseil de la radiodiffusion et des
Instance visant à vérifier si Globalive répond aux critères en matière de propriété et de contrôle
Konrad von Finckenstein Président
Len Katz Conseiller
Peter Menzies Conseiller
Cindy Ventura Secretaire
Stephen Millington Conseillers juridiques
Lyne Renaud Gérante de l'audience
Salon Réal Therrien
1, Promenade du Portage
le 1er octobre 2009
- iv -
TABLE DES MATIÈRES
PAGE / PARA
Globalive 290 / 1681
Bell Canada 296 / 1720
TELUS 315 / 1824
Rogers Communications Inc. 327 / 1897
Globalive 348 / 2023
--- L'audience reprend le jeudi 1er octobre 2009 à 0907
1666 THE CHAIRPERSON: Good morning, bonjour, tout le monde. Je crois que vous connaissez les commissaires et notre personnel, ce n'est pas nécessaire de les introduire.
1667 This is a resumption of the public hearing. As you know, we started on September 23rd and we had one day in camera hearing and we made the redacted transcript available to everybody.
1668 We have since had submissions from Globalive and the three intervenors and we will now hear closing arguments.
1669 We will go in the order of Bell Canada, followed by TELUS, Rogers, and Globalive will be finishing off.
1670 All interested parties to the proceedings are asked to submit their final written comments to the Commission by Monday, October 5th. Globalive will have until Wednesday, October 7th to reply to the comments submitted by the parties.
1671 All comments and reply comments must be served on all interested parties and received by the Commission by 5:00 p.m. on the dates specified.
1672 I will now ask the hearing secretary, Cindy Ventura, to make some logistical announcements.
1673 Madam Ventura...?
1674 THE SECRETARY: Thank you, Mr. Chairman, et bonjour à tous.
1675 I would like to remind you that interpretation services are available through the duration of the hearing. English interpretation is available on Channel 4 and French interpretation on Channel 5.
1676 Le service d'interprétation simultanée est disponible durant cette audience. L'interprétation anglaise se trouve au canal 4, et l'interprétation française au canal 5.
1677 Please note that there is extra seating in the examination room located to your left outside the hearing room, where you can hear and see the hearing via our videoconference centre.
1678 When you are in this room we would ask that you please turn off and not only put on vibration mode your cell phones and BlackBerrys as they cause interference on the internal communication system used by our translators and interpreters. We would appreciate your cooperation in this regard throughout the hearing.
1679 There is a verbatim transcript of this hearing being taken by the court reporter sitting to the table on my left. If you have any questions, please approach her.
1680 I would now invite Globalive to make their presentation should they want to present new information. Please reintroduce yourselves for the record, after which you may begin.
1681 MR. LACAVERA: Good morning, Mr. Chairman, Commissioners Katz and Menzies.
1682 I would like to reintroduce our team, many of whom you now know better than I think you ever expected.
1683 On my left here, Brice Scheschuk, the CFO of Globalive and AAL; Ken Campbell, the CEO of Globalive Wireless; Simon Lockie, the Chief Legal of Globalive and AAL; and Hank Intven, our Regulatory Counsel.
1684 At the table behind me, directly behind me, Andrea Wood, Chief Legal at Globalive Wireless; John Andrew with Lang Michener, a partner; and David Dobbie, Director Legal with Orascom Telecom.
1685 Mr. Aldo Mareuse, the Chief Financial Officer of Orascom Group Telecom, is going to join us a little bit later this morning, at 11:00 a.m. I believe.
1686 We have a vision of creating a much more competitive and customer-focused wireless telecom offering that Canadians deserve and that Canada has not seen for many years.
1687 We appreciate that you have permitted us to make some preliminary remarks this morning and we would like to discuss the changes we have made to the structure of our partnership with Orascom Telecom and Mike O'Connor.
1688 While not all of these changes were made uniquely as part of this process, we believe that we have comprehensively addressed any concerns that the Commission may have about our ownership and control.
1689 When Orascom and AAL agreed to partner together to provide Canadians with a new choice in wireless we always intended to fully comply with the applicable rules and restrictions governing our partnership. As you have heard over the course of this hearing, both Naguib and myself specifically instructed our advisors accordingly.
1690 We were pleased, but not surprised, when we were issued our licences following a comprehensive review by Industry Canada.
1691 Similarly, we submitted all of our documentation to the Commission in early April, immediately following Industry Canada's approval. Beginning with that submission, and throughout the twists and turns that have occurred since, we have cooperated fully.
1692 We are very happy to Commission has stood by its commitment to issue its decision on October 23rd and to put this question about Globalive's control and ownership to end once and for all.
1693 During this hearing we have listened carefully to your concerns and, as you know, we have proposed changes that we trust will address all of those current concerns.
1695 MR. CAMPBELL: Thank you, Tony.
1696 As Tony has indicated, and as the Commission has seen, shareholders have made numerous changes which we believe should address the Commission's concerns about Globalive Wireless' eligibility to commence operations.
1697 Of course, we fully expect that our competitors will say that they do not agree. Bell has gone so far as to suggest that there is no such thing as a compliant Globalive Wireless. Clearly, the incumbents don't welcome competition. They will continue to make their contrived and their disingenuous arguments.
1698 We realize that this is part of the regulatory game that they are determined to play. However, it is not the incumbent carriers that need to be satisfied. We trust they realize that the Government of Canada and this Commission have no vested interest in preventing a new wireless choice for Canadians.
1699 MR. LOCKIE: There have been two additions to the term sheet that was delivered to the Commission last week. These changes were reflected in the document circulated to the Commission and interested parties on Tuesday, so I will just outline them briefly.
1700 First, additional changes have been proposed in respect of the bridge loans in order to address the Commission's concerns. Orascom had previously agreed to remove all covenants from its bridge loans and to delete the appropriation of money section and the indemnity section.
1701 Orascom has now further agreed to extend those loans for a total of up to 36 additional months, namely, until August 5th, 2014. These additional extensions will be on the same terms and at the same or lower interest rates.
1702 Second, changes have been made to the Orascom Technical Services Agreement in the AAL Consultancy Agreement. These agreements have been amended to provide that Globalive Wireless may terminate them at any time, immediately upon notice, for any reason and with no early termination penalties whatsoever.
1703 I would like to note at this time that the circulated term sheet is not accurate on this point, but this is the agreement of the parties and what will be reflected in the documents.
1704 THE CHAIRPERSON: Thank you.
1705 On this last point, Mr. Lockie, at this point in time you only have a term sheet, we don't actually have the actual text?
1706 MR. LOCKIE: We have circulated amendments to those agreements and the terms are reflected in there.
1707 THE CHAIRPERSON: I see. Just so I understand on the OTS, if, let's say you are in year two and Globalive decides that the technical services that they are getting from Orascom are not what they need, they can then terminate it without a termination penalty, but also the provision that was there for an annual fee based on the formula is also terminated at that point in time?
1708 MR. LOCKIE: That's correct.
1709 THE CHAIRPERSON: Okay. Thank you.
1710 Any questions, fellow Commissioners?
1711 COMMISSIONER KATZ: Just a clarification.
1712 In the paragraph above it, you talk about the:
"... extension for 36 additional months on the same terms and at the same or lower interest rates." (As read)
1713 How are these lower interest rates struck? Is there a formula? Is there a process by which these rates --
1714 MR. LOCKIE: No, there isn't. The clarification was intended to capture that in the event of an extension there is no negotiation process whereby those rates could go up.
1715 COMMISSIONER KATZ: Thank you.
1716 THE CHAIRPERSON: Okay. Thank you very much. Thank you for giving to us all the documentation in time and also coming to a very quick agreement on the redacted version of the transcript that has been released.
1717 So I would now turn it over to Bell and we will hear their submission.
1718 THE SECRETARY: I would now invite Bell Canada to come forward.
1719 THE CHAIRPERSON: Good morning, Mr. Bibic. Do you want to introduce yourself and your colleagues for the record and then proceed?
1720 MR. BIBIC: Good morning, Mr. Chairman and Commissioners.
1721 For the record, I am Mirko Bibic from Bell Canada, Senior Vice-President of Regulatory and Government Affairs, and I have with me David Kidd from Blake Cassels.
1722 Before I begin, I would just like to thank the Commission and the other interested parties for allowing a change of the order so that I could meet another commitment. Thank you very much for that.
1723 We acknowledge, Commissioners, that Globalive made numerous changes to its corporate structure, governance and vetoes since we last met. It did this in response to concerns that you and we as intervenors identified.
1724 This is a normal part of the Commission's ownership review process. However, these changes do not, indeed they cannot, alter the conclusion that Globalive still does not satisfy the mandatory Canadian ownership and control requirements under section 16 of the Telecom Act.
1725 Globalive may not want to hear that, but in our view that is the only decision available. Globalive remains ineligible to operate as a Canadian carrier.
1726 I will provide my specific comments on why Globalive's amended status is noncompliant, but before I do let me start by pointing out two things that this hearing should not be about.
1727 First, it should not be about creating precedent that guts our foreign ownership laws. The Commission's jurisdiction requires that it apply the existing standards for control in fact.
1728 Mr. Chairman, as you rhetorically asked on day one of the hearing:
"What is there so special about Globalive that we should say, notwithstanding our precedents, notwithstanding our clear expressed view, in this case this is acceptable?"
1729 Let's take a moment and consider the foreign ownership precedent.
1730 Imagine, if instead of Orascom and Globalive in front of you, it was Bell Mobility in partnership with some other large multinational non-Canadian wireless carrier like Vodafone or Verizon. Imagine that, as here, the non-Canadian held virtually all of the equity and 100 percent of the debt. We wouldn't be sitting here. Yet, here we are.
1731 And notwithstanding the amended Globalive structure, if this applicant is deemed in compliance with section 16, inevitably the Vodafones and Verizons will surely be knocking on your door using this arrangement as the template.
1732 Alternatively, existing Canadian carriers, new entrants and incumbents alike, will seek them out. Once Canadian carriers have the benefit of foreign investment they will want to take advantage of foreign technical expertise.
1733 The next logical step will be to leverage their human capital. Ultimately, in either case, it would render our foreign ownership laws meaningless.
1734 If Canadian telecom foreign ownership law is to be changed, that is Parliament's role, not the Commission's.
1735 Second and related, this hearing should not be about propping up one competitor when other new entrants and the incumbents are playing by the rules.
1736 As we said, responding to Commissioner Menzies last week, the terms and conditions of the AWS auction were made clear to all participants from the start. All bidders were put on notice through Industry Canada's policies and circulars that they would need to satisfy the CRTC's independent ownership review separate and apart from Industry Canada's.
1737 As became clear last week, Globalive is not asking the CRTC for approval to operate as a Canadian carrier. Rather, Globalive is asking to be exempt from the rules where no exemption is available under the law.
1738 Commissioners, by far the single biggest obstacle preventing the Commission from finding Globalive to be an eligible Canadian carrier is its financing.
1739 I will repeat what I said in our opening statement last week because it remains as valid today as it was then. By following the money the Commission can derive significant insight into who owns and controls Globalive.
1740 The source of funds, the debt and equity, is the most important factor in this assessment. In this case, the facts speak for themselves.
1741 Orascom has provided all of the debt, it has also provided all of the equity. Nothing has changed on this front since last Wednesday. It is this continuing funding problem that makes it impossible to cure the fundamental defects in the Globalive structure.
1742 Mr. Chairman, you correctly summarized the problem at the in camera session as follows, and I quote:
"...but the fact is that the same company owns... practically all of the debt, owns the majority of the equity and is also your principal service supplier, and you this morning said that that Service Agreement is... another way of getting your return on investment... So there are three large levers in one hand and that hand is not Canadian. ... Basically what you are asking for is a conditional approval... without a clock, but basically give it and as soon as markets allow us, we will Canadianize this thing so that there can be no question about it. Except I don't have that authority. That is the issue. I mean if the Act allowed for something like that, then, you know, your business point, we all three hear it and they are very cogent... but it is not a business issue, it is a legal issue."
1743 None of the changes made by Globalive remove the three large levers held by Orascom.
1744 What has become crystal clear from the hearing evidence of Globalive and Orascom witnesses is that Globalive is in a conundrum and it wants the Commission to solve it even though the conundrum is of Globalive's own making.
1745 The conundrum is this: Globalive's overwhelming debt and equity dependency on Orascom puts Orascom in control. As a result, Globalive cannot commence operations because it is ineligible. But until it becomes operational and generates cash flow, it cannot obtain alternative financing. So Globalive's solution is for the Commission to grant them an indefinite approval, which, as you pointed out, Mr. Chairman, you cannot do.
1746 Globalive's conundrum is made even more untenable by two additional problems: timing and the added difficulty of replacing Orascom's initial investment with new debt.
1747 On the issue of timing, Globalive told you they cannot be held to any kind of deadline in obtaining new financing. I quote from last week:
"...when you put a financing condition on a financing... it becomes the lowest common denominator. So immediately if there is a clock, we will be held hostage..."
1748 So, in effect, Globalive needs the Commission to bless the current flawed structure but impose no deadline for fixing it. Mr. Chairman, you have already told them you cannot do so.
