Adapted excerpt from the ABI Bankruptcy Telecommunications Manual, Second Edition (2007), available at www.abiworld.org/abistore.
Written by a team of Bankruptcy & Telecommunications attorneys at Wiley Rein LLP (Washington, D.C. and Tysons Corner, Va.), the Bankruptcy Telecommunications Manual, Second Edition provides an overview of basic bankruptcy law for the telecom professional and basic communication law for the insolvency professional. Updated to include BAPCPA provisions, the manual examines the interrelationship and conflict between the Communications Act and the Bankruptcy Code, covering such issues as discontinuation of service, interconnection, nondiscrimination in delivery of service, transfer and assignment of FCC licenses and more. Statutes and regulatory schemes and an index of key terms are included.
This adapted excerpt highlights the uniqueness of telecom bankruptcies and the need for all participants in such cases to be well versed on the applicability and interplay between the two distinct bodies of applicable federal law—the Bankruptcy Code, on the one hand, and the Communications Act, as amended, on the other.
Role of the Federal Communications Commission in the Sale of Bankruptcy Assets
Fundamental telecommunications issues are likely to arise in every telecommunications bankruptcy case, including in the context of asset sales. Unlike the assignment of domestic authorizations and licenses from a bankrupt entity to itself as a debtor-in-possession, the sale of assets from a debtor-in-possession or bankruptcy trustee to a third party is usually a substantial transaction necessitating the filing of an application for Federal Communications Commission (“FCC” or “Commission”) pre-approval of the sale. Depending on the type of assets to be sold, different sections of the Communications Act of 1934, as amended by the Telecommunications Act of 1996, (“the Communications Act, as amended”) will govern the FCC approval process. But in all cases, Commission approval is a condition to valid transfer of telecommunications licenses, in addition to any requirement of bankruptcy court approval pursuant to section 363 of the Bankruptcy Code.
a. Transfers of Title II Domestic Common Carrier Assets (Lines)
Upon application for approval of a transfer under Section 214 of the Communications Act, as amended, the Commission is required to give notice to, among others, the governor of each state where such assets will be transferred. This notice ensures the right of the notified parties to be heard on whether to allow the transfer of the assets. Carriers obtain approval for the transfer of assets under either normal procedures or streamlined procedures. Under normal procedures, final action on an application “should be expected no later than 180 days” from the date of the initial public notice of the proposed transfer. Under streamlined procedures, transfer of assets is automatically permitted thirty days from the date of public notice, unless the Commission otherwise notifies the parties. Public comments on an application may be filed within the first fourteen days after public notice. Reply comments may be filed within the first twenty-one days after public notice.
Presumptive application of streamlined procedures applies to all transfer of control applications in which: 1) “both applicants are non-facilities-based carriers, 2) the transferee is not a telecommunications [carrier], or 3) the proposed transaction involves only the transfer of the local exchange assets of an incumbent local exchange carrier (“ILEC”) by means other than an acquisition of corporate control.” The streamlined procedures also apply in situations in which: 1) “neither of the applicants is dominant with respect to any service; 2) the applicants are a dominant carrier and a non-dominant carrier that provides services exclusively outside the geographic area where the dominant carrier is dominant; or 3) the applicants are [independent ILECs] that have, in combination, fewer than two percent of the nation’s subscriber lines installed in the aggregate nationwide, and no overlapping or adjacent services areas.” These eligibility requirements also apply to any affiliates of entities qualifying for streamlined procedural treatment.
The Commission’s rules also allow a domestic carrier to provide the Commission pro forma post-transfer notice in situations where the carrier undertakes a “corporate restructuring, reorganization, or liquidation of internal business operations that does not result in a change in ultimate ownership or control” of its lines or authorization to operate. This includes transfers in bankruptcy proceedings to a trustee or to the carrier itself as a debtor-in-possession, discussed in greater detail in section III.E.1 of the ABI Bankruptcy Telecommunications Manual.
b. Transfers of Title III Wireless and Broadcast Licenses
Section 310(d) of the Communications Act, as amended, governs approval of radio license transfers. To obtain FCC consent in accordance with section 310(d), the parties must file the appropriate application with the FCC and the FCC must grant the application(s) before the transaction is consummated. Requests for FCC approval of assignments and transfers of control of radio licenses must be filed on FCC Form 603, and possibly FCC Form 602 if ownership information is required. While the FCC will consider multiple factors, it ultimately will grant the application if it finds that doing so would serve the public interest, convenience, and necessity.
