September 21, 2016

Due Diligence: Don’t Overlook FCC Licenses!

This Davis Wright memo reminds buyers not to overlook FCC licenses in their due diligence investigations – even in deals that don’t involve telecom companies:

All sorts of non-telecommunications companies – energy providers, railroads, interstate trucking lines, toll-road operators, airlines, manufacturers, retailers, and numerous others — rely upon radio and telecommunications facilities in the operation of their businesses. Those facilities may be used for voice communications, equipment and systems monitoring, or data collection, transport and analytics. Eschewing third party and common carrier services, many companies instead utilize their own private radio and telecom facilities to support their mainstay businesses.

Ownership or control of licensed facilities can’t be transferred without FCC approval – and applications need to be filed well in advance. Big problems can result if this approval requirement isn’t addressed:

Failure to obtain advance FCC approval can delay closing, expose the parties to an acquisition to stiff FCC penalties, result in license conditions or denial, and give rise to disputes between the parties that may lead to post-closing adjustments or even litigation.

The memo relates a cautionary tale involving a large Canadian railway that completed two deals in 2008 without knowing that the sellers had FCC licenses:

Seven years later, the buyer discovered not only that the prior transactions were consummated without securing FCC approval of transfer of the licenses, but that the buyer subsequently had constructed, operated, modified and relocated other wireless facilities without FCC approval – leading to it having more than 100 unauthorized facilities by the time of its disclosure to the FCC.

The buyer voluntarily disclosed its violations and cooperated with the FCC’s investigation.  Nevertheless, it was fined $1.2 million – even though the FCC found that the company’s actions were taken in support of the safe operation of its facilities and that its facilities caused no harmful interference.

John Jenkins