Changes in the Board of Nonprofit Corporation Doom FCC Application for New FM Station – Addressing Control Issues in Noncommercial Broadcasting

In a decision released earlier this week, the FCC dismissed an application for a new noncommercial FM station based on a change in the majority of the applicant’s board of directors within a one-year period after the application was filed.  The change was deemed a major change in ownership, which the FCC rules says requires the assignment of a new file number – essentially meaning that the application is treated as a new application received after the filing window for the new FM stations was closed and was therefore dismissed.  The decision was one made by the full Commission which reversed a decision of its Media Bureau.  The Bureau had granted the application following a settlement with other mutually exclusive applications. The full Commission decision to instead dismiss the application was not made without some angst, as two of the Commissioners concurred in the decision but urged the FCC to change its rules before the next noncommercial filing window to avoid a similar result in the future.  But the decision does raise some questions about just what constitutes a change in control of a noncommercial broadcaster.

In this decision, the FCC found that two changes in the majority of the members of the board of directors of the applicant, where a majority of the board members changed in a period of less than one year, constituted a major change in ownership of the applicant requiring the assignment of a new file number to the application and its dismissal.  The decision contrasted this case with those of other noncommercial applicants in another new application filing window.  In that other window, the FCC granted blanket waivers of the major change rule to applicants that had a change in a majority of their boards over a much longer period of time while their applications slowly made their way through the Commission’s processes.  It was the difference between the relatively sudden changes in ownership in less than a year in the case decided this week as opposed to the more gradual changes in the other cases that seemed to make the difference in the outcome.  But the two Commissioners who separately commented on the case asked if this distinction really should make any difference, especially as the changes did not appear to be the result of any takeover of the organization, but instead were merely changes that occurred in the normal course of operation for this volunteer organization.

The FCC has long struggled with the question of when there is a transfer of control of a nonprofit organization.  In its recent order on Biennial Ownership Reports, about which we will write next week, the FCC implied that some control over these organizations resided in the Board of Directors, though the Commission also seemed to recognize that not necessarily all control resided there.  As we wrote here and here, many years ago, the FCC issued a notice of inquiry about assessing control over noncommercial entities.  In that Inquiry, the Commission suggested that gradual changes in a Board could be approved on an FCC Form 316 short-form application (essentially a minor change), as they were essentially pro forma, almost like a commercial broadcaster moving its licenses from a sole proprietorship to a corporation owned by the former sole proprietor.  But, in the Inquiry, the Commission suggested that sudden changes in the Board needed to be approved on a long-form transfer of control application, with public notice and the potential for petitions to deny the application.

That notice never went anywhere and the proceeding has been closed.  Its precedential value was rejected in last week’s decision as the proposals in the Inquiry were not adopted.  In fact, in the absence of any other guidance, attorneys representing noncommercial applicants have taken different positions as to when FCC approval for changes of a Board of Directors of a noncommercial applicant needed to be made.  While everyone agrees that a sudden change that essentially represents a takeover of a nonprofit company and a fundamental change in the direction of that company almost assuredly needs approval from the FCC, the question of gradual changes has been more problematic.  Some say that even if a majority of the board changes over the course of a few years, there really is no change in control as it really is the same entity that remains the licensee pursuing the same policies.  Merely because the University of [insert the name of almost any state here] changed the majority of its board of trustees over a 5 year period does not make the state university an entity under different control that somehow requires FCC approval, these attorneys would argue.  The analogy with a public corporation, where the public shareholders over a 10 year period could have dramatically (perhaps almost completely) changed without anyone really noticing or seeking any FCC approval, is sometimes raised.  On the other hand, some attorneys routinely file Form 316 applications in these circumstances, relying on the guidance offered by the now defunct FCC Inquiry.

This case does nothing to clarify the issue as to when FCC approval for a change in control of a noncommercial entity is needed.  Instead, it merely interprets the language of a rule (Section 73.3573) on processing construction permit applications, saying that a major change is one where the majority of the “ownership” as reported on the initial application has changed.  The FCC here equates ownership with board seats without ever specifically discussing that assumption.  One could argue that board members don’t have any ownership of the company at all, and thus ownership has never changed.  While, in a commercial context, the FCC has read this rule to really be talking about control, not equity, the noncommercial context could be seen as quite different.  In fact, the recent order on Ownership Reports acknowledges that ownership and control are really different concepts.

Nevertheless, the decision does cry out for more guidance from the FCC, as requested by the two concurring Commissioners, to prevent this sort of situation from arising in the future.  The noncommercial broadcasting community needs some insulation from concerns about processing applications which, by nature of FCC processes, may well take significant time, and which, were this decision to be applied broadly, could result in other entities losing their investments merely because their board went through some ordinary course changes.  As to when an existing noncommercial licensee needs to request approval for a change in control of its Board, that is a question that each station will need to discuss with its counsel unless the FCC chooses, at some point in the future, to issue a clarification of its rules.