DA 98-1888

 September 17, 1998
 

Cheryl A. Tritt, Esq. 
Morrison & Foerster LLP
2000 Pennsylvania Avenue, N.W.
Suite 5500
Washington, D.C. 20006

Michael K. Kurtis, Esq.
Kurtis & Associates, P.C.
2000 M Street, N.W.
Suite 600
Washington, D.C. 20036

 Re: Request for Letter Ruling Regarding Application of 
 47 C.F.R.  24.709(b)(7)

Dear Counsel:

 This letter responds to your request for a letter ruling, filed on behalf of DiGiPH PCS, Inc.
("DiGiPH" or the "licensee"), regarding a proposed modification to a financing arrangement
between DiGiPH and its foreign lender (the "lender"). Specifically, you seek confirmation that
affording a contingent right of conversion in a note held by the lender would not result in the note
being considered on a fully diluted basis, pursuant to Section 24.709(b)(7) of the Commission's
rules. You have also requested confirmation that, despite the proposed change, DiGiPH's
corporate structure would continue to comply with the foreign ownership limitations of Sections
310(b)(3) and (b)(4) of the Communications Act.

 According to your request, DiGiPH, a C block licensee for eight BTAs, is wholly owned by
a parent company, DiGiPH Communications, Inc. DiGiPH's vendor, a foreign manufacturer,
provided primary funding for system build-out via six separate, secured debt instruments. The
second and fifth of these notes have since been retired. The first and third 


notes give the lender the right to convert the loan amount to non-voting common stock in the
licensee's parent company and the licensee, respectively. The sixth note contains no conversion
rights. The fourth note is the subject of this letter ruling.

 DiGiPH proposes to modify the terms of the fourth note ("Note 4") to provide the lender
with a right of conversion to non-voting stock in DiGiPH's parent company in exchange for a
reduction of the interest rate associated with Note 4. According to DiGiPH, reduction of the
interest rate associated with Note 4 would result in a net savings for DiGiPH of over $500,000 in
interest annually. 

 DiGiPH has structured itself pursuant to the 49.9 percent passive equity exception in 
Section 24.709(b)(4) of the Commission's C block eligibility rules. Under this exception, if the
lender's equity interest does not exceed the 49.9 percent threshold of Section 24.709(b)(4), its
gross revenues are not included in determining DiGiPH's eligibility for a C block license. Section
24.709(b)(7) of the Commission's rules requires that for the purpose of calculating the ownership
level held by the lender, agreements such as stock options and convertible debentures generally be
considered on a fully diluted basis. Thus, under Section 24.709(b)(7), the conversion rights in
Notes 1, 3, and 4 would be treated as if the rights thereunder have been fully exercised. Exercise
of the conversion right in Note 4, in combination with the conversion rights contained in Notes 1
and 3, would increase the lender's passive equity in DiGiPH above the 49.9 percent threshold of
Section 24.709(b)(4).

 To avoid this result, DiGiPH proposes that the conversion right in Note 4 be contingent,
vesting only in the event that the lender first assigns or transfers all interest in the first note to a
qualified unaffiliated third party and/or receives a letter ruling from the Commission that its rules
permit Note 4 to be converted without such assignment. Thus, the licensee's proposed contingent
right of conversion would only be exercised upon divestiture of enough equity associated with the
other notes to allow the lender to remain below the 49.9 percent equity limit in Section
24.709(b)(4). According to DiGiPH, the right to convert Note 4 would be contingent upon its
ability to do so in compliance with all applicable law, including the Commission's C block
eligibility rules and foreign ownership rules in effect at the time of the conversion. DiGiPH
further represents that the lender is and will remain solely a passive investor, and will not
participate in the management of the licensee. DiGiPH states that under the proposed debt
structure, the lender at no time will exercise either de facto or de jure control over the licensee. 
Based on these representations, DiGiPH seeks a determination that the contingent conversion
right in Note 4 would not be treated on a fully diluted basis, but instead would be considered as
having been fully exercised only when it is actually converted to an equity interest. 


