A Half Million Reasons To Review Your M&A Due Diligence Checklist
Does your M&A due diligence checklist ask about FCC licenses? No? Well, the FCC just gave you a half million reasons to add a question—five hundred and four thousand, to be exact. That's how much (in US dollars) Marriott International, Inc. (Marriott) agreed to pay to settle an FCC investigation into the unauthorized transfer of licenses arising out of its 2016 acquisition of Starwood Hotels & Resorts Worldwide, Inc. (Starwood).
You may be asking yourself what a hotel chain merger has to do with the Federal Communications Commission. The answer entails a brief introduction to FCC licensing as a prelude. The Communications Act generally prohibits anyone from "us[ing] or operat[ing] any apparatus for the transmission of energy or communications or signals by radio" within or from the United States without a license.1 Broadcasters have FCC licenses for their over-the-air AM, FM, and TV signals. Mobile wireless carriers have FCC licenses for their subscribers' calls, texts, and data usage. And businesses across the United States have FCC licenses for the radio equipment they use for security, groundskeeping, maintenance, transportation, and other internal communications needs. Several dozen of the Starwood-owned or -managed hotels that Marriott acquired are among these businesses.
The Communications Act and the regulations implementing that statute generally require prior FCC approval before control of a license passes to another party, whether by assignment of the license or transfer of control of the licensee.2 The FCC may consent only if it finds the transaction will serve the "public interest, convenience, and necessity."3 While this requirement may seem an undue burden when the radio equipment in question is a peripheral part of the business being acquired, it rarely takes more than a few weeks for the FCC to consent. Indeed, the agency often acts overnight. But, to secure approval, the parties to the transaction have to apply for it.
Marriott and Starwood did not—due to what they explained was "an administrative oversight that occurred during a larger transaction involving both US and substantial non-US assets."4 After discovering the omission, Marriott voluntarily disclosed it to the FCC and sought retroactive consent from the Commission several months after the transaction closed. To settle the ensuing investigation, Marriott entered into a consent decree with the FCC's Enforcement Bureau, which was announced on August 28, 2018.
Marriott is now paying (literally and figuratively) for the administrative oversight. The consent decree requires Marriott to pay a $504,000 civil penalty to the US Treasury—$8,000 for each of the 63 FCC licensees Marriott obtained from Starwood.5 In addition to the monetary sanction, Marriott had to agree to a burdensome compliance program for three years:
- Marriott must develop and implement a compliance plan with three elements:
- operating procedures, including a checklist, to ensure compliance with the statute and rule requiring FCC consent to assignments and transfers of control of licenses;6
- a compliance manual explaining the legal requirements Marriott faces as an FCC licensee and the required operating procedures;7 and
- a compliance training program (to be repeated annually) for all Marriott employees and agents "who perform, supervise, oversee, or manage the performance of duties that relate to Marriott's responsibilities" as an FCC licensee, including the statute and rule requiring consent to assignments and transfers of control of licenses.8 Marriott must designate a "senior corporate manager" to "be responsible for developing, implementing, and administering" the compliance plan and ensuring adherence to the compliance plan and the consent decree.9
- Marriott must report to the FCC any failure to comply with its responsibilities as an FCC licensee or with the consent decree.10
- Over the next three years, Marriott must submit four "detailed" reports to the FCC on its compliance with the terms of the consent decree. Each report must be certified by the designated senior corporate manager based on his or her personal knowledge.11
It's easy to understand why costly M&A oversights involving FCC licenses are common. For businesses outside the telecommunications and media industries, FCC licenses and the associated radio equipment are not core assets. They rarely are material to valuation, and the target's executives and in-house lawyers are unlikely to be aware that the target, one of its subsidiaries, or (as in Marriott's case) one of the properties managed by the target or one of its subsidiaries holds an FCC license.
The good news is that preventing these oversights is not painful. First, M&A counsel should add a question about FCC licenses to their due diligence checklist. Second, because FCC licenses might exist without the target's executives and in-house lawyers knowing, the M&A lawyers—or consulting FCC counsel—also should run their own searches in the FCC's licensing databases. Marriott's misfortune provides another half million reasons to take these precautions.
If you have any questions about any of the topics discussed in this Advisory, please contact your Arnold & Porter attorney or the authors of this Advisory.
© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.