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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 DA 97-725 In the Matter of Loral Corporation Request For a Declaratory Ruling Concerning Section 310(b)(4) of the Communications Act of 1934 and In re Application of R/L DBS Company For Assignment of Continental Satellite Corporation's Direct Broadcast Satellite Construction Permit File No. 70-SAT-DR-96 File Nos. DBS 87-01 94-SAT-TC-96 49-SAT-TC-95 130-SAT-EXT-95 MEMORANDUM OPINION AND ORDER Adopted: May 14, 1997 Released: May 14, 1997 By the Chief, International Bureau: I. INTRODUCTION 1. By this Order we grant Loral Corporation's ("Loral") Request for Declaratory Ruling and find that under the controlling Bureau precedent, the indirect ownership of Continental Satellite Corporation ("Continental") by a Bermuda corporation does not contravene the Commission's foreign ownership restrictions. Because the Bureau precedent is under review by the Commission, this decision is subject to being revisited in a separate proceeding after any action the Commission may take as a result of that review. In addition, we grant the application of R/L DBS Company L.L.C. ("R/L DBS") for assignment of Continental's Direct Broadcast Satellite ("DBS") construction permit. II. DECLARATORY RULING A. Background. 2. Continental holds a permit to construct a DBS satellite system. Loral, through its subsidiary, Loral Aerospace Holdings Inc. ("LAHI"), had a controlling interest in Continental until the 1996 merger between Loral and Lockheed Martin. As part of the transaction consummating this merger, Loral created a Bermuda corporation, Loral Space and Communications Ltd. ("SpaceCom LTD.") which held one-hundred percent of the stock of a Delaware corporation, Loral SpaceCom Corporation ("SpaceCom Corp."), which in turn had a fifty-one percent ownership interest in Continental. On February 9, 1996 Loral filed a request for declaratory ruling that indirect ownership of Continental, a DBS permittee, by SpaceCom LTD., a Bermuda corporation, did not violate the Commission's alien ownership restrictions. 3. Subsequent to the merger, Loral requested Commission approval to transfer its majority ownership interest in Continental to Loral SpaceCom DBS Inc. ("DBS Inc."), a Delaware corporation. DBS Inc. is indirectly controlled by SpaceCom LTD. On April 16, 1996 the International Bureau approved a pro forma transfer of control without prejudice to whatever action the Commission might consider appropriate as a result of the instant petition for declaratory ruling. Presently, SpaceCom LTD. wholly owns Loral SpaceCom DBS Holdings Inc. ("DBS Holdings"), a Delaware corporation. In turn, DBS Holdings owns one hundred percent of DBS Inc. which holds the majority ownership interest in Continental. 4. In its petition, Loral asserts that foreign ownership restrictions do not apply to ownership of a DBS permittee. Specifically, Loral contends that Section 310(b) of the Communications Act applies only to broadcast, common-carrier, aeronautical en route or aeronautical fixed radio licenses. Continental represents that it will operate its DBS system as a non-common carrier subscription service, therefore Loral asserts that by its terms, Section 310(b) does not apply to this DBS permit. Loral argues that in the event the Commission finds that any foreign ownership restrictions apply to a DBS permit, only Section 100.11 of the Commission's rules would apply and that we should find that under that provision the public interest would not be served by denying its request. 5. Loral states that its proposal meets the standards that the Commission has employed in determining that denial of an application would not be in the public interest. First, according to Loral, the Commission considers whether the country with which the applicant is associated enjoys close and friendly relations with the United States and, therefore, is not a national security concern. Loral maintains that Bermuda has had close and friendly relations with the United States and that Bermuda presents no material security risk to the United States. Second, according to Loral, the Commission considers the citizenship of the stockholders, officers and directors of the parent corporation. Loral maintains that SpaceCom LTD., Continental's Bermuda parent company, is traded on the New York Stock Exchange and is widely held and that no other person or group owns five percent or more of any class of SpaceCom LTD.'s capital stock. Moreover, Loral states SpaceCom LTD.'s officers and directors are all U.S. citizens as of December 13, 1996 and do not pose any threat of foreign influence. Third, Loral says, the Commission considers whether there are intermediate corporations between the applicant and the parent that are incorporated in the United States. Loral points out that SpaceCom LTD. is headquartered in New York City and there are two U.S. corporations, DBS Inc. and DBS Holdings, between Continental and SpaceCom LTD. in the chain of ownership. Finally, according to Loral, the Commission considers the type of service license at issue. Loral asserts that the subscription television service to be offered by Continental does not fall within the category of licenses to which Section 310(b) applies. B. Discussion. 