1749 But it gets worse, because Mr. Scheschuk also agreed with the Vice-Chairman's question that -- and I quote again:
"No one on Wall Street would assume Orascom's debt either on a short-term or long-term basis at the present time." (As read)
1750 This is telling. What Mr. Scheschuk is acknowledging is, at best, Globalive may be able to raise some additional debt incremental to Orascom's at some point, but it is very unlikely that any financial institution would agree to assume that existing debt. Until the business is generating an operating profit -- which might be 2013 or later -- no lender would consider stepping up into Orascom's shoes regarding the existing debt.
1751 Mr. Chairman, you in fact identified Globalive's conundrum in camera when you posed the following hypothetical but very realistic question:
"We are in 2011, the loan is due, Globalive got approval from us. Now, they are working but are not a raging success, so they have not been able to raise private equity and they are unable to repay the loan. What happens then?"
1752 Unfortunately, Globalive's answer was recorded in confidence, but I will take a stab at answering the hypothetical.
1753 Orascom would call the loan once Globalive is in default or it could threaten to call the loan, using this as yet another lever of control. While doing so, Globalive would undoubtedly petition the Commission for still more time to seek financing, tantamount to a longer grace period that the Commission recognizes it does not have the jurisdiction to confer in the first place. Either way the conclusion is the same, non-Canadian control over Globalive.
1754 In addition to the lack of debt financing alternatives, Mr. Sawiris also admitted that Orascom is not in the lending business. He said lending money was not part of Orascom's business model.
1755 However, when it comes to taking equity positions in businesses such as Globalive, Mr. Sawiris said, if not for Canada's foreign ownership restrictions, he would want to own more.
1756 In a similar vein, Mr. Chairman, we should recall your exchange with Mr. Sawiris regarding dilution rights. He initially objected to modifying Orascom's right to retain a minimum of 51 percent of the common equity. While this has now been modified, surely Orascom has not overnight changed its longstanding business philosophy of excluding minority interests to the greatest extent possible.
1757 So the Commission has essentially been given an ultimatum:
1758 One, approve a structure where all of the debt is with a non-Canadian;
1759 Two, with the reality that there is no likelihood that the debt will be refinanced anytime soon;
1760 Three, where the non-Canadian holds virtually all of the qualifying common equity;
1761 Four, is unlikely to reduce its equity stake; and
1762 Five, where the non-Canadian has the technical expertise.
1763 In short, Globalive's structure does not comply with the foreign ownership rules.
1764 We now turn to governance matters. Although we identify a number of difficulties with Globalive's amendments, we must emphasize that addressing them will not cause Globalive to be in compliance in our view.
1765 Let's start first with Board structure.
1766 With regard to the Boards at GIHC and GWMC, Globalive's proposals fall far short of what is needed. In the new structure, AAL and Orascom have the same number of Board seats, which is unacceptable. The addition of three independent directors does not change this conclusion. At the very least, AAL should appoint more directors than Orascom.
1767 In discussing a similar problem regarding the GCHC Board last week, Mr. Lockie frankly admitted:
"...there was no attempt to match up the equity holdings with positions on the Board."
1768 In camera, Mr. Intven compared the new Board structure of Globalive with that of Unitel to justify Orascom having the same number of Board seats as AAL. As you are aware, in Unitel the Commission allowed the Canadian banks and AT&T, the non-Canadian, to each nominate three out of nine members of the Board.
1769 However, it is important to note exactly what the Commission stated as its reasons for allowing the Unitel Board structure, and I quote from Unitel:
"Given the circumstances, including the fact that only one-third of the Board can be appointees of the non-Canadian, one-third of the Board membership consists of independent directors and there are safeguards in place to ensure the Board's independence, the Commission considers that ATC has not had the means to dominate and control and has not in fact dominated or otherwise controlled the Board of Unitel." (As read)
1770 In Unitel the independent directors were appointed by extraordinary resolution, which meant that no independent director could be elected without approval of the Canadian banks. That is not how the independent directors are appointed in Globalive.
1771 Mr. Chairman, I believe that that was the reference in the quote I just read to additional safeguards in place to ensure the Board's independence, this issue of a Canadian bank veto over the approval of the independent directors.
1772 I notice that Mr. Intven read this same quote to you in the in camera session. I have a completely different perspective of what that quote meant.
1773 I now turn to Board quorum.
1774 The Commission should not overlook the fact that under Globalive's new Board structure a quorum of the board can consist of the following nine members: two AAL, four Orascom and the three independents.
1775 In such a circumstance, Orascom would have twice as many directors as AAL present at a meeting. Because Orascom's nominees will vote together, this could provide Orascom with control over any number of voting matters.
1776 Retraction rights.
1777 The proposed changes to the retraction rights amount, at most, to a tweaking of the existing conditions.
1778 AAL's ability to walk away by putting its shares to Orascom has simply been deferred until year three.
1779 AAL's lack of commitment to Globalive's wireless business continues to be extraordinary.
1780 It also supports our point that since the wireline business must continue to be operated separately, the contribution of wireline assets cannot be counted as common equity.
1781 Through its significant levers of control, such as the debt, the equity, the Board structure and the TSA, Orascom can exert such significant pressure on AAL that AAL could feel compelled to exercise its put rights in year three. By doing so, Orascom can effectively convert AAL's put right into a call right in the hands of Orascom.
1782 Now, the veto rights.
1783 Globalive has adjusted the monetary threshold for the veto rights to 5 percent of its winning Spectrum bid. However, the threshold should be set at 5 percent of the enterprise value or, as a proxy, a net asset value.
1784 In addition, we note that the monetary threshold in Schedule A, Part 2, Section I, regarding the incurrence of indebtedness, has a typographical error and should be corrected to read "$22.1 million", not "$2.1 million".
1785 With respect to Orascom's veto power over material contracts, there is a drafting problem requiring correction. It should only be material contracts which meet the monetary threshold and which are outside the ordinary course of business that give rise to Orascom's veto power.
1786 Perhaps that was what was intended in the amendment, but the clause is unclear on this point. I am not going to read it, but at Footnote 12 we have some alternative language.
1787 In addition, if Globalive and Orascom consider network builds and upgrades as decisions outside the ordinary course of business, this would continue to give Orascom a veto over fundamental business and operational matters.
1788 Here I would like to pause to comment on Globalive's rebuttal to Bell during the in camera session on the issue of veto rights.
1789 Our position is that Globalive's path has already been charted under Orascom's control, and this cannot be undone now.
1790 Mr. Campbell's response is that decisions made to date have been made by GWMC Management. That is not our point. It doesn't matter if Orascom did or did not actively make these decisions. I do not know. What matters is that Orascom had the power to stop them. It, therefore, controlled.
1791 Loan agreements:
1792 With respect to the loan agreements, we note that although Orascom filed the amendment to the Spectrum Loan Agreement, the amendment to the Operating Loan Agreement was not filed.
1793 In camera, Globalive attempted to downplay the loan agreements as levers of control, claiming that their restrictive covenants were removed. However, the amendment to the Spectrum Loan Agreement does not address Orascom's right to render it in default if, in the reasonable opinion of the lender, an event occurs which has or could reasonably be expected to have a material adverse effect.
1794 That is broad language and a broad right.
1795 We had a section here in paragraph 31 of our Opening Statement on the TSA, and I think that Mr. Lockie mentioned a change to that, so I am going to skip over this. If that change has indeed been made, it changes my point, but it would be good to see that amendment filed on the public record before closing written arguments.
1796 So I will skip to the "Eligible Purchaser/Strategic Competitor" issue.
1797 It is clear that, as a large, independent operator, Orascom does not want to be forced to partner with other similarly situated carriers. Given that Globalive is effectively Orascom's company, it continues to be able to dictate to whom AAL, the purported controlling investor, may sell its interest by prohibiting a sale to a strategic competitor.
1798 In conclusion, a carrier is either eligible to operate as a Canadian carrier or it is not. Globalive is not.
1799 Orascom has already exercised influence and control over the start-up and operational decisions made by Globalive thus far. Orascom's dominating influence and control persists despite the amended corporate structure. This has not and cannot be fixed.
1800 So long as Orascom holds all the debt and all the equity, Globalive cannot be permitted to operate because it is not a Canadian carrier. This is about the law.
1801 Thank you again for inviting us to participate in this hearing, and we welcome your questions.
1802 THE CHAIRPERSON: Thank you.
1803 Point 32 -- explain to me exactly what it means. The way it reads right now -- and you read the transcript and questions on both the public and in camera hearings.
1804 The way I read it right now, it basically means that it can't be sold to somebody who is in the telecom business in Canada.
1805 There is no conclusion that you set out at Point 32, but I presume that you object to the clause as it is right now. What would, in your view, be a reasonable version of this clause?
1806 Clearly, I can understand that you don't want to directly sell to a competitor; on the other hand, presumably, your point is that it should be more the market -- the most likely people who want to invest are people who are in the business or who are familiar with the business.
1807 What would be an acceptable clause, in your view, in terms of an eligible purchaser?
1808 MR. BIBIC: In our view, the majority, purported, controlling investor -- the Canadian -- should have the right to sell the business.
1809 Of course, law would dictate -- unless the foreign ownership laws change, law would dictate that the purchaser would have to be an eligible purchaser. That should be the only condition.
1810 The strategic competitor should be removed.
1811 I understand Orascom's point. It is not uncommon for a minority shareholder to have certain rights, to the extent that Orascom wants to be protected from not having to partner up with a company that it is not interested in partnering up with.
1812 The more traditional clause that you would see to protect the minority shareholder would be to allow the shareholder to tag along in the sale, and get out, as well.
1813 But the ultimate decision as to whom to sell to should be the controlling shareholder's decision.
1814 THE CHAIRPERSON: I think it would be helpful to us if you could provide us with a simple -- or what you think would be an acceptable definition of a purchaser, given your experience in the telecom industry.
1815 MR. BIBIC: We could certainly do that, Mr. Chair.
1816 THE CHAIRPERSON: Thank you.
1817 Mr. Katz, Mr. Menzies, any questions?
1818 COMMISSIONER KATZ: No, thank you.
1819 COMMISSIONER MENZIES: No, thank you.
1820 THE CHAIRPERSON: Okay. Thank you very much.
1821 MR. BIBIC: Thank you.
1822 THE SECRETARY: I would now invite TELUS to come forward.
1823 THE SECRETARY: Please reintroduce yourselves for the record, and then proceed with your presentation.
1824 MR. WOODHEAD: Thank you.
1825 For the record, my name is Ted Woodhead, Vice-President of Telecom Policy and Regulatory Affairs for TELUS.
1826 With me today, on my left, is Stephen Schmidt, our Chief Regulatory Legal Counsel.
1827 On Tuesday evening we received a number of documents from Globalive's counsel, and by separate e-mail we received the redacted transcript from the in camera portion of this proceeding, held on September 24th, and lastly, yesterday, we received the revised Order of Appearance from the Hearing Manager.
1828 This proceeding is very important, which you have recognized in classifying it as a Type 4 review under the Commission's new classification system for conducting such reviews.
1829 It is important in that it brings a level of transparency to the process, which TELUS has advocated, and it will, at the end of the day, provide greater certainty to all who are interested in such things, including other telecom carriers, broadcasting undertakings, and other market participants; for example, strategic and financial investors.
1830 Given the number of representatives of the broadcasting and telecom industries here on the 23rd, it is apparent that there are many who are watching and waiting to see what the Commission will do, because your ultimate determination will establish the playbook, to a very large degree, for how participants in those sectors will structure their affairs.
1831 I don't envy you as you enter your deliberations. You are being urged by Orascom to find as a fact that they are not the bankers -- or, at least, the reluctant bankers -- in this transaction and structure.
1832 You are being urged to conclude that Orascom's network and handset choices are not relevant. I will speak a little about that later.
1833 You are being urged to find that Orascom is not the controlling investor, mind and hand in this venture.
1834 You are being asked to find as a fact, in the face of substantial evidence to the contrary, that Globalive's proposed wireless venture is, in fact, not controlled by non-Canadians.
1835 To cut through it, this entity is not controlled by Canadians.
1836 What we know is that you have never approved an arrangement with this level of economic participation by a non-Canadian before. This level of foreign economic participation in a Canadian carrier or broadcaster is unprecedented.
1837 While it is my respectful submission that this level of economic participation through equity and debt, representing a staggering 82 percent of the capital structure, prima facie makes Globalive non-compliant, you should continue to be very concerned, even with the other concessions made by Orascom, with respect to the other levers of control, as the Chairman put it, and reciprocally, in some instances, by Globalive last Thursday.
1838 The reason you should continue to be very concerned is that the concessions announced by Orascom and Globalive are strictly structural in nature and do not resolve or remedy the issue of Globalive being controlled in fact, in our submission, by non-Canadians.
1839 The arrangement before you effectively cedes control by Globalive to Orascom.
1840 As a preliminary matter, I would like to comment on an exchange between the Chairman and Mr. Intven at page 95, paragraph 569 of the redacted transcript, where it would appear that the Commission is being asked to conditionally approve this arrangement without a clock, so that Orascom and Globalive can use their best efforts to remedy the 98 percent or more of Globalive's debt currently held by Orascom.
1841 Mr. Chairman, you rightly expressed some scepticism with any suggestion that the Commission could accommodate such a request as a matter of law. In our submission, you do not have the ability, as a matter of law, to issue conditional approval of the sort that it would appear Globalive is requesting. The Telecommunications Act does not provide for it, and, in fact, does not allow it.
1842 Subsection 16(4) is clear that no Canadian carrier shall operate as a telecommunications common carrier unless it is eligible to operate under the framework set out in section 16 as a whole.
