SKY (SKY LN)
Our Thoughts on the proposed (withdrawn) amendments to the Digital Economy Bill
On 8 February 2017, Lord Puttnam withdrew his proposed amendments to the Digital Economy Bill regarding proposed changes to the “fit and proper test” undertaken by Ofcom relating to media mergers. However, we believe it is still relevant to review how these proposed amendments (if reincarnated) could affect the Sky-Fox transaction as well as detailing the process of a passage of a Bill through both Houses of Parliament into law.
The House of Lords are currently debating the proposed amendments to the Digital Economy Bill - sponsored by Karen Bradley and Lord Ashton of Hyde and introduced to the House of Commons on 29 November 2016.
As per the explanatory notes accompanying the Bill, the Bill “contains measures related to providing a broadband universal service for the United Kingdom, granting additional powers to Ofcom in respect of information provision, consumer switching and automatic compensation in relation to communication matters, a new Electronic Communications Code and other communications infrastructure matters, introducing better controls on online pornography and protecting citizens from nuisance calls, digital intellectual property, powers to share data between public authorities and some measures relating to the BBC” The Bill “aims to enable access to fast digital communication services for citizens and businesses, to enable investment in digital communications infrastructure, to shape the emerging digital world to the benefit of children, consumers and businesses, and to support the digital transformation of government, enabling the delivery of better public services, world leading research and better statistics.”
These proposed amendments underscore the strong political opposition the Fox bid is facing. The political opponents to the deal seem to be seizing ever possible avenue to try and derail the transaction. They appear to have focussed on the “fit and proper test” which is subjective and currently there is no precise definition for what constitutes a “fit and proper person”. The proposed amendments appear to be directly targeted at James Murdoch (who has not been explicitly named) and if these amendments are passed into law, it will make it more difficult for Ofcom to justify viewing James Murdoch as a “fit and proper person” to own Sky due to his previous involvement in the News International hacking scandal. Baroness Bonham-Carter of Yarnbury in the House of Lords Digital Economy Bill debate also stated that her proposed amendments would ensure that “the present chief executive of 21st Century Fox, James Murdoch, would undergo proper scrutiny if he were to retain a senior position at Sky.”
We remind that Ofcom has an ongoing responsibility to ensure that broadcast licensees are “fit and proper” and no action was taken by Ofcom against the appointment of James Murdoch as the Chairman of Sky in October 2016. In the interim, Sky is regarded as having shown “exemplary adhesion” to the Broadcasting Code.
Evidently, politicians are using all available ploys to ensure the Sky deal remains in the forefront of political consciousness as in our view, this Bill has very little to do with media plurality and concerns about the Fox and its directors being “fit and proper” to own Sky in its entirety.
The relevant amendments to the Sky deal are as follows:
Amendments proposed by Lord Puttnam, Lord Lansley and Baroness Bonham-Carter of Yarnbury are as follows:
· 229ZA - Insert the following new Clause— “Mergers: specified considerations for mergers involving broadcasting media enterprises
(1) Section 58 of the Enterprise Act 2002 (specified considerations) is amended as follows.
After Clause 84 - continued
(2) After section (2C) insert—
“(2D) The need for those who, as a result of a merger, have increased control of media enterprises (excluding newspaper enterprises) which require a broadcasting licence, under section 3(3) of the Broadcasting Act 1990 or the Broadcasting Act 1996, to be fit and proper to hold such a licence having regard in particular to— (a) the extent of any criminal wrongdoing that has taken place by companies and other organisations under their control; and (b) the extent of any failures of corporate governance and management in such companies and organisations.
(2E) The need for there to be, in the governance arrangements of any relevant media enterprise (excluding newspaper enterprises), which provides news services, sufficient safeguards for unrestricted editorial freedom in the provision of full and accurate news services by such media enterprises.
(2F) The need to prevent a media enterprise (excluding a newspaper enterprise) from—
(a) exercising undue influence over distribution of, and access to, rights, talent and other forms of cultural expression;
(b) promoting its own business interests through its editorial outlets, to the detriment of competitors where this is against the wider public interest;
(c) exercising undue pressure in the regulatory and political environment, to the detriment of competitors where this is against the wider public interest.”
Amendments proposed by Lord Puttnam and Baroness Bonham-Carter of Yarnbury:
· 229ZB - Insert the following new Clause— “OFCOM: relevant factors for “fit and proper” determination
(1) After section 3(3) of the Broadcasting Act 1990 (licences under Part 1) insert—
“(3A) For the purposes of this section the determination of “fit and proper” includes having specific regard to—
(a) the extent of any unlawful or improper conduct within such companies and other organisations for which a person holding the licence has or had responsibility for management or corporate governance; and
(b) the extent of any corporate governance and management failures at such companies and other organisations for which a person holding the licence has or had responsibility for management or corporate governance.
