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Shark Attack in Space: ORBIT Act Bites Back

By | October 13, 2003

      By Maury Mechanick

      One of the strangest pieces of legislation ever enacted by the U.S. Congress is causing major repercussions for the satellite industry.

      As a Washington veteran for more than two decades, I have never seen anything quite like what affectionately is called the ORBIT Act, more formally known as The Open-Market Reorganization for the Betterment of International Telecommunications Act (47 U.S.C. ßß 761 et seq.). The ORBIT Act was adopted in March 2000, ostensibly as an expression of overall U.S. policy regarding the proper manner for the privatization of international satellite organizations such an Inmarsat and Intelsat.

      The law imposed a number of specific conditions and criteria that had to be satisfied for the privatizations to be pro-competitive, according to the view of Congress. A failure to satisfy any of those conditions would lead to the conclusion that the privatization had not been conducted in an appropriately pro-competitive manner.

      Such a determination would then provide the Federal Communications Commission (FCC) with the mandate to restrict the offending organization’s access to the U.S. market.

      In reality, the ORBIT Act was much more a manifestation of extreme xenophobia than sound public policy. It is questionable whether it contributed in any meaningful way to securing the pro-competitive privatization of either Intelsat or Inmarsat. Much of what it sought to achieve via legislative fiat would have occurred in any event. In addition, the heavy-handed legislative approach primarily served to unnecessarily antagonize the 144 other countries that were members of Intelsat when it was an intergovernmental satellite organization.

      The ORBIT Act’s impact on the Inmarsat privatization effort was less pronounced since the bill was not passed until nearly a year after that London-based mobile-satellite organization had privatized on its own.

      At its core, the law’s principal defect is that it reflects a fundamental mistrust of the very market forces that it purports to serve. The ORBIT Act also assumes that those market forces would not take hold naturally in the absence of legislative “assistance.” Once the major Intelsat and Inmarsat shareholders had committed themselves to pursuing privatization, a reasonably pro-competitive outcome was inevitable because of market forces alone. The dynamics of the capital and debt markets, as well as stock exchange listing requirements, would have ensured it.

      The law also delves into the minutia of the privatization process. In effect, the law attempts to micromanage the privatization process for both organizations. The law’s piece de résistance involves setting firm deadlines for both organizations to conduct initial public stock offerings (IPOs). Those IPO deadlines have proven to be a real Achilles heel, since market conditions for such equity offerings have been horrendous. Those market realities have forced extensions of those deadlines three times so far, because the deadlines were unachievable. In this regard, it would appear as though the U.S. Congress was taken in to the same degree as many others by the “go-go 90s” mentality that the IPO gravy train would last forever.

      Its inglorious origins notwithstanding, ORBIT’s ultimate impact on the privatization process has been relatively benign. Indeed, it appeared for awhile that ORBIT’s principal legacy would be the annual congressional reporting requirement imposed on the FCC and the U.S. State Department.

      Recent events, however, have breathed new life into the ORBIT Act’s moribund state. ORBIT’s provisions about substantial dilution of shareholder interest recently have been invoked in an attempt to thwart the share repurchase activities of New Skies Satellites [NYSE: NSK]. Under the ORBIT Act, New Skies, an Intelsat spin-off, legislatively was classified as a “separated entity” from its former parent. Pleadings recently filed with the FCC have attempted to thwart Intelsat’s proposed purchase of a portion of the Loral Space and Communications’ [OTC BB: LRLSQ.OB] satellite fleet because Intelsat has yet to complete its IPO.

      The ORBIT Act continues to hang as a sword of Damocles over the planned sale of Inmarsat. The issue is whether substantial dilution obtained via a private equity transaction comports with the explicit requirement for an IPO in the ORBIT Act.

      Caught front and center in all this is the FCC, which has the unfortunate assignment of ultimate arbiter for the more arcane provisions of the ORBIT Act. The problem very simply is that a bad law is still the law, unless amended or repealed.

      In that context, the arguments now before us pose some challenging issues of statutory interpretation and intent, even though the underlying issues may be totally inconsequential in the greater scheme of things.

      Nonetheless, with the renewed ascendancy of the ORBIT Act, the FCC may now need to decide whether the law effectively precludes Intelsat from proceeding with the proposed Loral transaction, without first completing an IPO. The FCC also must decide if Inmarsat’s planned dilution of its existing ownership in a private equity transaction is sufficient to comply with the ORBIT Act.

      Whether these questions actually merit answers is an entirely different matter.

      Maury Mechanick, a former chairman of the Intelsat Board of Governors, is counsel with the Washington office of the international law firm, White & Case LLP, and a member of the firm’s Telecommunications Practice Group. He can be reached by phone, 202/626-3635, or by e-mail,

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