6. Both the Communications Act and the Commission's rules contain restrictions on non-United States ownership of certain types of licenses. Section 310(b)(4) of the Communications Act provides, in pertinent part, that "[n]o broadcast or common carrier or aeronautical en route or aeronautical fixed radio station license shall be granted to or held by...any corporation directly or indirectly controlled by any other corporation. . . of which more than one-fourth of the capital stock is owned of record or voted by aliens, their representatives, or by a foreign government or representatives thereof, or by any corporation organized under the laws of a foreign country, if the Commission finds that the public interest will be served by the refusal or revocation of such license." The pertinent provisions of Section 100.11 of the Commission's rules are modelled after Section 310 of the Communications Act and contain similar restrictions. 7. We agree with Loral that Section 310 does not apply to the ownership of Continental's permit under existing Bureau precedent. By its terms, Section 310(b) applies only to common carrier, broadcast or certain aeronautical licenses. Because Continental intends to offer a non-common carrier subscription service, its DBS permit does not fall under any of the regulatory classifications covered by the statute. 8. Similarly, we find, under the MCI Order, that Section 100.11 of the Commission's rules does not apply to Continental's permit. In the MCI Order, the Bureau reasoned that because the ownership restrictions in Part 100 of the rules were virtually identical to the statutory restrictions in Section 310(b) and because the Commission had previously determined to apply to DBS providers only those statutory requirements expressly mandated by the Communications Act, the restrictions in the rules should not apply to a non common-carrier subscription service like Continental's because the statute itself is inapplicable. Under Bureau precedent, Continental's ownership structure should be approved. We recognize that the decision in theMCI Order is before the Commission pursuant to Applications for Review. Our action here is subject to being revisited in a separate proceeding after any action the Commission may take in reviewing the International Bureau's decision in the MCI Order. We also note that it has been suggested that we apply to the DBS service a test analogous to the "effective competitive opportunities" test developed in our Foreign Carrier Order. Although that test has not been adopted in the DBS context and currently only applies to common carrier licensees, in the instant case, even if we were to apply such a test, the most analogous precedent suggests that approval of the transaction is warranted. Specifically, in the AT&T/Loral decision the International Bureau approved SpaceCom LTD's indirect ownership of a satellite system providing service on a common carrier basis. The Bureau examined the Foreign Carrier Order, where the Commission indicated, in examining investments involving Section 310(b), it would determine the "home market" of an investor and whether that market provides effective competitive opportunities for U.S. entities. The Bureau concluded that SpaceCom LTD.'s home market, for the purposes of Section 310(b) is the U.S. Although chartered in Bermuda, the Bureau noted that all other indicia point strongly to the U.S. as the home market for SpaceCom LTD. The International Bureau concluded that it was in the public interest to assign AT&T's SKYNET satellite services business to SpaceCom LTD. In the AT&T/Loral proceeding and in Loral's present request for declaratory ruling, the corporation in question is SpaceCom LTD. III. REQUEST FOR ASSIGNMENT A. Background. 9. We next address R/L DBS's application to assign Continental's DBS construction permit. R/L DBS, the proposed assignee, is a Delaware limited liability company formed by DBS Holdings and Rainbow DBS Holdings, Inc. ("Rainbow DBS"), a wholly owned subsidiary of Rainbow Programming Holdings, Inc. ("Rainbow Programming"). Since each company would hold fifty percent of R/L DBS under the proposed assignment, neither DBS Holdings nor Rainbow DBS would have control of a majority interest in the permit. 10. R/L DBS states that grant of the requested assignment will facilitate competition in the DBS marketplace and will serve the public interest for several reasons. First, R/L DBS contends that DBS Holdings' affiliation with Space Systems Loral ("SS/L"), a well established and experienced satellite manufacturer, makes it well suited to bring DBS to the market. Second, it asserts that Rainbow DBS's close affiliation with Rainbow Programming and Cablevision, both leaders in the development and distribution of video programming, will benefit R/L DBS's development of its DBS service. R/L DBS maintains that the combination of manufacturing expertise and video programming ensures its success in the DBS marketplace. Also, R/L DBS states that it recognizes the importance of the rapid deployment of service. It also asserts its commitment to offering DBS service to the public as soon as its satellite system is constructed. 