1843 Accordingly, while it may be that Globalive does not need to be eligible today, it does need to be eligible when it launches and begins to operate as a Canadian telecommunications common carrier.
1844 TELUS is not aware of any case in which the Commission or its counterparts administering similar ownership regimes have ever judged an entity to satisfy a control test where such a large part of its capital was owned by a single investor.
1845 As noted above, this factor, taken on its own, should be sufficient grounds for disqualifying Globalive from operating as a telecommunications common carrier.
1846 During the course of the in camera hearing, Globalive and Orascom announced the deletion of various positive and negative covenants associated with the Spectrum financing.
1847 Mr. Intven argues that this is enough, that the debt no longer acts as an instrument for exercise of control by Orascom.
1848 Specifically, he states that to determine that debt operates as a lever of control, you have to look at the conditions of that debt.
1849 In respect of Orascom's Spectrum financing loans, Mr. Intven concludes that, with the removal of the final covenants from the loan, there is no control.
1850 In my respectful submission, Mr. Intven is incorrect in both his legal analysis and in his conclusion.
1851 The Commission, the Office of the Superintendent of Financial Institutions, and the Canadian Transport Agency have all provided analyses that look at debt and control in a fuller and more sophisticated way.
1852 These analyses also lead to a different conclusion about control, and we would be happy to discuss those with you.
1853 As I think everyone agrees, this proceeding is about whether the arrangement before you complies with the Canadian ownership and control regime. In particular, this proceeding is about whether Globalive is controlled in fact by non-Canadians.
1854 In order to determine that, you must make findings of fact based on the evidence before you.
1855 Given the evidence before you, you must determine whether Orascom has the ongoing power or ability, exercised or not, to determine or decide the strategic decision-making of Globalive.
1856 What do we know about the strategic decision-making of Globalive?
1857 We know that the minority voting shareholder owns 98 percent of the debt of Globalive, but we are told that the level of economic participation by Orascom is not a lever of control sufficient to make Globalive non-compliant.
1858 We know that Mr. O'Connor, a very recent and senior executive, and trusted advisor of Orascom, was the conduit through which this arrangement was consummated.
1859 We know that Mr. Campbell was a senior executive in some of Orascom's other ventures.
1860 We know that the advisory agreements between Globalive and Orascom de facto bind Globalive to the network and handset choices through the price book of Orascom, but we are told that those are not really levers of control sufficient to make Globalive non-compliant because the final contracts with the vendors were signed in Canada and the decisions concerning the siting of towers and equipment have been made in Canada.
1861 In my respectful submission, in terms of strategic decision-making, no greater or more fundamental decisions can be made in starting up or operating a wireless network than choice of network, network equipment and handsets. All of those critical and strategic decisions have effectively been made by Orascom, and will continue to be made by Orascom in the future.
1862 We know that the advisory and technical agreements do not prohibit Globalive from seeking technical network handset products and services elsewhere, but it is apparent that there are substantial monthly royalties or dividends, in the form of percentages of revenue, that are returned to Orascom whether any of those services are used.
1863 These covenants effectively remove any incentive for Globalive to, in fact, exercise independence. That fact alone provides a powerful, irresistible and immutable incentive to obtain those services from Orascom.
1864 We know that Globalive sees a great commercial incentive in being able to access the price book of Orascom. They have said so many times throughout this proceeding.
1865 That commercial incentive, inextricably tying Globalive to Orascom, is a powerful lever of control, and it rests solely in the hands of Orascom.
1866 It is clear, from a commercial perspective, that the majority equity and near total debt infusion from Orascom, the decision to license Orascom's WIND brand, and the access to Orascom's price book for the very building blocks of Globalive's wireless operation make business sense.
1867 Unfortunately, those commercial decisions were taken with what would appear to be little or no consideration for the legal and regulatory consequences of such decisions, or, alternatively, in hopeful defiance of them.
1868 Those were decisions made by Orascom, and I would suggest, to a much lesser degree, by Globalive.
1869 Globalive would have accepted whatever conditions Orascom imposed, because that is the only way that Globalive could have participated in the auction.
1870 Mr. Lacavera stated that time was of the essence. Mr. Lacavera travelled to Cairo and pitched Mr. Sawiris on his plan.
1871 Mr. Lacavera desperately needed funding. He made real concessions for it, and that is the arrangement that is before you.
1872 Orascom's participation was necessary as a result of Globalive's inability to secure funding either through its own internal means or elsewhere, and the ability to control key decisions was necessary in order for Orascom to justify its unusually large investment and participation in one venture.
1873 Mr. Sawiris himself stated last week that his investments and economic participation in ventures in other countries -- for example, Egypt, where he is a resident -- were considerably smaller in terms of percentage of participation in the partnership.
1874 The results of those decisions by Orascom and Globalive are why we find ourselves here today. Those decisions were Orascom's decisions, and they are asking the Commission to look the other way. The Commission cannot look the other way, as a legal matter.
1875 Orascom and Globalive have put the Commission in a difficult position, no doubt. They have put you in that position because they refuse to accept the Commission's invitation to conduct this review in tandem with the Industry Canada review.
1876 They have put you in this position because a transparent process is their enemy.
1877 They have put you in this position because neither you nor they can avoid the unmistakable conclusion that this arrangement leaves the control of this enterprise in the hands of non-Canadians.
1878 Mr. Sawiris, albeit jokingly, suggested on the transcript that the Canadian government might take over Orascom's debt in Globalive. Joking or not, Mr. Sawiris would appear to understand that he is not permitted to have the level of investment or assert the level of control over Globalive that he has.
1879 Mr. Sawiris now understands that the conditions on his investment that he imposed were ill-advised and non-compliant. He is asking you to remedy that non-compliance.
1880 The structural changes that Orascom has offered up do not achieve that. You cannot authorize Globalive to operate under these circumstances, the Act does not allow it. That should end the matter there, in my view.
1881 However, let's look at this another way. As you are considering this arrangement, I think the Commission should ask itself whether it would be prepared to accept the same arrangement for other telecom competitors, or, in fact, broadcasters.
1882 Specifically, would you be prepared to accept that TELUS, Rogers and Bell hive off their wireless and other operations into similar structures with foreign carriers?
1883 Would you be prepared to accept a similar structure with Canwest or CTV?
1884 Would you be prepared to find that any of these undertakings, with these levels of non-Canadian economic participation, executive contacts, with these levels of control over brand, purchasing and network choice, meet the statutory test?
1885 I think not.
1886 In my submission, Globalive and Orascom need to find other sources of financing in order to satisfy the requirements of the Act. They need to access the capital markets that they acknowledge are rebounding and rework their arrangement. They need to come back to you with an arrangement that is compliant.
1887 Thank you.
1888 THE CHAIRPERSON: Thank you very much for your submission.
1889 As you know, on the day we sat the in camera hearing, TELUS came in with a sheet of all sorts of changes to the governance structure, and then they filed the actual document implementing them. I notice that you made absolutely no comment on any of those changes. I know that it is your position that they are not sufficient, but the changes, by themselves, are they acceptable to you?
1890 MR. WOODHEAD: The structural changes are acceptable, but they are simply structural changes.
1891 THE CHAIRPERSON: Okay. Thank you.
1892 Len and Peter, any questions?
1893 Okay, thanks very much.
1894 MR. WOODHEAD: Thank you.
1895 THE SECRETARY: I would now invite Rogers to come forward to the presentation table.
1896 THE SECRETARY: Please reintroduce yourselves for the record, after which you may begin your presentation.
1897 MR. MILLER: Good morning, Mr. Chairman, Vice-Chairman Katz and Commissioner Menzies. My name is David Miller and I am General Counsel at Rogers.
1898 To my right is Howard Slawner, Director of Regulatory Matters at Rogers.
1899 At the close of Rogers' oral presentation on September 23rd, the Chair asked Mr. Engelhart what Globalive would need to change in order to satisfy the Commission that the company was not controlled in fact by non-Canadians.
1900 In response, Mr. Engelhart identified seven items that would have to change in order to satisfy the statutory requirements. At least one of these concerns was addressed at the public hearing, when Globalive announced the elimination of AAL's right to exit the business in Year 1.
1901 Since that time we have received abridged documentation identifying a large number of additional changes to the shareholder loan and consulting agreements that were made during the in camera part of the proceeding.
1902 Notwithstanding the large number of concessions made by Globalive, a number of fundamental concerns identified by the Rogers witness panel remain.
1903 In our final argument, I propose to review our remaining concerns in light of the new material that has been filed, and identify the additional changes that are required to satisfy the statutory requirements.
1904 Capital structure:
1905 Our primary concern, as expressed at the hearing, relates to the position of Orascom as the major shareholder and major debt holder in Globalive. Orascom continues to hold approximately 65 percent of the equity, and substantially all of the debt.
1906 The fact that the equity injected by AAL was in the form of Mr. Lacavera's wireline business, rather than in the form of fresh capital, means that Orascom contributed virtually all of the capital for the wireless business.
1907 The 18 percent interest rate on the loans also means that Orascom will be entitled to virtually all of the economic rent from the Globalive business for the foreseeable future.
1908 There has been considerable discussion in this proceeding regarding the extent of Orascom's economic stake in Globalive and the nature of the loans it has provided. In its reply comments at paragraph 61, Globalive described its loans as speculative seed capital.
1909 In his testimony, Mr. Intven stated that, in his opinion, the $508 million in loans should be considered as additional equity. That brings Orascom's stake in Globalive up to approximately 80 percent, growing by another $100 million a year, in the form of accrued interest. At this rate, it won't be long before Orascom controls close to 100 percent of the economic value of the company.
1910 This is not just Rogers saying this. A recent report by CIBC Capital characterized Orascom as holding most of Globalive's wireless risk capital.
1911 Since the public phase of this proceeding, Globalive has revealed two additional aspects of Orascom's economic interest and financial support of the company. First, the Technology Agreement has been amended to provide Orascom with a $100 million guaranteed payment for technical services, regardless of whether such services are actually provided.
1912 We heard earlier from Mr. Lockie that there have been some changes to that document, but our comments reflect our reading of the abridged documents that we received yesterday.
1913 According to Article 5, subsection (viii) of the amended Technology Agreement, if either party terminates this agreement other than for material breach, Orascom is entitled to receive $100 million, less any payments already made under the agreement.
1914 Now, while Globalive can also now terminate the agreement at any time, for any reason, it remains required to make Orascom whole. Mr. Intven described this extraordinary payment at page 10 of the abridged transcript as part of the return on investment for this deal. It is part of the negotiated return.
1915 Clearly, this additional return increases the economic rent payable to Orascom for its investment in Globalive, comprised principally of the loan, and is another lever of control.
1916 A second new factor that has come to light is the undertaking given by Orascom to suppliers. Although the Commission has not seen fit to order the release of any additional information related to the undertaking, we urge the Commission to also carefully consider this undertaking when assuming the true extent of Orascom's economic stake in and control of Globalive.
1917 While Orascom has amended the Loan Agreement in certain respects, including adding the right of Globalive to obtain certain extensions to the loan, the removal of the covenants, and the ability of the parties to agree to a lower interest rate on such renewals, Rogers does not believe that these amendments address the fundamental control issues posed by the non-Canadian shareholder holding the majority of the equity and debt of Globalive.
1918 First, contrary to the assertions of Globalive's counsel at paragraph 574 of the abridged transcript, removal of the covenants does not remove all elements of control from the loan. A key lever contained in Section 7.1(f) of the Loan Agreement remains in tact.
1919 As described by the Rogers panel, this section provides Orascom with the ability to declare, in event of default, whenever, in its opinion, something adversely affects Globalive in a material way. Effectively, this means that the loan is callable by Orascom almost on demand, providing Orascom with the power to seize the company's assets.
1920 Second, the possibility of a lower interest rate is illusory, as this is nothing more than an unenforceable agreement to discuss rates. The level of the interest rate remains in Orascom's control. This provision simply supplies Orascom with another lever to influence Globalive through its power to set the interest rate.
1921 These rights provide Orascom with enormous clout over the Globalive board.
1922 This situation also illustrates why both the Commission and the NTA in the past have stressed the danger of allowing a non-Canadian to assume the dual roles of major equity holder and major debt holder.
1923 We would submit that these very serious concerns are heightened when the party assuming these dual roles is also the strategic partner, with all of the know-how and experience in the wireless industry.
1924 While Mr. Sawiris stated that it would not be in Orascom's interest to pull the plug on the loan, regulators have to look at the opportunities presented for non-Canadians to control a telecom carrier, not what their current intentions might be.
1925 As the Chair stated at paragraph 474 of the transcript, the regulator has to look at the worst case scenario.
1926 This very broad right to call the loan, even if just threatened, provides an important lever of control to Orascom. AAL simply does not have the countervailing power to ignore such a threat.
1927 The fundamental problem with Globalive's capital structure must be changed before Globalive begins to operate as a Canadian carrier.
1928 Globalive and Orascom characterize the $442 million loan as a temporary bridge loan in the Shareholders' Agreement, and stated at the public hearing that the parties were anxious to replace it, as soon as financial markets improve.
1929 The dilemma for Globalive is that a third party investor is unlikely to invest what Globalive admits is speculative seed capital in a company that has virtually no equity, and Orascom cannot increase its equity position in Globalive without going way over the acceptable limits for non-Canadians.