An assignment of authorization is a transaction in which ownership of a license, or the facilities authorized thereunder, is transferred from one entity to another. For example, the sale of a CMRS license from Company A to Company B would constitute an assignment. Such transactions usually take the form of “asset sales” and result in the issuance of a new FCC license once the transaction is consummated.
In contrast, a transfer of control is a transaction in which the licensee remains the same, but control of the licensee is transferred from one person or entity to another. A change from less than fifty percent ownership to fifty percent or greater ownership is always considered a transfer of control. For example, a transfer of control would occur if Company A purchases a majority of the stock in Company B, which holds a broadcasting license. In this situation, the entity holding the license (Company B) remains the same, but ownership of the entity, and presumably control of the license, has changed. Similarly, a change from positive control (greater than 50% ownership) to negative control (50% or less ownership) is deemed a transfer of control requiring prior FCC approval. Transfers of control often take place in corporate mergers or bankruptcy reorganizations.
While section 310(d) applies to all assignments and transfers of control, the Commission applies section 310(d) slightly differently depending on whether the assignment or transfer of control is “substantial,” “pro forma,” or “involuntary.”
Generally, any substantial assignment or transfer of control must be pre-approved by the Commission through the section 310(d) application process described above. There are two types of substantial transactions – de jure and de facto. A de jure assignment involves the legal assignment of a license to an entity not controlled by the same parties as the assignor. Similarly, a transfer of control is de jure, and therefore substantial, if it is one in which the legal sale or transfer of the licensee’s stock occurs. Typically, de jure control is evidenced by ownership of 50.1 percent or more of an entity’s voting interest. De facto transactions, typically transfers of control, are those in which there is a change in the day-to-day actual control of the licensee. The FCC’s policies regarding what constitutes de facto control vary and decisions regarding de facto control are extremely fact-specific.
While radio service licensees generally must obtain Commission approval before completing a substantial assignment or transfer of control, the Commission forbears from enforcing this rule where licensees using the spectrum to provision telecommunications services to the public (e.g., CMRS providers) complete pro forma transactions. Pro forma assignments and transfers of control are transactions involving a non-substantial change in ownership in the license or the licensee (e.g., a corporate reorganization). With two exceptions, the licensee need only notify the Commission by filing Form 603 within thirty days of completing the pro forma transaction and updating the necessary ownership information as required.
Involuntary assignments and transfers of control, such as those triggered by a bankruptcy filing, do not require prior Commission approval. Transfers or assignments to a court-appointed bankruptcy trustee, or to the licensee, as a debtor-in-possession, are viewed as involuntary and pro forma under the FCC’s rules. Because they are unplanned, the Commission’s rules require only that licensees file Form 603 no later than 30 days after the event causing the involuntary assignment or transfer. However, FCC approval of any ultimate transfer of control or assignment of the license from the trustee or debtor-in-possession to a new owner or licensee is required in accordance with section 310(d).
According to the Commission’s rules, failure to meet any of these requirements is a violation and may result in monetary forfeitures. Under section 1.80 of the Commission’s rules, unauthorized substantial transfers of control may be punished by a base forfeiture amount of $8,000 per violation, and unauthorized pro forma transfers of control carry a base forfeiture amount of $1,000 per violation. In addition, there are filing fees associated with most FCC applications, but in the case of bankruptcy filings, the FCC has discretion to waive or refund the fees for bankrupt companies.
Finally, under the Commission’s rules, a licensee must notify the Commission in writing of consummation of the transfer or assignment. Such notice must be provided to the Commission within 180 days of public notice of the Commission’s grant of the assignment or transfer application, unless a request for an extension is filed prior to the expiration of the 180-day period. Both notices of consummation and requests for extension must be filed on FCC Form 603.