11. Previously, Continental and Rainbow proposed to enter into a series of three associated transponder agreements with respect to this DBS permit, including an Options Agreement, a Channel Lease Agreement, and a Management Agreement. On February 26, 1996, the International Bureau issued a declaratory ruling, without opinion, that Continental and Rainbow Programming's transponder Lease Agreement, if executed and implemented, would result in the unauthorized transfer of control of Continental's DBS permit to Rainbow, in violation of Section 310(d) of the Communications Act. The Bureau advised Continental and Rainbow that this ruling would become final unless, within 30 days, the parties requested a full memorandum opinion and order. The parties have proposed this merger as an alternative to the flawed transponder lease agreement. 12. DBS Industries, a shareholder in Continental, petitions the Commission to dismiss or deny R/L DBS' application because of pending litigation before a California state court to determine various ownership interests in Continental. It argues that the California Court granted an injunction which precludes the assignment of the Continental authorization. Mr. Dixon, a minority shareholder in Continental also petitions the Commission to deny the instant application for the same reasons as DBS Industries. Additionally, Mr. Dixon raises numerous issues including private contractual and commercial matters. 13. Both, DBS Industries and Mr. Dixon request that the Commission defer or dismiss action on R/L DBS' application until there is a final resolution of Continental's ownership. DBS Industries and Mr. Dixon have chosen to challenge the ownership structure of Continental in two separate lawsuits and in their petitions to deny. The remaining issues raised in the petitions to deny are primarily commercial disputes that have been raised in formal pleadings before the courts and therefore will not be addressed. We have consistently declined to involve ourselves with commercial disputes such as those filed in the DBS Industries and Mr. Dixon's petitions. Controversies which do not reflect upon the qualifications of a Commission licensee are best left to the local courts for resolution. We have specifically stated that we will not interfere in a private contractual disputes absent a showing of a violation of the Commission's rules or federal statute. Therefore, we do not believe that the pending litigation requires deferral of our action. Our grant of the instant application is without prejudice to any further litigation and we reserve the right to reevaluate our decision in light of that decision. 14. According to DBS Industries and Mr. Dixon the FCC is legally disabled from fulfilling its jurisdictional obligations under Sections 309 and 310 as a result of the California Court Order, April 16, 1997. The court order requires the parties to "inform the FCC of the litigation." It also states "no parties shall proceed with any disposition of the Federal Communications Commission DBS license issued.......[a]ny action by the FCC with regard to the license shall be without prejudice to this Court's final determination regarding the respective rights of the parties to this action in connection with such license or the share ownership of Continental." On May 8, 1997 the California Court dissolved the April 16th preliminary injunction without prejudice to a future motion for preliminary injunction by James Dixon. In these circumstances, we see no reason to defer action. 15. Mr. Dixon in his petition to deny contends that the assignment application was not properly executed because Mr. Schollard was not the proper signatory to the transfer application. At the time the application was filed, Mr. Schollard was the only duly authorized officer of Continental with the authority to sign the application. Mr. Schollard's resignation did not take place until after the application was executed. Additionally, at the time the application was executed Loral controlled Continental. We therefore find that the application was properly authorized and executed. 16. Finally, Mr. Dixon contends that the lease agreements between Continental and Rainbow Programming that comprise the Options Agreement are not enforceable. The International Bureau in its declaratory ruling stated that the "Lease Agreement, if executed and implemented, would result in an unauthorized transfer of control" At that time, the Bureau refrained from issuing a final opinion and order since successful renegotiation of those agreements would moot the pending request. The parties have proposed this assignment as an alternative to the flawed lease agreements. B. Discussion. 17. We believe that it is in the public interest to grant the request for assignment. R/L DBS will have the benefit of the combined expertise of a satellite manufacturer and a video programmer. Given the depth of experience and involvement of R/L DBS's principals in the U.S. communications marketplace, we believe that its control of DBS facilities, and its subsequent competitive offering of DBS service should yield considerable procompetitive benefits for consumers. The assignment will also fulfill the Commission's objectives to expedite DBS service to the public and to allow the market to maximize efficient use of public resources. 18. Grant of R/L DBS's application for assignment would obviate the need for any further action by Continental and Rainbow to remedy the infirmities in the existing Lease Agreement with respect to the unauthorized transfer of control of the permit to Rainbow. Finally, upon assignment R/L DBS will be the DBS permittee and assume all of the obligations of Continental. 