 The Commission's C block attribution rule provides that for purposes of calculating the
equity held in an applicant or licensee, certain stock interests, such as stock options or conversion
rights, will generally be treated as if the rights thereunder already have been fully exercised. The
underlying purpose of the rule was to include ownership interests that do not leave the ownership
decision in the designated entity's control, because such agreements can potentially force the
designated entitiy to sell its ownership interests. However, by including the word "generally," in
Section 24.709(b)(7), the Commission recognized that for purposes of calculating ownership
levels, some ownership interests need not be treated as "fully diluted." In its Fifth Memorandum
Opinion and Order, the Commission established two exceptions to the rule, for rights of first
refusal and "put" options, which it did not codify in Section 24.709(b)(7). Although these
exceptions are inapplicable to the facts you have presented, their adoption and the Commission's
inclusion of the word "generally" in Section 24.709(b)(7) suggest that the Commission
understood that it could not foresee every possible situation in drafting the rule. 

 Upon consideration of DiGiPH's request, we find that Section 24.709(b)(7) requires us to
consider the conversion rights in Note 4 on a fully diluted basis. However, we also find that the
policy underlying Section 24.709(b)(7) can be furthered without considering all existing stock
conversion rights as having been fully exercised simultaneously in a case where the various
conversion rights are mutually exclusive by their terms. Based on your representation that the
lender could exercise its stock conversion rights only upon the condition that DiGiPH's control
group maintained the necessary 50.1 percent total equity interest in and control of the licensee,
and your representation that the lender, as the holder of only passive equity, will have no ability to
exercise control over the licensee's operations, it appears that the modified debt arrangement that
DiGiPH contemplates will not transfer de facto control to the lender in violation of the designated
entity eligibility rules. Accordingly, we interpret the "fully diluted" requirement in Section
24.709(b)(7) to permit the lender's conversion rights or stock options to be considered
individually rather than collectively when they are mutually exclusive. Under our interpretation,
for the purpose of calculating ownership interests, we continue to calculate all stock interests on a
fully diluted basis, but if a stock interest is by its terms mutually exclusive of one or more other
stock interests, we will treat the various ownership interests as having been fully exercised only in
the possible combinations in which they can be exercised by the lender. For each combination, the
lender 



will be considered to have exercised its stock conversion rights, and each combination will be
subject to the 49.9 percent equity limit in Section 24.709(b)(4).
 
 We emphasize that this ruling does not constitute a waiver of the fully diluted requirement
in Section 24.709(b)(7), but only an interpretation of the rule that addresses how such stock
interests will be calculated when the rights thereunder are granted on a contingent basis that
makes them mutually exclusive of other existing ownership interests. We also caution DiGiPH
that we will consider one ownership interest to be mutually exclusive of another only if the
agreement that conveys the first interest contains explicit language making it clear that the rights
conveyed by that agreement cannot be exercised unless all ownership rights associated with the
other agreement are either terminated or transferred or assigned to a qualified unaffiliated third
party. 
 
 We also conclude that the addition of contingent conversion rights in Note 4 would not
violate the foreign ownership restrictions of Sections 310(b)(3) and (b)(4) of the Communications
Act. Under the Commission's decision in Data Transmission, direct foreign investment in the
licensee and direct foreign investment in the licensee's parent are not aggregated for purposes of
calculating foreign ownership. In DCR PCS, Inc., the Wireless Telecommunications Bureau
addressed the foreign ownership limitations in Section 310(b)(4) and held that while Section
24.709(b)(7) does provide that stock options will be generally treated as fully exercised for the
purpose of determining eligibility as a small business, with respect to foreign ownership questions,
an option held by a foreigner to buy stock in a licensee or the parent of a licensee is not
cognizable until it is exercised. Furthermore, DiGiPH represents that the rights of conversion
associated with Note 4 would require prior divestiture of any other holding that would result in a
violation of the Commission's foreign ownership rules. Based on this representation and the
precedent cited above, it is our opinion that the contingent conversion rights DiGiPH proposes to
include in Note 4 would not violate the foreign ownership limitations in Sections 310(b)(3) and
(b)(4).

 This opinion is based on our understanding of the facts as explained in your letter and the
supplemental information provided on several occasions both orally and in documentary form. 
The Division has not conducted an independent investigation of the proposed financing
arrangement. Our assessment of the financing arrangement could change if the facts change
significantly from those you have presented in connection with your request for a letter ruling.




 This action is taken pursuant to delegated authority under Section 0.331 of the
Commission's rules. 47 C.F.R.  0.331. 
 
 Sincerely,


 Amy J. Zoslov 
 Chief, Auctions and Industry Analysis Division
 Wireless Telecommunications Bureau