The question of whether Rupert Murdoch’s Fox network and its lawyers have been candid with the FCC over the past decade about the facts relating to Fox’s claimed compliance with restrictions on foreign ownership turns in part on what one supposes the FCC needed to know. In particular, did it need to know that News Corp., an Australian company, would (and does) own over 99 percent of Fox’s equity?
While stressing that they have told the FCC everything, from day one, about News Corp.’s interest in Fox, Murdoch and his men have also contended that even if the FCC somehow lost sight of the fact that News Corp.’s equity interest was above 25 percent, it’s legally irrelevant anyway. But is it?
The primary purpose of the restrictions, which date back to the Radio Acts of 1912 and 1927 and took their current form in the Communications Act of 1934, was to protect national security, especially in wartime, in part by preventing interests that might spread foreign propaganda from exercising control over any U.S. broadcaster. But both the detailed statutory provisions and the FCC’s interpretations over the past ten years have imposed broad, prophylactic restraints even on some relatively passive forms of foreign investment, arguably including noncontrolling equity interests like News Corp.’s interest in Fox.
The provision at issue in the FCC’s pending investigation of Fox, section 310(b)(4) of the Communications Act, states: “No broadcast … station license shall be granted to or held by … any corporation directly or indirectly controlled by any other corporation of which any officer or more than one-fourth of the directors are aliens … [or] more than one-fourth of the capital stock is owned of record or voted by aliens … if the commission finds that the public interest will be served by the refusal or revocation of such license.” (Emphasis added.)
The statute on its face gives the FCC discretion to allow indirect foreign ownership of broadcasters above the statute’s 25 percent “benchmark” in at least some cases. It also ,suggests a presumption that (in the words of one Fox brief) the law “permits foreign ownership in excess of 25 percent unless and until the commission affirmatively finds that the public interest would be served by restricting such ownership.” ”
At the FCC, however, a page of history is worth a volume of logic. And the agency has long reversed this presumption, and has never (with one obscure exception) allowed above 25 percent foreign ownership.
While the FCC’s interpretation may well be unduly rigid, and while Fox’s 1985 application may well have warranted approval on a public interest basis (had it been presented that way, which it was not), Fox still has a problem on the duty-of-candor front if the evidence suggests it sought to hide, or even divert the FCC’s attention from, facts that the FCC would have considered relevant to the threshold issue of whether News Corp.’s equity interest in Fox exceeded the statute’s 25 percent benchmark.
The critical legal question underlying the duty-of-candor investigation thus comes down to whether it was clear to both Fox and the FCC in 1985 that, as Fox argues now, “The 25 percent benchmark in section 310(b)(4) applies only to direct ownership ‘of record’ of capital stock, not indirect, noncontrolling beneficial ownership interests or equity contributions.”
The statutory language, hi…
The question of whether Rupert Murdoch’s Fox network and its lawyers have been candid with the FCC over the past decade about the facts relating to Fox’s claimed compliance with restrictions on foreign ownership turns in part on what one supposes the FCC needed to know. In particular, did it need to know that News Corp., an Australian company, would (and does) own over 99 percent of Fox’s equity?
While stressing that they have told the FCC everything, from day one, about News Corp.’s interest in Fox, Murdoch and his men have also contended that even if the FCC somehow lost sight of the fact that News Corp.’s equity interest was above 25 percent, it’s legally irrelevant anyway. But is it?
The primary purpose of the restrictions, which date back to the Radio Acts of 1912 and 1927 and took their current form in the Communications Act of 1934, was to protect national security, especially in wartime, in part by preventing interests that might spread foreign propaganda from exercising control over any U.S. broadcaster. But both the detailed statutory provisions and the FCC’s interpretations over the past ten years have imposed broad, prophylactic restraints even on some relatively passive forms of foreign investment, arguably including noncontrolling equity interests like News Corp.’s interest in Fox.
The provision at issue in the FCC’s pending investigation of Fox, section 310(b)(4) of the Communications Act, states: “No broadcast … station license shall be granted to or held by … any corporation directly or indirectly controlled by any other corporation of which any officer or more than one-fourth of the directors are aliens … [or] more than one-fourth of the capital stock is owned of record or voted by aliens … if the commission finds that the public interest will be served by the refusal or revocation of such license.” (Emphasis added.)
The statute on its face gives the FCC discretion to allow indirect foreign ownership of broadcasters above the statute’s 25 percent “benchmark” in at least some cases. It also ,suggests a presumption that (in the words of one Fox brief) the law “permits foreign ownership in excess of 25 percent unless and until the commission affirmatively finds that the public interest would be served by restricting such ownership.” ”
At the FCC, however, a page of history is worth a volume of logic. And the agency has long reversed this presumption, and has never (with one obscure exception) allowed above 25 percent foreign ownership.
While the FCC’s interpretation may well be unduly rigid, and while Fox’s 1985 application may well have warranted approval on a public interest basis (had it been presented that way, which it was not), Fox still has a problem on the duty-of-candor front if the evidence suggests it sought to hide, or even divert the FCC’s attention from, facts that the FCC would have considered relevant to the threshold issue of whether News Corp.’s equity interest in Fox exceeded the statute’s 25 percent benchmark.
The critical legal question underlying the duty-of-candor investigation thus comes down to whether it was clear to both Fox and the FCC in 1985 that, as Fox argues now, “The 25 percent benchmark in section 310(b)(4) applies only to direct ownership ‘of record’ of capital stock, not indirect, noncontrolling beneficial ownership interests or equity contributions.”