19. Construction Milestones. To further the Commission's policies for DBS, we believe it necessary to condition the grant as follows: R/L DBS, as the assignee of Continental's permit, would assume Continental's position and as such be obligated to construct, launch, and operate its DBS satellite in accordance with Continental's construction milestones. Commission rules require that DBS permittees complete contracting for satellite construction within one year of grant of authorization, and that they begin operating a DBS system within six years of grant of authorization. Previously, we granted an extension of time to Continental to complete construction of four satellites by August 15, 1999. R/L DBS, must conform to this schedule. 20. Our decision to grant the assignment is based in large measure upon R/L DBS's commitment to develop its DBS system, and in particular, to adhere to Continental's current construction schedule. As stated above we adopted our DBS milestone rules to ensure the timely development of DBS service and prevent unnecessary delays. Accordingly, as a condition of this assignment, we reserve the right to reexamine the authorization granting the assignment to the extent that R/L DBS fails to comply substantially with Continental's current timetable for construction, launch, and operation of its DBS system. Consequently, we will carefully monitor R/L DBS's semi-annual reports to ensure adherence to its construction schedule. 21. Service to Hawaii and Alaska/Use of DBS Capacity. The DBS Order requires those holding DBS permits or licenses provide DBS service to Alaska and Hawaii, accordingly, upon assignment, we will expect R/L DBS to provide DBS service to Hawaii and Alaska. In addition, the DBS Order provides that all transponder capacity be used primarily for DBS service no later than the fifth year of its license term. That policy requires "that a DBS licensee must begin DBS operations within five years of receipt of its license, but may otherwise make unrestricted use of the spectrum during that time. After that five year period, such a licensee may continue to provide non-DBS service so long as at least half its total capacity at a given orbital location is used for DBS service." R/L DBS must comply with our policies on the use of DBS satellite transponder capacity. V. CONCLUSION 22. In view of the foregoing, we find that Continental's current ownership structure, including a Bermuda corporation, does not implicate the Communications Act or the Commission's foreign ownership rules. In addition, we find it in the public interest to grant the application to assign Continental's DBS construction permit to R/L DBS and accordingly we deny the petitions to deny submitted by DBS Industries and Mr. Dixon. VI. ORDERING CLAUSES 23. Accordingly, IT IS ORDERED, pursuant to Section 0.261 of the Commission's rules on delegated authority, 47 C.F.R. 0.261, that Loral Corporation's request for declaratory ruling concerning foreign ownership restrictions IS GRANTED. 24. IT IS FURTHER ORDERED that the Application of R/L DBS Company L.L.C. for assignment of Continental Satellite Corporation's Direct Broadcast Satellite Construction Permit to R/L DBS Company L.L.C., File Nos. DBS 87-01, 49-SAT-TC-95, 130-SAT-EXT-95 IS GRANTED, effective upon adoption, subject to the condition that the Commission may reconsider this application and modify or cancel it, in whole or in part, if R/L DBS fails to make progress toward construction and operation of its DBS system substantially in compliance with Continental's timetable. The assignment is also subject to the condition that the parties void the three associated lease agreements between Continental Satellite Corporation and Rainbow Programming Holdings, Inc. within 30 days of the effective date of this Order. 25. IT IS FURTHER ORDERED that the petitions to deny or dismiss R/L DBS' application for assignment of Continental's construction permit filed by DBS Industries and Mr. Jim Dixon ARE DENIED. 26. IT IS FURTHER ORDERED that R/L DBS will provide DBS service to Hawaii and Alaska and will comply with our use provisions in accordance with the Commission's DBS rules and policies in our Revision of Rules and Policies for the Direct Broadcast Satellite Service, Report & Order, 11 FCC Rcd 9712,  125 (1995). 27. IT IS FURTHER ORDERED that the assignment shall be completed within 90 days from the date of adoption of this order and the Commission shall be notified by letter of the date of consummation. 28. IT IS FURTHER ORDERED that R/L DBS Company L.L.C. must submit in writing to the Commission, within 30 days of consummation of the pending assignment, an updated satellite construction and payment schedule. 29. This Order is issued under Section 0.261 of the Commission's rules, 47 C.F.R. 0.261 (1996), and is effective upon adoption. Petitions for reconsideration under Section 1.106 or applications for review under Section 1.115 of the Commission's rules, 47 C.F.R.  1.106, 1.115, may be filed within thirty days of the public notice of this order (see 47 C.F.R.  1.4 (b)(2)). FEDERAL COMMUNICATIONS COMMISSION Peter F. Cowhey Chief, International Bureau