Franchise Transfers & Sales
Contact: John W. Pestle
Cable systems are often transferred or sold, or the cable company itself is sold. When this happens, municipalities can often obtain significant benefits for themselves and their residents by making sure that prior to the sale current problems are corrected, and that there are adequate assurances that the municipality and its residents will be no worse off after the sale than before. Usually this can be done at no cost to the municipality, because the cable companies reimburse all costs. There is a significant risk of lost rights if municipalities fail to take action on proposed transfers.
We have both a memo titled "Cable Franchise Transfers and Sales, Municipal Rights, Risks and Opportunities" and overheads from a PowerPoint presentation to a municipal group titled "Cable Franchise Assignments and Transfers". A summary of some of the key points about franchise transfers from these documents is as follows.
Many cable franchises are transferred as part of a long term consolidation of cable companies in the U.S., combined with the larger companies selling off systems (often in smaller communities) that are not a "good fit" with their operations.
Other transfers occur as cable companies "swap" systems so that only one cable company will serve an entire metropolitan area. This provides some efficiencies--but it also removes the ability to compare one cable company in an area against another that is literally across the street.
Some of the transfers are sales of the franchise--an asset sale where the company legally franchised to serve an area changes. Others are changes in control--the local cable company doesn't change, but through sales of stock or otherwise the entity controlling it changes. In either case, for practical purposes the cable company changes hands, and often personnel and operations may change, too.
A municipality has the right to review, approve, condition or reject a transfer if its cable franchise so provides. Typically a municipality can request a wide range of information and impose a wide range of conditions to assure (for example) that it and its residents are no worse off after the transfer than before. Cable company claims that Federal law limits municipal rights to obtain these protections are simply incorrect, and have been rejected by the courts.
We have represented approximately 100 municipalities in connection with transfers or changes in control of their cable systems, such as where the cable system is sold to a different company. Among the items we have addressed in the transfer process are getting assurances that the municipality and its residents will be no worse off after the transfer than before, resolving outstanding disputes, ensuring adequate customer service after the transfer, and protecting against undue increases in rates.
Risk of Loss of Rights
There is a significant risk for municipalities in transfers as follows: Cable companies contend that under the 1984 Cable Act in a transfer the "slate is wiped clean" as to any defaults by the prior cable company. Unless this contention is specifically negated as a part of a transfer, the municipality may find that it has lost significant rights and claims, such as claims for damages or underpayment of franchise fees. The risk is increased because under Federal law, if a municipality does not act on a complete Form 394 within 120 days of receiving it, the transfer is automatically deemed approved.
The combination of "approval by lapse of time" and the cable company contention creates a risk that municipalities can easily lose rights in a transfer.