1930 Even if Globalive were to seek new capital in the form of debt or equity, there are a number of aspects of this structure that make it extremely unattractive for new investment.
1931 The 18 percent loan and the $100 million and Technology Service Agreement essentially guarantee that all of the economic rent derived from the venture will go to Orascom for the foreseeable future.
1932 The anti-dilution provisions are also unfriendly toward new investors, as Section 3.6 of the amended and restated Shareholders' Agreement allows Orascom to maintain a 40 percent equity level by purchasing additional shares at a fixed price.
1933 A new shareholder is unlikely to agree to pay a higher price for its shares than the price at which Orascom is able to top up its holdings.
1934 To make matters worse, any new capital must first be used to repay the initial loan, thus significantly reducing the possibility that new capital will be attracted.
1935 The fact that shares cannot be offered to strategic industry players severely limits the available sources of capital.
1936 Approval of this transaction in the hope of an eventual change in capital structure is not an option. Not only does the legislation not provide for this, it could be a very long wait.
1937 Vetoes and restrictions:
1938 In its previous comments, Rogers identified a number of concerns relating to the vetoes given to Orascom and the restrictions placed on AAL's ability to exercise strategic and operational control over Globalive. One of the most important levers of control exercised by Orascom is its veto over any individual or cumulative changes in the business plan in excess of 10 percent. This has not been changed.
1939 As Rogers has already stated, any ability to veto the business plan gives rise to a significant influence over a company. In this case the veto relates to changes in all facets of the business plan, including revenues, expenses, capital expenditures and cash flows.
1940 Moreover, for a start-up, a 10 percent change is not very meaningful. Effectively, Orascom will likely continue to have a veto over ordinary course transactions under $22.1 million.
1941 Now, Orascom has agreed to an increase in the financial threshold for its veto rights over purchases, contracts and debt to $22.1 million, and to limit these vetoes to transactions outside the ordinary course of business.
1942 The new financial threshold represents 5 percent of the price paid by Globalive to purchase AWS Spectrum. While these amendments represent a step in the right direction, AWS Spectrum is not expected to be Globalive's only asset. This means that the financial threshold is still below the 5 percent rule that has been established by the Commission.
1943 To satisfy this requirement, the financial threshold for the exercise of veto rights should be set at the greater of $22.1 million and 5 percent of Globalive's assets.
1944 Finally, Orascom's veto right over the grant of security interests, which is also unchanged, effectively precludes Globalive from acquiring debt or vendor financing, even for a small amount, without the approval of Orascom.
1945 Turning to the composition of the Board of Directors, AAL surrendered its ability to appoint a majority of the board. A controlling shareholder would insist on appointing the majority of the board at the operating, or at least at the Holdco level.
1946 While these are other instances in which the Commission has allowed an independent Canadian to hold the balance of power on a board, there are no examples that we are aware of where the non-Canadian held so many other levers of control, let alone in the absence of a board controlled by the Canadian shareholder.
1947 In the Unitel case, for example, the Commission found that the three Canadian chartered banks, with collective assets of over $36 billion, provided a counterbalancing force to AT&T's size and obvious industry strength.
1948 In that case, AT&T and the banks split the equity, and AT&T held little or no debt, so the lack of control of the board by the banks was less of a concern.
1949 While we acknowledge that Globalive has improved the process for selecting independent directors, this does not address the fundamental fact that the party with 66.68 percent of the voting shares cannot elect a majority of the board and cannot counterbalance all of the other levers of control residing in the hands of Orascom.
1950 It is also interesting that the new material discloses that AAL gets to appoint a majority of the board at the wireline company, but not at the wireless company. This suggests that Orascom is allowing AAL to control its former wireline business, but is not prepared to diminish its levers of control at the wireless business by giving AAL the ability to appoint a majority of directors.
1951 Rogers has also raised serious concerns with AAL's right to exit the business in Year 1, AAL's put, and Orascom's call and drag-along rights.
1952 Although AAL's right to exit the business in Year 1 and Orascom's call and drag-along rights have been removed, AAL continues to have a right to put its shares at a guaranteed minimum price.
1953 We understand, based on statements by Globalive at the public hearing, that this put is now only exercisable in Year 3. However, our point remains the same: the put essentially insulates AAL from any risk in the wireless venture, and provides it with an easy exit and with a guaranteed return.
1954 This conclusion is reinforced by the increase in the guaranteed minimum price payable to AAL, presumably because of the change in timing.
1955 Put rights are usually accorded a minority investor, not a controlling shareholder. If AAL were really in control of this business, Orascom would never agree to this provision. AAL would only agree to a guaranteed minimum exit price to AAL if Orascom was in control.
1956 In order to ensure that AAL has the incentive to counter Orascom's levers of control, the guaranteed minimum exit price to AAL must be eliminated.
1957 Furthermore, the new provisions do not provide a mechanism to address deadlocks between Orascom and AAL. Aside from the AAL put, the exit provisions now require the party seeking to sell its shares to find a buyer for its shares within one year. If the seller does not find a buyer within the year, the other shareholder is entitled to arrange a sale of the shares, on such terms as the non-selling shareholder may arrange, in its sole discretion, or a sale of the entire company.
1958 This is clearly not an effective means of addressing shareholder deadlock.
1959 The brand agreement:
1960 As discussed in our previous comments, Orascom's control over the WIND brand is an important lever of control which remains unchanged.
1961 As noted by Mr. Engelhart in his testimony, the current structure highlights that AAL's role in this venture is that of an accommodation party, rather than a controlling shareholder. This is really Orascom's business.
1962 Despite the concessions that have been made by Globalive, Orascom remains the majority shareholder, the majority lender, and a strategic partner, holding the brand and technological expertise.
1963 The matters I have enumerated need to be changed in order for the Commission to find that Globalive is not controlled in fact by non-Canadians.
1964 While this case may require more changes than usual because of the one-sided nature of the shareholder and debt agreements, the onus remains on the carrier to satisfy the statutory requirements.
1965 Section 16 of the Telecommunications Act is clear in this regard. A Canadian carrier is eligible to operate as a telecommunications common carrier if it is a Canadian-owned and controlled corporation, incorporated or continued under the laws of Canada or a province. The importance of this provision is emphasized in section 73 of the Act, which reserves the strictest sanctions for breach of this provision.
1966 There are no provisions in the Act or the associated regulations that provide any exceptions to the statutory ownership and control tests. There is no discretion afforded the Commission to allow a non-compliant party to come into compliance at a later date.
1967 The clear rule is that a carrier is not eligible to operate as a telecommunications common carrier unless it is Canadian-owned and controlled.
1968 In this case, the onerous financial obligations surrounding the loan and the technology agreements, as well as Orascom's anti-dilution rights, make third party equity investment in this venture extremely unlikely, nor is a banker or third party financier likely to want to replace Orascom's loan, since this is really the seed capital in the venture, and without it there is no real equity in the company and no real prospect of obtaining further financing.
1969 So approval by the Commission with the hope of an early refinancing is not a realistic option.
1970 Finally, the only government policy which should bear on this issue is found in subsection 7(d) of the Act. It identifies the following as an objective of the Canadian Telecommunications Policy, namely, to promote the ownership and control of Canadian carriers by Canadians.
1971 In summary, the following changes must be made in order to satisfy the test for Canadian ownership and control.
1972 1. Change Globalive's capital structure so that Orascom is no longer the lead lender to the company, in addition to being the majority equity holder.
1973 2. Eliminate Orascom's veto right with respect to the business plan, and replace it with a consultation right.
1974 3. Increase the financial threshold for the exercise of veto rights by Orascom to the greater of $22.1 million or 5 percent of Globalive's assets.
1975 4. Increase AAL's nominees on the boards at both the Holdco and Opco levels to a simple majority.
1976 5. Eliminate the guaranteed price payable to AAL if it exercises its put option.
1977 6. Ensure that the termination and transition provisions relating to the WIND brand name give Globalive sufficient time to transition to a new brand, in an orderly manner, if Orascom terminates the licensing agreement.
1978 Thank you, Mr. Chairman.
1979 THE CHAIRPERSON: Thank you for your submissions.
1980 Let's go back to page 4, the second paragraph. Explain to me exactly what you are driving at there. I am not quite sure that I get the point.
1981 MR. MILLER: We understand that some form of undertaking has been given by Orascom, in connection with a contract that Globalive may have entered into with one of its suppliers. To the extent that that undertaking is in the form of a financial guarantee or other support of Globalive, this would simply mean that Globalive would have continued dependence on Orascom for that support in order to fulfil or complete that contract.
1982 THE CHAIRPERSON: You are talking here about a guarantee given to a vendor of handsets, or something like that. Is that what you are suggesting?
1983 MR. MILLER: That's what I would have in mind, yes.
1984 THE CHAIRPERSON: And without that guarantee Globalive couldn't get their handsets, so it is even more dependent on Orascom than before.
1985 That is the point you are driving at.
1986 MR. MILLER: That would be the point, Mr. Chairman, yes.
1987 THE CHAIRPERSON: Point No. 5 in your summary on page 5: Eliminate the guaranteed price payable to AAL if it exercises its put option.
1988 The way I understand it is, AAL can exercise that at the end of Year 3, and, as you say, it is usually a minority shareholder who has such a right, rather than the majority shareholder.
1989 MR. MILLER: That's correct.
1990 THE CHAIRPERSON: But how does the fact that they have that right, at a guaranteed price, increase the control of Orascom?
1991 I don't understand that.
1992 It's unusual, I understand that, but I don't know why that gives Orascom an additional lever, as you seem to suggest here.
1993 MR. MILLER: It is simply that, with a guaranteed exit price, in a sense, AAL has less skin in the game, and less of a motivation to counterbalance Orascom's control.
1994 THE CHAIRPERSON: Okay, it has less skin in the game, but the other side is what we are really looking at, to what extent does it give Orascom a lever. I don't see that, necessarily.
1995 MR. MILLER: I think that's a fair comment. For us it is almost corroborative of the fact that Orascom is in control, that you wouldn't expect a minority shareholder to give that to a controlling shareholder.
1996 It is suggestive of the fact that Orascom must be in control, because of the fact that it is given it.
1997 THE CHAIRPERSON: Okay, thank you.
1998 Len, Peter...?
1999 COMMISSIONER KATZ: I have two questions.
2000 Good morning. On page 7, you say in the middle paragraph: "To make matters worse, any new capital must be used first to repay the initial loan, thus significantly reducing the possibility that new capital would be attracted."
2001 I understand what that says, but if you are advocating the reverse of that, then the dilution of Orascom's investment would be slower, as opposed to going to write off all of the Orascom debt first.
2002 Doesn't this go contrary to your argument?
2003 MR. MILLER: We think that what Globalive needs are new sources of funding, not funding to replace the existing loan.
2004 You are correct, though, in the sense that, if there is new funding, depending on the price, that might or might not accelerate the dilution.
2005 COMMISSIONER KATZ: Okay. The second question: On page 12, you indicate at the top that the proposal is not an effective means of addressing shareholder deadlock.
2006 What would be, in your view?
2007 MR. MILLER: There could be a more -- you might have more typical buy/sell arrangements, not the one that has been advocated here. That is perhaps something that we could address in our final submissions, as to what we might view as being more reasonable.
2008 COMMISSIONER KATZ: Could you, please?
2009 MR. MILLER: Yes.
2010 COMMISSIONER KATZ: Thank you.
2011 THE CHAIRPERSON: Peter...?
2012 COMMISSIONER MENZIES: On the last page, your first point, where it says "Change Globalive's capital structure so that Orascom is no longer the lead lender to the company, in addition to being the majority equity holder," am I to take it -- and I understand that there are other points here, too, but just within that, it would be, in your view, acceptable for Orascom to be a lender, provided it was not the lead lender?
2013 MR. MILLER: I think there may be a level of financing that would be acceptable; certainly not at current levels.
2014 COMMISSIONER MENZIES: Okay, thank you.
2015 THE CHAIRPERSON: Thank you very much.
2016 We will take a 15-minute break before we hear from AAL and Orascom.
--- Suspension à 1017
--- Reprise à 1040
2017 THE CHAIRPERSON: Okay, let's resume.
2018 Mr. Mareuse, I hope you can hear me.
2019 MR. MAREUSE: I can hear you perfectly well, Mr. Chairman.
2020 THE CHAIRPERSON: That's great.
2021 Let's resume with the presentation of AAL, Orascom and Globalive.
2022 I don't know whether you are going to do it, Mr. Lacavera or Mr. Campbell, but go ahead.
2023 MR. LACAVERA: Thank you, Mr. Chairman.
2024 I would like to thank the Commission and your staff for the courteous and cooperative manner in which we have been treated during this very difficult phase of the start-up of our wireless business.
2025 Our competitors are clearly trying to protect their multi-billion dollar markets. However, we have been really pleased to see in the Commission's questions that you have not been unduly influenced by these parties' self-interested arguments.
2026 We are facing the three very well financed incumbents that you have seen in the room, who are opposing us every step of the way.
2027 We, of course, expected this. The combination of AAL's Canadian telecom start-up and operating experience and Orascom's scale and technical expertise is certainly a formidable partnership.
2028 I knew that I understood the market, but I also understood it well enough to know that I needed to partner with someone with experience, capital, entrepreneurial spirit, and the endurance that could keep up with me.