(2) After section 3(3) of the Broadcasting Act 1996 (licences under Part 1) insert— “(3A) For the purposes of this section the determination of “fit and proper” includes having specific regard to— 16 Digital Economy Bill
After Clause 84 - continued
(a) the extent of any unlawful or improper conduct within such companies and other organisations for which a person holding the licence has or had responsibility for management or corporate governance; and
(b) the extent of any corporate governance and management failures at such companies and other organisations for which a person holding the licence has or had responsibility for management or corporate governance.”
We note that these amendments are still being debated in the House of Lords (the Report Stage at the House of Lords is scheduled for 22 February and the timing for the Third Reading at the House of Lords has yet to be announced but should take place at the end of February/early March). At the Third Reading, the members of the House of Lords will “tidy up” the bill – concentrating on ensuring that the eventual law is effective and workable – without loopholes. Amendments can also take place at this stage and are usually to clarify specific parts of the bill. The bill (with the Lords amendments) will then go back to the House of Commons who will consider the amendments – this could take place by mid-April if the Commons accept the amendments made by the Lords and do not make any further amendments (if the Commons make further amendments the bill goes back to the Lords to consider these amendments, could take some time as both Houses need to reach agreement). Once the House of Commons and House of Lords agree on the final version of the Bill, it can receive Royal Assent and become an Act of Parliament (the bill will now become Law). This could occur by the end of April at the earliest if no further amendments are made to the Bill by either House and both Houses have agreed the final version of the Bill. If further amendments are made, then the process could drag on to Q2/Q3.
Given that the government does not have a majority at the House of Lords there is an eventuality for these amendments to be accepted at the House of Lords, but the government has to accept these amendments and ultimately pass the bill into law, which we see as a very remote probability.
On 8 February, Lord Puttnam stated in a House of Lords debate in relation to the Digital Economy Bill that there is too much “wriggle room, and a lack of clarity as to the precise grounds on which a referral (to Ofcom) is based.” Lord Puttnam clarified that the purpose of his amendments is to “buttress the referral process by adding further and easily understood grounds directly to the Bill. Specifically, they would add a fit and proper persons test, which, somewhat bizarrely, exists only as an ongoing test for licence holders, not bidders, and is thus to be conducted only after the fact of any merger. I say “bizarrely” because I ask: how sensible does it seem to judge the ongoing fitness and propriety of a licence to a higher standard than the one sought at entry? Possibly when she comes to answer the Minister might help me understand what I see as an extraordinary anomaly.” Lord Puttnam also called for Leveson 2 to go ahead “without delay”. He then continued stating that he “does not think that his amendments as they stand are good enough” – and happily withdrew his proposed amendments but stated his certainty that the subject would be revisited in the “hope that the amendments put forward by the Government would be acceptable to the entire House.”
Given that we expect the EC filing to be made in March/April – within 10 days Karen Bradley can issue an intervention notice and refer the transaction to OFCOM, it appears unlikely that any amendments (if approved) will be written into law before this time. It is unlikely that the House of Lords will conclude their deliberations and send the bill back to the House of commons who will debate any changes and the bill will only be passed into law by April at the earliest.
Legal framework for the “fit and proper person test”:
1. A provider of any “relevant regulated television service” must hold a licence under the Broadcasting Act 1990 (the “1990 Act”) or the Broadcasting Act 1996 (the “1996 Act”). Depending on the type of television service in question, a provider may be licensed under either the 1990 Act or the 1996 Act.
2. Under s.3(3) of each of the 1990 Act and the 1996 Act, Ofcom: (a) shall not grant a licence to any person unless satisfied that the person is a fit and proper person to hold it; and (b) shall do all that they can to secure that, if they cease to be so satisfied in the case of any person holding a licence, that person does not remain the holder of the licence.
3. Therefore, Ofcom has an ongoing duty to remain satisfied that broadcast licensees are fit and proper.
Under Sections 3(3) of each of the 1990 and 1996 Broadcasting Acts, Ofcom:
(a) Shall not grant a license to any person unless satisfied that the person is a fit and proper person to hold it; and,
(b) Shall do all that they can to secure that, if they cease to be so satisfied in the case of any person holding a license, that person does not remain the holder of the license.
Our View:We are likely to see further amendments to bills and expect a lot more political “noise” as UK politicians strive to keep this deal at the forefront of political and public consciousness. We also expect a lot more pushback from politicians about whether James and Rupert Murdoch are “fit and proper people” to be in charge of the entirety of Sky.
With regards to the proposed amendments to the Digital Economy Bill currently being debated at the House of Lords, as OFCOM is only able to rule based on what is currently law at the time of their review, it is likely that any OFCOM decision will be taken around the legislation currently in place. The bill is unlikely to be signed into law until April at the earliest.
Given the withdrawal of Lord Puttnam’s amendments, we can also expect to see more debate and opinions over the subjects raised in the coming weeks and it is highly probable that Lord Puttnam will refine his amendments and put them to the House of Lords again – possibly at the third reading (a date for the Third Reading has yet to be set, but could occur towards the end of March, early April).
Furthermore, the government is also rather preoccupied with Brexit and is likely to prioritise this over any merger transaction (no matter how politically charged). Nevertheless, there is room for volatility and bad headlines, and we think there is room for headline noise in the coming weeks.