The statutory language, history, and FCC precedents appear on balance to cut against Fox’s contention. While the Radio Act of 1927 restricted foreign ownership based on the percentage of capital stock “voted by aliens,” the Communications Act of 1934 added restrictions on the percentage of capital stock that could be “owned of record” by aliens. (Emphases added.) This suggests a congressional purpose to count nonvoting or limited-voting equitable interests against the statutory benchmark.
The purpose of this Change seems apparent: Congress wanted to guard against any efforts to circumvent its presumptive restrictions on foreign control through arrangements in which foreign interests with under 25 percent of the voting control might nonetheless be able to exercise disproportionate influence because of their ownership of more than 25 percent of the equity.
Fox seeks to rebut this inference by quoting scraps of legislative history and judicial case law, like a statement in a 1934 Senate report that the purpose was “to guard against alien control and not the mere possibility of alien control,” which is quoted with approval in a 1958 D.C. Circuit decision, Noe v. FCC. But when read in context, these materials provide only modest support for Fox’s position.
Fox also contends that a literal reading of the words “capital stock … of record” in the statute points to the conclusion that News Corp.’s 24 percent of the total number of issued shares “of record” on the books of Fox’s holding company puts it below the 25 percent benchmark regardless of the value of those shares.
But while Murdoch’s lawyers arguably achieved what one calls “literal compliance” with the statute, by conceiving a peculiar structure in which foreign owned stock with well over 99 percent of the equity ownership represents only 24 percent of the total number of issued shares (and 24 percent of the vote), the applicability of the statute should not turn on the ingenuity of lawyers in manipulating the number and value of issued shares. Under Fox’s analysis, for example, News Corp.’s interest would clearly rise above the statute’s 25 percent benchmark if there were a 2-for-1 split of its common shares, an event that would have no other legal or business significance at all.
Whatever the intrinsic merits of Fox’s interpretation of the statute, Fox and some neutral experts also claim that in 1985, the FCC was concerned only about foreign control of broadcasters, not equity ownership. But a series of FCC actions beginning in 1985 have indicated with increasing clarity that the FCC believes that the 25 percent benchmark is exceeded (at least arguably) whenever aliens (like News Corp.) own over 25 (let alone 99) percent of the equity in a broadcaster’s holding company.
Most relevant to the lack-of-candor investigation is a declaratory ruling called Wilner & Scheiner, involving alien limited partnership interests in broadcasters, which was released on June 25, 1985, just one day after Fox had filed its application for FCC approval of the Metromedia deal, and months before Fox filed various amendments and won FCC approval.
The FCC held in Wilner & Scheiner that the equity contributions of nonvoting limited partners, unlike the interests of creditors, should be counted as “capital stock” in computing the foreign ownership percentage, even though a literal reading of the statute would limit its application to corporations. The commission held that the statute’s use of the words “capital stock … owned of record or voted by aliens” indicated that the 25 percent benchmark was “applicable to partners who hold equity or voting interests in a limited partnership” (emphasis added), because Congress intended to prevent not only “actual [foreign] control,” but also “undue alien influence in broadcasting.”
This language invites the inference that similar logic would apply in the corporate context, and thus that News Corp.’s 99 percent equity interest puts Fox far above the 25 percent benchmark.
The inference is strengthened by a January 10, 1985, letter from James McKinney, then chief of the FCC’s Mass Media Bureau, to American Colonial Broadcasting Corp. The letter stated that equity holdings by aliens in the form of nonvoting preferred stock must be counted in determining whether the foreign ownership of a corporate holding company exceeds 25 percent.
And in October 1986, in response to a petition for reconsideration of Wilner & Scheiner, the FCC confirmed its broad implications by asserting that Congress’s “adoption of an independent restriction on equity ownership by aliens in addition to one relating to voting rights indicates a specific congressional concern about substantial equity investment by aliens.” The FCC has extended this reasoning since 1986.
Fox unpersuasively dismisses Wilner & Scheiner as having no implications for cases outside the Iimited-partnership context. But as the FCC explicitly held in the second Wilner & Scheiner ruling, its earlier opinion “described the manner in which [the statute] applied to both partnership and corporate interests.” Reyner himself, while arguing that Wilner & Scheiner is bad law, acknowledges in a May 23, 1994, letter to the FCC, that it stands for the proposition that “the commission has previously concluded that indirect equity ownership by foreign individuals and entities must be included under the section 310(b)(4) benchmark.”
Fox is also unpersuasive in arguing that neither Wilner & Scheiner nor the letter to American Colonial have any relevance to corporations that (like Fox’s holding company) have only voting stock. Nor is Fox persuasive in dismissing the letter to American Colonial as irrelevant because it was only a “private, unreported nondecisional nonfinal staff letter in an unrelated case.” It was also a clear signal that the FCC staff might well find News Corp.’s equity interest in Fox to be above the 25 percent benchmark. And while Fox, citing deposition testimony, suggests that none of its lawyers were aware of the American Colonial letter in 1985, it was cited three times and paraphrased in the 1985 Wilner & Scheiner opinion, which any competent lawyer on Fox’s team should have read.
As a fallback, Fox’s lawyers argue that even if Wilner & Scheiner does have some relevance, some of the same FCC lawyers who worked on the Fox application in 1985 were contemporaneously drafting the first Wilner & Scheiner ruling, and had recently written the American Colonial letter; surely these staffers would have said something if they had seen News Corp. ‘s more-than- 25-percent equity in Fox’s holding company as posing a Wilner & Scheiner problem.
Two FCC staffers, on the other hand, have implied in their sworn declarations that they did not raise the issue because nobody told them in 1985 that more than 25 percent of Fox’s equity would be alien-owned.
Which brings us back to the question of who was told what in 1985.