2029 I am a builder, and I needed a builder as a partner.
2030 That said, we would now like to talk about why we are confident that our structure is compliant.
2031 Last week the Commission focused on three major issues, namely: equity, debt, and operational control.
2032 I would ask our counsel, Mr. Hank Intven, to speak first regarding the equity issue.
2033 MR. INTVEN: Thank you, Tony.
2034 Mr. Chairman, I believe that the incumbents and all parties, including the Commission, would agree that the level of total equity financing by Orascom, that is, 65 percent, is within the bounds of acceptability for Canadian carriers.
2035 TELUS itself cited three cases where overall foreign equity financing was at or about the same level as that of the Globalive wireless business.
2036 This is the first public hearing on the application of the foreign ownership rules under the Commission's new policy. However, as the Commission is certainly aware from the many compliance reviews that it and Industry Canada have undertaken on a confidential basis in the past, there are certainly other cases where foreign investors have held this level of equity ownership in Canadian telecom carriers.
2037 Thus, the equity level, on its own, is not unusual or precedent setting, or in any way contrary to the ownership and control rules.
2038 Simply put, the ownership and control rules focus on voting shares, not overall equity. Any non-Canadians who want to invest in non-voting shares of a Canadian carrier can do so, and many have been encouraged to do so as a means of financing the growth in Canadian cable companies and others with two-tier equity structures.
2039 So we don't believe that anyone, including these incumbents, would argue that this level of equity ownership, on its own, is a problem. Their issue, we believe, relates to the combination of this level of equity with other factors, like the level of debt or possible operational contacts, and we will address those matters later in this argument.
2040 I would now like to ask Brice Scheschuk to address the debt issue, the second of the three major issues.
2041 MR. SCHESCHUK: Thanks, Hank.
2042 The Commission is clearly concerned that the debt advanced to Globalive Wireless by Orascom somehow operates as a control lever. You have already heard a brief summary of the significant changes that Orascom has agreed to in order to address that concern.
2043 With respect to the loans, as the new documents filed with the Commission indicate, the first major change is that Globalive now has the unilateral ability to extend the loans for up to an additional 36 months, at the same terms and at the same or better interest rates. This grants to Globalive Wireless an extension to August 5th, 2014, of loans with no covenants and no ability for the lender to require additional terms or conditions.
2044 The very notion of Orascom calling its own loans, when it has the level of economic interest that it does, is absurd, unless Orascom's goal is to put the venture into bankruptcy and have Bell Canada offer 50 cents on the dollar for its spectrum.
2045 In this particular case, any notion of debt as a control lever is eliminated by the fact that the equity holder who would suffer the largest loss would be the very entity calling the loan.
2046 Even if that were not the case, these additional concessions eliminate any reasonable concern that these loans carry with them any element of control.
2047 The terms and conditions of the loans:
2048 The right to extend the loans to August 2014, as described above, would be illusory if Orascom were able to exact stringent conditions, or dramatically raise the interest rate, or take such other actions at the time of renewal.
2049 As alluded to above, and recognizing that this would be a concern, Orascom has agreed in advance that the terms will be the same for all renewal periods and the interest rate shall be the same or lower for all renewal periods.
2050 Globalive Wireless has the ability to pay off these loans at any time and Orascom has indicated to you in no uncertain terms that it can hardly wait for that to occur.
2051 Nobody at this end of the table believes or expects that the loans will need to be extended. However, if they are, the Commission can clearly see that Globalive Wireless will not be unduly pressured by Orascom as the terms and conditions are already set.
2052 These terms and conditions, by the way, are likely the lightest the Commission has ever seen or is likely to ever see. They are certainly the lightest I have ever seen.
2053 I am going to digress from my written comments and prepared remarks for a second to move to a point that was addressed by the incumbents talking about section 7(1)(f) of the loan agreements.
2054 At the break I spoke with my counterparts at Orascom, AAL and Globalive Wireless and we realized that we had made an error in not deleting that section. That was an administrative and an inadvertent error on our part and we have agreed collectively that that section will be deleted. So the references around the material adverse change and so on have now been removed from the loan agreements.
2055 THE CHAIRPERSON: And you will file the amended documents with us?
2056 MR. SCHESCHUK: Yes, sir.
2057 To carry on. While Mr. Intven can elaborate, my understanding is that there is no rule limiting the debt held by non-Canadians, absent control levers like negative or affirmative covenants or conversion privileges. Such terms are nowhere to be found in these loans.
2058 The circumstances of how Orascom got into this situation have been outlined in detail. It is abundantly clear that every party to this transaction has a strong incentive to reduce Globalive Wireless' reliance on Orascom's debt financing. We have gone into great detail, particularly in the in camera, regarding our efforts to do so.
2059 However, even Rogers' witness, Lorraine Daly, admitted that realistically there would be no other financing available to a company like Globalive Wireless today or during the period since immediately following the auction.
2060 So it may take a little time, but you have everyone's commitment that we are trying to move that debt off Orascom's books as soon as possible.
2061 We do not suggest that we are not currently compliant and this would be an effort to come into compliance, we are suggesting that these loans were never intended to be and do not operate as control levers over the wireless business.
2062 TELUS, since the hearing of last week wrapped up, sent the Commission an unsolicited piece of evidence containing a press release indicating that Public Mobile, another AWS new entrant, had apparently found some new private equity backing in addition to the possible $50 million that it may have attracted from OMERS.
2063 TELUS concludes by stating that it hopes that this information will be useful to the Commission in reaching its final determination on the compliance of Globalive with the Canadian ownership and control regime.
2064 As I trust I addressed sufficiently in the in camera session last week, this press release, with its suspect timing, is anything but helpful to the Comission in this regard.
2065 The insinuation appears to be that Globalive is being picky or not trying sufficiently hard to replace its reliance on Orascom.
2066 This is nonsensical. The Commission has heard from banking experts who have told them of the difficult market conditions. Those bankers have also spoken to making apples-to-apples comparisons.
2067 To elaborate on comparables, even TELUS acknowledged that the other operators who have raised capital were in fact wireless add-ons to established incumbent terrestrial operations of enormous scale.
2068 In other words, they actually compared their own ability to raise funds in this market to that of a standalone greenfield operator. We do not expect that the Commission will find this self-serving comparison compelling.
2069 Bell Canada and TELUS have each again raised the spectre of precedent. We think it is good policy and good for Canada and Canadian consumers if a non-Canadian lender is prepared to loan hundreds of millions of dollars in the toughest market conditions to Canadian carriers without any protection whatsoever.
2070 However, the reality is we highly doubt you will ever see another situation like this with a foreign lender. This case turns completely on its facts and Mr. Bibic's hypothetical example would never happen. Once we are approved, we would encourage his finance team to try and find that type of financing and see how that goes.
2071 The incumbents argue the combination of debt and equity interest held by Orascom evidences too much control. That is, even if each of the components standing alone is acceptable, this combination is still somehow offensive. They even tried to add the two numbers together to come up with some kind of metric.
2072 The Commission should have no difficulty in seeing through this strained exercise of new math. There are no control levers with respect to Orascom's nonvoting equity and there are no control levers with respect to the debt. The sum of two zeroes is still zero.
2073 Even the incumbents have provided no argument as to why their tortured aggregation equals control.
2075 MR. LACAVERA: Thank you. Thank you, Brice.
2076 I would like to speak very quickly to a question that has come up from this Commission during this hearing, several times during the course of the hearing. This issue is a critical one especially, but not solely from an AAL perspective.
2077 The Commission will notice that we have not offered any substantial constraints on the time frame or terms on which we will accept additional financing.
2078 As we hope is very apparent, we have done all that we reasonably can to address the Commission's concerns in this regard but the types of potential constraints we discussed last week, such as the time frame within which we must raise additional capital, cannot be accepted and simply will not be accepted by any Globalive Wireless shareholder.
2079 To accept such terms would crush Globalive Wireless and even more so, it would crush AAL. We cannot accept financing on commercially unreasonable terms and we cannot negotiate commercially reasonable terms under duress.
2080 I would now like to pass it to Ken to discuss the operational issues.
2082 MR. CAMPBELL: Thank you, Tony.
2083 Mr. Chairman, Commissioner Menzies, Commissioner Katz, last week saw us complete our first tower in Calgary. We also placed our first call here in Ottawa. We also started hiring store managers in Toronto. This was accomplished by the people at Globalive Wireless without shareholder involvement, without shareholder control.
2084 I told you last week when I was here that I was the one who was running the business on a day-to-day basis. Nothing has changed. We have now grown to 277 employees, many of whom I expect, unfortunately, since we have much work to do, are glued to the audio feed of this transmission of this session.
2085 The pictures the incumbents are trying to paint of Orascom controlling the wireless business is simply divorced from reality. They are either being disingenuous or they are seriously mistaken. While I try not to take this personally, the suggestion that anyone other than my team and I are managing this business is inaccurate and offensive.
2086 It is entirely understandable that between February 2008 and our projected launch date later this year there was a need for some amount of support from Orascom. That has now been largely accomplished, as could be demonstrated if you walk through our offices at Queen's Quay in Toronto or in North Vancouver, or up the road here in Kanata.
2087 That said, our shareholders made a number of important changes to the documentation that has now been filed with the Commission.
2088 The most important change is that the Orascom Technical Services Agreement, the TSA, has been amended to provide for termination by Globalive at any time. If ever there were a change that proved that this is not a control element, this is it. We heard you loud and clear.
2089 That same provision was, of course, added to the AAL Telecom and Strategic Consulting Agreement and neither agreements -- there is a mistake on the transcript -- neither agreements have minimum payments in the event of termination pursuant to this new right.
2090 As the Commission is aware, these were dual purpose agreements, so a provision was inserted to ensure that if either party's agreement was terminated the parties would need to negotiate the new arrangements to preserve the equivalent economic benefits and tax efficiencies.
2091 However, there were and are already a variety of reasons why the Commission should not view the current operations as being controlled in any way by Orascom.
2092 First, the TSA, the Technical Services Agreement, is nonexclusive. We can and we have gone elsewhere for consultancy services. We do not always agree with Orascom, as is the case with many consultants and even some counsel. We have on many occasions thanked them for their advice and taken a different direction.
2093 Second, while the incumbents have suggested that the TSA was dictated by Orascom as a condition of investment in the company, the evidence contradicts this. Mr. Lacavera was insistent that he had the ability to leverage Orascom's experience and buying power and went so far as to append a draft to the original investment agreement. The fact that management can ignore their advice or even refrain from seeking it at all ought to dispel any doubt.
2094 Third, the incumbents have argued that access to Orascom's buying power, which is one of the key benefits that Globalive gains through the TSA, is somehow a point of control. The notion that I can get a great deal on equipment means that Orascom has control over Globalive is ludicrous. What it means is that Globalive will be able to pass on lower costs to Canadian consumers. I understand why that thought must be terrifying to the incumbents, but where is the control?
2095 The incumbents have strongly argued against the branding agreement. Because the Commission granted confidentiality over the key provisions that the incumbents are speculating about, only we and the Commission know how dead wrong they are.
2096 They have acknowledged that the branding agreement can act as a control point only if the term of the agreement is short, if the agreement can be terminated easily or on short notice or if there are important restrictions on the use of the brand. Since these details have been filed in confidence, we invite the Commission to apply the test set out by the incumbents and to draw its own conclusions.
2097 Notwithstanding all of the above, TELUS states that Orascom's intention is clearly to run Globalive as an Orascom company. This is false and can be clearly seen by the evidence.
2098 I would now like to turn to Tony. He would like to speak about the issue of experience relative to that of Orascom.
2099 MR. LACAVERA: Thanks, Ken.
2100 The incumbents have all made comments about my own and my team's size and experience relative to Orascom's. Let me begin by saying that I don't take any of this personally. I have been working with and competing with the incumbents for over a decade. I have developed a thick skin and a healthy respect for the lengths they will go to to deflect or impede new competition. So their comments and innuendo do not affect me at all. They know me and I know them.
2101 That said, they have put their comments on the record of this hearing and so my advisors have suggested that I respond.
2102 As I hope has become clear to the Commission throughout this process, anyone who has worked with me or for me or has competed against me in the marketplace could not seriously maintain that I don't have what it takes to succeed in Canadian telecom. My team and I have already succeeded.
2103 If the Commission examines the experience of Orascom and AAL seriously, it will see that we have complementary skill sets and experience bases. The Commission should bear in mind that the AAL team has 11 years of experience in the Canadian telecom market starting and operating telecom companies, which is 11 years more than Orascom.
2104 Maybe our 11 or 12 years of experience doesn't sound like much to the Commission. If so, I would remind the Commission that Orascom has been around for no longer than this either.
2105 I believe that Hank wants to speak to the legal aspects of what, quite frankly, strikes me as a topic that has received altogether too much attention.
2107 MR. INTVEN: Thank you, Tony.
2108 During their presentation, TELUS invited to Commission to consider the CRTC's Unitel decision as an acceptable precedent compared to the Globalive one because the non-Canadian company AT&T's experience was balanced by that of two experienced Canadian partners, Rogers and CP.
2109 TELUS implied that this balancing of experience allowed the Commission to determine that Unitel was Canadian-owned and -controlled, notwithstanding that AT&T was a large non-Canadian investor with a strategic interest.
2110 The implication is that there is no corresponding counterweight to Orascom's size and therefore the Commission ought to assume that Orascom is therefore in charge.
2111 As the Commission will see if it rereads the Unitel decision, TELUS' description is not accurate.
2112 At the time the CRTC reviewed Unitel's ownership and control, Rogers and CP had already exited the business. The Canadian investors that the Commission considered in the Unitel case were three Canadian banks.
2113 These banks clearly had far less operating telecom experience than AAL does, as you have just heard Tony said. Nonetheless, the Commission did not find that its greater level of experience than the banks led to a conclusion that AT&T controlled Unitel.
2114 The point is not a compelling one in any event. Size is not the issue. Control is.
2115 Obviously ESPN is bigger than CTV, Goldman Sachs is bigger than Canwest, so are Hearst or BBC and many other minority investors in regulated Canadian entities larger than their Canadian partners. But that is not enough. You have to look at the control elements.
2116 There is nothing preventing smaller Canadian licensees or carriers from doing perfectly acceptable deals with larger non-Canadian entities as long as the latter understand that they cannot control the venture and govern themselves accordingly.
2117 THE CHAIRPERSON: Can I ask you to change seats because we can't hear you. Use another microphone, please.
2118 MR. INTVEN: You have heard Mr. Sawiris say that he knew from the very beginning that he could not control Globalive, and Orascom has governed itself in accordance with his instructions.
2119 I would now propose to address certain matters relating to the corporate structure and the Board of Directors of the wireless venture.
2120 Mr. Chairman, as you have heard, the shareholders have agreed to make some very substantial changes to the corporate structure and governance. These changes simplify the ownership structure and clarify the locus of control of the business. The changes should dispel any remaining concerns about the potential for non-Canadian control of the business.
2121 Let me summarize the key changes briefly.
2122 First, Tony Lacavera will become the Chair of each of the Boards of the holding company and the operating wireless company. Future Chairs will be chosen by those Boards. Those future Chairs will be either Tony or an independent Canadian director.
2123 Second, the intermediate holding company, which was originally part of the corporate structure, has been eliminated. The wireless and wireline operating companies will now be 100 percent owned directly by the parent holding company. This means that the overall levels of the voting and equity shareholdings of Orascom, AAL and Mojo in the Globalive Group of Companies will be unchanged, but they will be consolidated and transparent at the HoldCo level.
2124 The third change deals with the independent directors. The first independent director has already been selected by AAL and, as you have heard, AAL selected Bruno Ducharme for that role. Other dependent directors will be nominated by a committee comprised of the longest-serving independent director, one AAL nominee director and one Orascom nominee director.
2125 The partners have also established a clear requirement that the independent directors shall be experienced directors for which a definition was added. This change will help ensure good corporate governance.
2126 The experienced independent directors will help ensure that the companies operate in accordance with the law, including the Canadian ownership and control rules. They will also assist in implementing the plans to access the capital markets to reduce reliance on the Orascom debt and bring on new equity investors.
2127 Now, I will depart from the written text here, Mr. Chairman, to address one point that Bell made in argument.
2128 They argued that somehow in the Globalive structure the Canadian shareholder doesn't hold rights that the Unitel shareholders, the banks held in the case of the Unitel transaction, and suggested that the banks had a right through special resolution to approve the independent directors.
2129 Well, if you look at it carefully, the situation is precisely the same in the Globalive transaction. Here the documentation has been prepared in such a way that both shareholders, including OT, are compelled to accept the independent directors selected by the nominating committee.
2130 So the net effect is the same. In Unitel, as in this case, the nominating committee will select the independent directors and the foreign shareholder must go along with that selection.
2131 Now, the fourth change I would like to highlight is that at the holding company level the Board of Directors will be comprised of 11 directors, as you have heard, four nominated by AAL, four by OTH and three independents.
2132 All AAL nominees and independent directors must be independent Canadians and shall remain independent Canadians at all times while they are members of the Board. Each independent director shall serve for annual terms and any independent director's replacement shall be nominated by the nominating committee.
2133 The membership of the Globalive Wireless board, the operating company, will be essentially the same as the holding company, except that at least two of the nominees of Orascom shall be resident Canadians, and so at least two of the nominees of Orascom and all of the nominees of AAL shall be members of the holding company Board.
2134 The parties have also clarified a few points that were raised by the Commission during the hearing.
2135 First, they clarified the fact that the CEO of Globalive Wireless, Ken Campbell, reports to the Board of Directors of the company.
2136 They have clarified that the term "managing director" means the same as CEO, as distinguished from Chairman.
2137 And any references to the strategic plan have been corrected to refer to the business plan. That was a mere correction.
2138 So with these changes we believe that the Globalive Wireless structure has addressed all of the legitimate concerns about structure and Board membership.
2139 I would now like to ask Simon Lockie to speak to the liquidity rights of the shareholders.
2140 MR. LOCKIE: Thank you, Hank.
2141 I don't propose to lecture the Commission about the reasonableness and ubiquity of shareholder liquidity rights. I will say, however, that such rights are certainly in all of the many shareholders agreements I have negotiated with and without Tony.
2142 Any businessperson both insists on their presence in a shareholders agreement for their own benefit but also understands that their partners deserve such provisions as well. Everybody enters a deal with the hope and expectation that the relationship will be a success but business prudence requires building processes to deal with the eventuality that it is not. We would always rather have such provisions and never use them than find ourselves in a bad situation without them.
2143 We have heard the Commission's concerns with respect to the existing exit mechanisms. These have been removed in their entirety and replaced with a simple, single and mutual liquidity right for both parties.
2144 This new mutual liquidity right is not effective until a point in the future, although the precise date is confidential. I will refer to it today as the effective date. I would like to walk you through it quickly.
2145 At any time after the effective date either AAL or Orascom may, by issuing an exit notice, exercise its liquidity right and, subject to the right of first refusal in favour of the other shareholders, sell all of its respective shares to an eligible purchaser, which may be the non-selling party of the two.
2146 The notifying party has 12 months from delivering its exit notice to identifying an eligible purchaser to purchase its shares. For Orascom this purchaser need not be a resident Canadian.
2147 If AAL is the notifying party and exercises in the first year of the liquidity right and sells its shares to an eligible purchaser within a 12-month period, AAL will receive the greater of the fair market value of the shares in an agreed-upon floor outcome.
2148 If the notifying party cannot identify an eligible purchaser within a 12-month period, the other party can arrange for a sale of the notifying party's shares, again subject to the right of first refusal in favour of the other shareholders.
2149 If AAL is the notifying party in such case and has exercised this liquidity right in the first year only, in order to provide certainty to AAL in the event that the ability to sell AAL's interests moves to Orascom and GIHC, and to ensure Orascom and GIHC's motivation to complete that sale, Orascom will loan AAL an amount equal to the greater of the fair market value of AAL's shares in the agreed floor outcome, pending purchase of such shares -- or GIHC -- by an eligible purchaser.
2150 Fair market value for the purposes I have just outlined will be by an independent investment bank. The parties have agreed that GIHC will select one of two acceptable banks. If neither of those banks agrees to enter into that engagement or if both have a conflict at that time, an investment bank will be agreed to by the parties or determined by arbitration.
2151 Ken will now address the issue of vetoes.
2152 MR. CAMPBELL: Thank you, Simon.
2153 As you will recall, I had indicated last week that in my experience the thresholds that we had agreed to with Industry Canada were not overly restrictive. Indeed, there had only been a handful of cases where management had sought Orascom's consent thus far.
2154 Notwithstanding this fact, the parties have now made changes to the veto section of the shareholders agreement to allay any concerns that the Commission may have had with those vetoes. These changes, I believe, provide management with even greater flexibility in the operation of this business.
2155 These include the following changes.
2156 Point one. An ordinary course of business definition has now been inserted using the BCE decision as a precedent.
2157 Point two. The veto thresholds have been increased as follows: expenditures, liabilities or guarantees, from $10 million to $22.1 million; material contracts, from $5 million to $22.1 million; repurchase, prepayment, redemption or other acquisition of debt securities of the Corporation, from $1 million to $22.1 million, again; incurred indebtedness, from $20 million to $22.1 million.
2158 Point three. The following Part 2 vetoes were amended. Paragraph (a) was amended so that an employee's stock option plan for up to 5 percent of the shares of GIHC or GWMC is exempted from the veto. Paragraph (c) was amended to remove the reference to the portion of the business plan applicable to the non-wireless business.
2159 Point four. The following Part 1 veto was deleted. Paragraph 1, material change to the portion of the business plan related to the non-wireless business.
2160 Now, the incumbents have tried to argue that the former thresholds were so low that they amounted to Orascom control over Globalive Wireless' business. They did not then, and they especially do not now.
2161 I also want to address Bell's assertion last week that all of the really important decisions have been made and so therefore the damage in some sense is done.
2162 Not only is the conclusion Bell reaches rather absurd and -- I am assured by our counsel -- fundamentally mistaken as a matter of law, the premise is equally wrong. It is simply not true that all of the really important decisions of this business have already been made. Those decisions were not made by Orascom, they were made by me, they were made by my team, and we continue to make key decisions every day.
2163 MR. INTVEN: Mr. Chairman, I would now like to speak about the test for control in fact that is set out in the Telecom Act.
2164 The submission of the incumbents contains a lot of allegations that Globalive is controlled by Orascom. These submissions are long on rhetoric but, in our respectful submission, fall short of providing any specific evidence or logical analysis to show that Orascom can actually exercise control in fact over the Globalive business.
2165 Last week we and other parties cited the Canadian Airlines case, which is the precedent the Commission has used to define control in fact. As we discussed, that case makes it clear that the ability of non-Canadian investors to influence the business is not sufficient to support a finding of control by non-Canadians.
2166 Since this test is so important, I will just read it to you briefly again.
2167 The decision indicates that:
"Control in fact generally can be viewed as the ongoing power or ability, whether exercised or not, to determine the strategic decision-making activities of an enterprise or to manage and run the day-to-day operations of an enterprise." (As read)
2168 The decision also states that:
"Minority shareholders and their designated directors normally have the ability to influence a company, as do others such as bankers and employees. The influence, which can be exercised either positively or negatively by way of veto rights, needs to be dominant or determining, however, for it to translate into control in fact." (As read)
2169 So that is the test that we submit the Commission should apply carefully to the facts before it.
2170 Based on this, it is clear that the proper test is to ask whether the non-Canadian investor has the ability to unilaterally determine strategic decision-making or to dominate decisions regarding the day-to-day operations of an enterprise. The ability to influence strategy or operations is simply not enough.
2171 The submissions of the incumbents have generated a lot of smoke about things that they view as suggestive of control by Orascom, but while there has been a lot of smoke there is no fire. They have not provided evidence of a single mechanism or arrangement that gives Orascom the clear power to determine or to dominate either day-to-day operations or corporate strategy.
2172 No doubt, Orascom's 65 percent equity level -- nonvoting equity level in large part -- its large loans and its arrangement to provide consulting services give Orascom the ability to exert some influence on operations or strategy but the Canadian Airlines decision makes it clear that it is not enough to make a finding of control.
2173 Such influence must be dominant, I remind you, or determining to amount to control. There is simply no evidence of any arrangement, certainly not after all the changes that have been made, that would give Orascom such control.
2174 The incumbents also seem to be arguing that even if no single arrangement gives Orascom control over Globalive, the cumulative effect of such arrangements must be seen to amount to control.
2175 Their argument is not logical and it should be rejected. It is like saying that even if we don't have a 10-foot plank to get across a 9-foot gap, we can get there by having a bunch of 4-foot planks. It simply can't be done. You cannot cumulate a number of different arrangements that do not grant control and then say the sum of those arrangements nevertheless grants control.
2176 We would encourage the Commission to be rigorous in its analysis of the arrangements between Orascom, AAL and Globalive Wireless, and reject the fuzzy concept that because there is high nonvoting equity investment, a large bridge loan plus a consulting agreement, none of which grant control in themselves, that taken together they might amount to control. That is not logical.
2177 The equity doesn't confer control because it is mostly nonvoting; the debt doesn't confer control because there are no covenants or other control levers attached to it and it can be replaced as soon as the company can find alternative financing; and the consulting agreement does not confer control because it is purely advisory and can be terminated at any time for any reason.
2178 Since none of these or any other arrangements confer control in themselves, it cannot be said that somehow when put together they confer control.
2179 Bell's well-worn maxim that the CRTC should follow the money to find where control lies is catchy but it is fuzzy logic. It is not compelling in law. There are lots of examples in Canadian business and certainly in the communications sector where investors put in most of the money but don't control a business.
2180 This is the case, in fact, with many of the broadcasting entities in the cable and other businesses that have two-tier share structures, such as Rogers, Astral, Shaw and many others, and it is certainly the case that many Canadian communications enterprises rely very heavily on foreign debt, in the U.S. debt markets primarily but also in the global markets. In those cases the foreign debt-holders have put up, in many cases, very substantial amounts of money but they don't control the business.
2181 Moving along to another legal issue, we have discussed the wording of section 16(3) of the Telecom Act. As we discussed, those words plainly say that a corporation is considered to be Canadian-controlled for telecom purposes if it is not controlled by non-Canadians.
2182 These words do not say that the test is that the company must be controlled by Canadians. As we have discussed, this is different from the ownership and control test in the Broadcasting Act.
2183 Mr. Chairman, you will recall that when you questioned Mr. Ryan about this issue you quoted from my interpretation of subsection 16(3) of the Act and said, and I quote:
"It is not a question of whether it is controlled by Canadians, it is a question of whether it is not controlled by non-Canadians, and he makes a big deal out of that. What is your position on that?"
2184 Mr. Ryan answered:
"I think that Mr. Intven is quite correct in telling you that the test is whether the company is not controlled [by non-Canadians] -- or is controlled by non-Canadians. I'm getting lost in my double negatives [he said] but Mr. Intven was right in the position [that] he put to you in that respect, and I think the Commission said as much in the Unitel case."
2185 So as you can see, Mr. Ryan and I agree on the proper interpretation of section 16. I don't believe there is any magic in the interpretation, it is clear from the plain words of the Act.
2186 As we discussed during last Thursday's hearing, the new structure proposed for the Globalive Wireless companies has a Board of Directors of which there are four members appointed by the Canadian shareholder, four by the non-Canadian and three independents, of which the first is appointed by the Canadian. Under this structure, the non-Canadian investor simply cannot control the Board and thus the structure must be seen to pass the test in subsection 16(3).
2187 Finally, on another legal issue, we have previously pointed out that the Canadian ownership and control rules set out in section 16 of the Telecom Act only apply to companies once they are operating as telecom common carriers. That is what subsection 16(1) says. The rules do not apply to any preoperational arrangements or work.
2188 Mr. Chairman, I might digress here to say that while Bell has made a big point of the fact that the horse is out of the barn -- or that's their theory -- and that preoperational influences by Orascom somehow have tainted the business irreparably, I was pleased to see during the argument of the other parties that they don't take that position and, I think, generally acknowledge that the proper time for the application of the control test is once a company is operational, and so --
2189 THE CHAIRPERSON: No, we don't question that point.
2190 MR. INTVEN: You don't, okay. So I will not continue with the rest of the comments I had in reply to Bell. I think it is accepted by most people.
2191 I would like, Mr. Chairman, to deal with another point and that is the fairness point.
2192 Some of the incumbents have argued that it would somehow be unfair to approve the Globalive Wireless ownership structure with its heavy reliance on financing from a single foreign strategic investor. The argument seems to be that Globalive is looking for regulatory treatment that would not be available to others.
2193 This is a red herring. Nobody is asking for any special treatment. In fact, Globalive agrees with the incumbents that the rules should be the same for all. Globalive has never asked for a ramp-up period or some special treatment during its early stages. It understands that that is not the way the law is written.
2194 The reality is that the incumbent operators do not need to enter into financing arrangements like Globalive has been forced to enter into due to the economic circumstances over the past year.
2195 The incumbents run mature, proven businesses and they have no trouble raising capital on terms that are far more favourable than a greenfield wireless start-up like Globalive. They do not need to go to a shareholder for bridge financing or to start up or to stay in business. They do not have to pay the high interest rates that normally attach to such new venture funding.
2196 If the incumbents think it is unfair to allow Globalive to have such financing arrangements, I'm sure that Globalive would be pleased to swap their loans and interest rates for the type of borrowing terms available to the incumbents. The so-called fairness argument is illusory, there is nothing to it.
2197 That said, I'm sure you will appreciate the irony of the position that the incumbents are taking.
2198 Many Canadian telecom carriers started up their business with the help of foreign capital.
2199 Bell Canada was started by Charles Fleetford Sise, an American agent for the National Bell Telephone Company of Boston who came up to Canada to start Bell Canada.
2200 The BC part of TELUS, then BCTel, undertook its major expansion in the 1920s when it was owned by Theodore Gary, an American whose National Telephone and Telecom Corporation eventually devolved into the Anglo-Canadian Telephone Company, which was subsequently owned by U.S.-based GT&E based in Connecticut.
2201 AT&T was instrumental in the establishment of Unitel, which subsequently became Allstream, and in his memoirs Ted Rogers concedes that he had issues with compliance with the Canadian ownership rules during the high-debt, high-growth days of his business, and the list goes on.
2202 It is ironic to hear the incumbents complaining now that someone else might be looking to a major foreign investor to do exactly what they did themselves at an earlier stage in their history. This was during the stage when they established their businesses.
2203 But Globalive is not looking for equal treatment; it recognizes that the rules changed in 1993. It is merely looking for fair treatment under the current rules, treatment based on a fair and rigorous interpretation of the rules, not an interpretation that is based on unsubstantiated fears of foreign investors controlling a business through means that no one has demonstrated.
2204 Mr. Chairman, we are aware of the fact that the Commission's new policy for public review of Type 4 ownership situations is aimed at providing guidance for future and other investment in the telecom industry.
2205 We are also aware that some of the parties have, and did again in their arguments a few minutes ago, suggested that if it was approved the Globalive structure could set a precedent that would lead to more cases where non-Canadian strategic investors provided most of the equity and all of the debt for a new Canadian carrier. This has led to some concerns about the precedent effect of your decision in this case.
2206 We don't think the Commission should be concerned about setting an inappropriate precedent and we say this for several reasons.
2207 First, you must recognize that the Orascom precedent is not a very attractive one for any foreign investor to follow and you have Mr. Mareuse on the video link if you want to question that any further. That is perhaps the greatest understatement in this argument.
2208 How many foreign investors would want to land over half a billion dollars to a wireless start-up, strip all the covenants and other conditions from their loan, and then agree to have it extended for five years from the present time at the sole option of the borrower?
2209 How many would like to have their veto thresholds set at the very high levels of the amended shareholders agreement or make the other concessions that Globalive shareholders have made?
2210 Not very many. Probably none.
2211 Second, in terms of the precedent effect, it should be remembered that every case is different and should be considered based on the relevant facts and circumstances. The Globalive case occurred during a very unique set of circumstances, ones that are clearly distinguishable and unlikely to occur again.
2212 Finally, it should be kept in mind that the telecom ownership and control rules, and particularly subsection 16(3) of the Telecom Act, are different from the broadcasting rules, so this case will not act as a precedent for any broadcasting investment.
2213 We recognize that the Canadian policy concerns over foreign ownership have a much longer, deeper and, I would suggest, more logical basis in the broadcasting area due to the related cultural and nation-building concerns.
2214 We hope the Commission's review is complete and that the parties, especially Orascom, have given you enough comfort on this set of facts with this set of players and that based on that you can approve the arrangements to fulfil the goal of the Government of Canada, a goal shared by many Canadians, namely, to add a new competitive spark to our wireless markets.
2215 I will now ask Ken to conclude our remarks.
2216 MR. CAMPBELL: Thanks, Hank.
2217 Although we have outlined the changes, we have attached for ease of reference the redacted term sheet as a reminder of just how far the parties have gone to satisfy the concerns we heard expressed last week.
2218 I would like to leave you with a few final thoughts.
2219 Globalive Wireless is the only new entrant that is national in scope and which comes with the backing of a large international player.
2220 This is a capital-intensive business where scale matters. Incumbents know this. They know that access to capital is a competitive advantage.
2221 Tony Lacavera knows this as well. He knew it when he started knocking on doors seeking an international partner and he certainly knows it today. His success in securing this partnership is a success for himself, it is a success for Orascom, it is a success for our employees, and most of all, it is a success, we hope, for Canadian consumers who deserve a very new and a very different wireless choice.
2222 As you have heard, we represent a unique threat. Make no mistake, this is what is behind the incumbents' initiation of interference with participation in this hearing.
2223 The reality is that Orascom does not control this business. Canadians started it, Canadians are running it, Canadians are managing it and Canadians control it.
2224 I trust, along with my shareholders, with my Board and with my team, that the Commission sees this as clearly as we do. Thank you.
2225 THE CHAIRPERSON: Thank you for your presentation.
2226 First of all, I have a question for you, Mr. Mareuse.
2227 We have gone through the term sheet. This transaction, as a result of this hearing, has been restructured considerably. You, yourself, Mr. Campbell, just mentioned it, extensively in light of this, et cetera. Yet, I have heard from Orascom, from Mr. Sawiris that they never wanted to be lenders, they are only lenders by default.
2228 Then why did we have all these provisions in here? Why these elaborate control provisions which now have all fallen by the way? If you don't want to be controlling shareholders, if you are just an equity investor in a foreign country and you realize you have to be a minority, you can't control, why then all of these provisions which, when the spotlight was put on them, fell away like snow melting in the sunshine?
2229 MR. MAREUSE: Well, I think it is probably because when we drafted all these loan agreements we used standard precedents and, frankly speaking, we did not really think through that this would be interpreted as control from the Commission, and when we really dug into it, you know, we thought that all these provisions were unnecessary and we were very happy to give them away because this was not that crucial for us.
2230 So this basically comes from a standard kind of loan documentation that we use, that we probably took from one of the loans we have with a bank, and just by thinking about it, we took out the provisions that were not necessary to us.
2231 THE CHAIRPERSON: But when I asked you, Mr. Mareuse, on the anti-dilution right, Mr. Sawiris said he always wanted to have as much equity as possible, for instance, and yet that anti-dilution right is gone, it's now down to 40 percent, et cetera. There seems to have been a major change in heart here by the majority equity-holder.
2232 MR. MAREUSE: I think this anti-dilution provision was mostly done for a reason, you know, if and when the law changes. You know, if it doesn't change, we have no issue.
2233 So I think this is probably -- as you know, because the structure has to comply with all the regulations, it becomes a little bit complicated, and some things, you know, frankly speaking, we did not think through them and they were not that important. So really when we heard your remarks and we thought through all the implications, we were very happy to give them away because it was not our initial intention.
2234 THE CHAIRPERSON: Mr. Lacavera, you state on page 6 that you feel that the lever aspect, frankly, is a topic that has received altogether too much attention. Isn't this what it's all about? Aren't we supposed to determine whether in law and in fact you control this corporation or not?
2235 MR. LACAVERA: Yes, Mr. Chairman. I think what I was referring to there was the comparison of the relative size of the shareholders in the context of the relative experience of the shareholders question. I know that we spent a lot of time debating those issues and I felt that it was at this point gone through ad nauseam. We have made exhaustive and comprehensive changes but we are very happy to go through them all again.
2236 THE CHAIRPERSON: Now, you have those, in effect, exit provisions for AAL and I am somewhat stunned why they are there. Why do you still need them?
2237 I mean I thought this was your venture. I thought you were the driving force. You saw an opportunity, you found a foreign partner, you are in control of this, you have voting control, et cetera, and yet, there is a provision for you to exit. I just don't understand it. Isn't this your baby? Aren't you going to be Globalive?
2238 MR. LACAVERA: Very much so, Mr. Chairman. It is something that I started 11 years ago and it is very much my baby. It is a company that I've built up, built teams up over the years that we have described to you and it has been a lot of blood, sweat and tears to get this company to where it is today.
2239 What I think we are providing for is a mechanism like you have in any good shareholders agreement, a mechanism for the parties to go their separate ways if things don't go as you expect.
2240 THE CHAIRPERSON: Yes, but you are being guaranteed a floor price here, if I understand it correctly. That's what I don't understand. If you are the one in control you don't need a floor price. If anybody, Orascom should have the floor price.
2241 MR. LACAVERA: I understand that concern. I think I would like to stress on that point that the floor price is in no way -- to the Rogers comments and to your question, they are in no way de-risking the venture for me in any way.
2242 It would be a disastrous outcome for me personally and for the business if I were to have to exit it. It is a negotiated business term that the parties agreed to, but in no way do I see it as something -- anything other than an absolutely disastrous outcome for myself.
2243 THE CHAIRPERSON: In terms of reputation, in terms of ego, I can understand that. In terms of money, I don't see that. Wouldn't you, in effect, because of the floor price, walk out whole?
2244 MR. LACAVERA: Actually, Mr. Chairman, not at all. Obviously it is a good sum of money that we are discussing, but it is in no way representative of the existing value in my business today.
2245 I have built a business with over $120 million a year in sales that has been now recognized as one of the best-managed companies in Canada for the past five years. I have an incredible team around me that I have built up over the years.
2246 You know, a financial outcome is not at all my objective here in any way. In no way is it representative of a de-risking in any way for me. It is, frankly, not in any way an outcome that I would be happy with.
2247 THE CHAIRPERSON: A couple of technical questions.
2248 On page 5 you are talking about the terms of the TSA agreement and the fourth paragraph, the last sentence, says:
"As the Commission is aware, these were dual-purpose agreements, so a provision was inserted to ensure that if either party's agreement was terminated the parties would need to negotiate a new arrangement to preserve the equivalent economic benefits and tax efficiencies." (As read)
2249 Can you elaborate? I don't want you to say anything that's in confidence, but just in generic terms, what does this mean?
2250 MR. LOCKIE: Well, in generic terms the fact that there is now this unfettered ability to terminate the agreement by the corporation, this secondary purpose for these agreements will have to somehow be sorted out between the shareholders otherwise and that's just been reflected in the shareholders agreement.
2251 THE CHAIRPERSON: So there is an obligation to negotiate these terms in the shareholders agreement now?
2252 MR. LOCKIE: I wouldn't describe it as an obligation to negotiate. There is an agreement between the shareholders that if they lose the mechanism and the vehicle for this distribution mechanism that is currently in those agreements, that they will otherwise address the economics.
2253 THE CHAIRPERSON: If it isn't an agreement to negotiate, what is it?
2254 MR. LOCKIE: It is the terms -- the negotiation, I guess, I would see going more to the economic benefits themselves. This is simply to come up with some other mechanism for achieving the exact same negotiated result.
2255 THE CHAIRPERSON: Yes. Let's put it very simple. You tell me TSA can now be terminated and you tell me there is no penalty for early termination. That's what you said this morning.
2256 MR. LOCKIE: Correct.
2257 THE CHAIRPERSON: When that happens, however, there will be a set of negotiations whereby the tax benefit or the economic benefit, as you call it, that Orascom gets pursuant to the TSA will have to be substituted in a way yet to be determined?
2258 MR. LOCKIE: That is correct. I would just note that the decision to terminate this agreement by the corporation would itself be unfettered. What we are attempting to do is address the Commission's concern that it was operating in some way as a control lever.
2259 THE CHAIRPERSON: I understand that. I'm trying to get to the bottom of what happens -- let's assume that a determination takes place and you now then sit down, to use your words, to determine equivalent economic benefits and tax efficiencies. You can't agree to those. What then? The thing goes to arbitration? Is there going to be an arbitration clause?
2260 MR. LOCKIE: I can give you a very simple example of what the parties might do. They might agree that the only mechanism available will be to issue dividends for those amounts respectively. If they weren't able to come to agreement on that, you would have a contractual dispute like any other and I guess we would go to arbitration in accordance with the provisions of the agreement.
2261 THE CHAIRPERSON: So this would be arbitrable. A failure to agree to negotiate equivalent economic benefits or tax efficiencies would go to arbitration and that will be spelled out in the TSA or however you are going to spell it out?
2262 MR. LOCKIE: We haven't looked through the specifics, but I can tell you the general arbitration provision applies to any dispute under the agreement. So yes.
2263 THE CHAIRPERSON: You are making a specific representation here, you have just explained it, I would like to see it in writing to see how it actually works.
2264 MR. LOCKIE: Understood.
2265 THE CHAIRPERSON: Lastly, the selection of the CEO -- sorry, second last. The selection of the CEO, if I understand it, he or she is going to be elected by the Board in both cases. There are no specific provisions, Mr. Intven or Mr. Lockie, if I understand it, regarding the selection of the CEO?
2266 MR. INTVEN: I believe that's correct, Mr. Chairman. It is just a question of the Board selecting the CEO.
2267 THE CHAIRPERSON: Okay. Coming back to the Board, the way you set it up, the first independent director is Mr. Ducharme, who has been nominated by AAL.
2268 MR. INTVEN: Yes.
2269 THE CHAIRPERSON: How is Mr. Ducharme replaced if something should happen to him or if he should resign or anything like that? Does AAL get to replace Mr. Ducharme or does he get replaced by the selection committee?
2270 MR. INTVEN: The way the agreements work, Mr. Chairman, the process is intended to be self-perpetuating, because Mr. Ducharme, together with a nominee from AAL and OT, will now select the two remaining independents.
2271 THE CHAIRPERSON: Okay, but he can't -- I understand it's self-perpetuating, but the key on which you are trying to convince me that AAL is in control is because they appoint Ducharme?
2272 MR. INTVEN: Yes.
2273 THE CHAIRPERSON: So presumably they should appoint his replacement too. Otherwise, the selection of the replacement is being watered down through that independent committee?
2274 MR. INTVEN: Well, if Mr. Ducharme, heaven forbid, passes away or is no longer on the Board --
2275 THE CHAIRPERSON: Let's say resigns. Let's just say resigns.
2276 MR. INTVEN: That's a better example. If he does, then the way the agreement is structured, the most senior -- the first appointed independent as of that date will take his place on the nominating committee.
2277 So the Board is in the process right now -- or the committee is in the process of selecting the two remaining independents. If they were to select John Smith and Jane Brown, John Smith would be the first independent. If Mr. Ducharme resigns, John Smith would step up to the nominating committee and then participate in the selection of future independents. That is the theory.
2278 THE CHAIRPERSON: I assumed, maybe wrongfully, that you were trying to emulate the BCE decision or coming close to it. This is not the same. I would just point it out at you and you might want to reflect on that.
2279 Okay, Mr. Katz, do you have any questions?
2280 COMMISSIONER KATZ: Yes, I do.
2281 Mr. Lacavera, I want to take you to page 4 of your comments here and the reference you made quite unequivocally about the fact that you cannot accept any levers or conditions on raising debt, and then you say towards the end:
"To accept such terms would crush Globalive Wireless, and even more so, it would crush AAL." (As read)
2282 My first questions are: In what sense would they crush those two companies, one is the operating company and one your personal company?
2283 MR. LACAVERA: Yes, Mr. Katz.
2284 In the first instance, the concern that we would have is that a party would be negotiating with us not on a commercial basis because that party would have knowledge that we are in a position where we either are not able to begin operations until we accept their capital, which would be the recommendations of the incumbents largely, or secondarily perhaps, that we are in a situation where we are operating but we have now a certain block of debt or a certain cap or a certain structure that we have to accommodate, which, to use Mr. Scheschuk's words from the first hearing, would put us to the lowest common denominator in terms of that negotiation.
2285 So really the issue is we need an ability to negotiate our financing on a fair and equitable basis on commercial terms and if that means that the terms may not be what we like, we still may not be in a market that is ideal, but adding in a regulatory requirement for approval or post-approval for such a situation would create a very onerous situation for us.
2286 The related point on AAL is, of course, that now shrinking it from the global markets for a diversification of the foreign debt or a diversification of the foreign equity, talking specifically about the Canadian shareholder, in this case AAL, we would be put in a situation where now we are dealing with a smaller universe and a small set of investors that are financially in a position to participate in a venture like this and we would be facing an incrementally even more onerous situation for AAL.
2287 COMMISSIONER KATZ: I guess I don't understand. If you had to move the paper, so to speak, off of Orascom's books to somebody else, there is a commercial market for it as well. It may be higher than what you are paying today and it may cost another couple of points to move it off, but I don't understand why it would crush the company. Yes, it would push out your cash flow by another couple of months or whatever the case may be, but I don't understand the notion of crushing it.
2288 MR. LACAVERA: I don't think it's -- it's not just necessarily a question of the cost, sir, it's also a question of the terms that would come in associated with that. Orascom has pledged true start-up funding for this business that gives the business the runway it needs to get out of the gate and get to a position where we are generating some cash flows.
2289 COMMISSIONER KATZ: But I think I heard Orascom say that they are not discounting that paper to you, you are paying full commercial rates today, which is what I asked them last week. So if you are paying full commercial rates today, yes, if they have to move that paper off of Orascom, there may be another charge for a third party to take it off, but I can't see it as being that onerous at the end of the day.
2290 MR. LACAVERA: It's not just, as I say, about the cost. Yes, it is possible the cost may be higher with another party. It is also the terms that would come in associated with that, the covenants that may be introduced, the restrictions on what the management team can do with the financing, restriction on the business plan, restriction on the capital plan.
2291 We have a very good business plan that we have worked now a couple of years on developing, we are in the market getting ready to launch, and introducing a scenario where -- so as I have been trying to say, the cost is one issue but also it would have to be a situation where we were able to find someone that is offering us the seed type of funding with the terms comparable to what Orascom is offering.
2292 COMMISSIONER KATZ: I mean the notion in the next sentence:
"We cannot accept financing on commercially unreasonable terms." (As read)
2293 To me, the term "commercially unreasonable" is an oxymoron. If it is commercial, it's whatever the market will bear; if it's unreasonable, then you are saying there is no market.
2294 MR. LACAVERA: Yes.
2295 COMMISSIONER KATZ: That's a different story if there is no market than if there is a market but it is a higher cost to you. That's what I don't quite understand.
2296 MR. LACAVERA: I understand.
2297 MR. MAREUSE: Commissioner Katz, if I may just add a comment here.
2298 I don't think when we said they were commercial terms, they are commercial in a good market. I don't think today if you go to anyone you will get the same terms that we have provided to Globalive. Otherwise, you know, even if they are bit more onerous, we would be very happy to have someone take up this debt off our books at similar terms, even a bit more onerous.
2299 I don't think we have done -- as we explained last time, we have done a lot of efforts to try to find such financing. As Tony says, you know, the terms will be not only more onerous but very, very, very difficult for the business. I mean the only propositions we saw were, you know, absolutely unacceptable.
2300 So when I said last week that they were commercial terms, they are commercial terms in a good market, in a very good market, in a very bullish market. We saw all the precedents and we compared the precedents which were done in a very bullish market.
2301 Today you would not find, you know, even at 200 or 300 basis points more, these kind of conditions for Globalive Wireless today. You heard actually the treasurer, I think it was from Rogers, expressing the same way about our ability to finance ourselves.
2302 COMMISSIONER KATZ: Thank you.
2303 COMMISSIONER MENZIES: Just a couple of questions.
2304 One, I want to give you an opportunity to address something that I may not be clear on.
2305 Mr. Scheschuk, you said in your argument that the sum of two zeros was still zero and yet, in Mr. Intven's argument -- I don't want to put words in his mouth but I sort of took it that having a lot of influence doesn't necessarily mean control. Now, influence, to me, doesn't seem like zero.
2306 So I'm trying to understand. I mean I accept that -- if I were to accept that each is a zero and I added two zeros together that I have to come up with zero. To do otherwise is illogical.
2307 But I would have to accept the premise that it's a zero in each of these areas and I would want to give you the opportunity to address that because my guess is that people on the other side would say, no, no, you can't call this a zero, there is a lot of influence in this and there are lots of different analogies you can come up with to work this on.
2308 But I want to give you a chance to clarify that, if you understand my question, before we conclude.
2309 MR. INTVEN: Mr. Menzies, perhaps I could take that. I think it's basically a legal question, a question of precedent.
2310 I wouldn't argue. Perhaps the words were badly chosen that the levers of influence that have been identified by the incumbents to the Commission amount to zero. I wouldn't take that position.
2311 I like the four-foot plank analogy. You can have, as the Canadian Airlines decision says, a number of parties that have significant influence over a company, including its bankers, which is very often the case, key employees, CEOs often have an awful lot of influence over the company, and minority shareholders.
--- Difficultés techniques
2312 THE COURT REPORTER: Could you please repeat your last comment and speak closer to the microphone, please?
2313 MR. INTVEN: Would you like me to start all over? I don't know. Well, okay.
2314 I would say that in answer to your question, Mr. Menzies, that the proper test is the one that is set out in the Canadian Airlines case and it very clearly says -- recognizes that while a number of parties have the power to exert influence, and often substantial influence, over a company, that simply does not translate into control until it becomes dominant or determining.
2315 In other words, it is like an on/off switch on a light, if a particular player, an actor, can say no and stop an activity from going ahead, either a strategic activity or a significant operational activity, then that could amount to control.
2316 But if they can merely say, look, we have a lot of debt in this business and that, we don't think we would feel right if you could do that but we can't really stop you, then that's influence.
2317 That in my mind is the distinction between influence and control.
2318 If you look at the precedent, it very clearly says it's the power to decide, to determine or dominate, not simply the power to influence. So I do believe that you cannot take a lot of individual influences that, as I said, may be four-foot planks and use them to cross a nine-foot gap, it just doesn't work.
2319 COMMISSIONER MENZIES: Thank you.
2320 I just have one other question and that is in terms of your search for financing and your search for bridge financing in Canada.
2321 Just so I understand the breadth of it, did that include public or government sources as well as private sources?
2322 MR. SCHESCHUK: When you say public, you mean like government?
2323 COMMISSIONER MENZIES: Yes.
2324 MR. SCHESCHUK: Yes. We did and I think continue to speak to the Export Development Corporation. That is the only one coming to mind.
2325 COMMISSIONER MENZIES: Thank you.
2326 THE CHAIRPERSON: Okay.
2327 Before we wrap up, Mr. Mareuse, I want to return to you because I found your explanation somewhat difficult to accept.
2328 You said you asked for all of these control questions or covenants, which have now disappeared, because you used a standard legal document and they were there, et cetera, and it was only when questioned by the Commission and put them under examination that you felt that they weren't needed.
2329 I accept that but doesn't that also -- why shouldn't I also take the interpretation you don't need them because you have control anyway, so this was just icing on the cake, being the largest shareholder and being basically the sole debt-holder, you control this company and therefore making those concessions is really not a meaningful concession?
2330 That's how it is being represented by the other intervenors and I would like you to have a chance to rebut that.
2331 MR. MAREUSE: Well, you know, we can just reiterate that, you know, the debt we have doesn't give us any control over the operation. We have, you know, given very, very flexible terms. I don't personally see how this gives us any control over the operation.
2332 I think what I have heard from the incumbents is purely speculation about what would happen, but I have not heard any material argument, any fact that, you know, as per the agreement we would control with the bridge that we have provided the operation of Globalive Wireless. I have not seen any factual argument saying that we control.
2333 I mean we have -- you know, we have pushed to limit the lender to give as much flexibility to Globalive Wireless. We have taken off all the covenants, we have extended the maturity, extended the term at their option. I don't see what else we could do apart from just, you know, giving free money. We pushed it as hard as we could.
2334 THE CHAIRPERSON: Okay. So thank you very much for your presentations.
2335 As I mentioned at the outset, the parties have until the dates that I mentioned -- I think it is October 5 and October 7 -- to come back with further documentary proof or rebuttal of the points that were raised and we will render our decision by the 23rd as promised.
2336 Thank you very much. That ends the proceedings.
--- L'audience se termine à 1156
Kristin Johansson Jean Desaulniers
Monique Mahoney Sue Villeneuve
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