In developing its survey, MTDP considered the question of defining minority ownership to determine which broadcast stations to include in the survey analysis and research for this report. Finding variation even in its own past reports, MTDP researched the issue and learned that definitions appear to differ according to the purposes and proponents of a given program.⁽¹⁾ While not advocating a particular definition, this report briefly reviews some present and proposed definitions to provide a basis for further study of the issue. The following discussion may assist policymakers to fashion a fair, but flexible definition that helps entrepreneurs to meet their capital needs. At the same time, the definition should be sufficiently tailored to ensure that any policies promoting minority broadcast ownership in fact benefit the intended beneficiaries, thereby protecting the integrity of the government's efforts.

Generally, the definitions require demonstrations of both equity ownership by minorities and their "control" of the business, although the definitions evolved from a requirement that minorities maintain more than 50 percent of a firm's equity interests. Definitions incorporating evidence of control may reflect a recognition of the persistent limitations on capital access that historically have plagued minority entrepreneurs. By reducing equity stakes below 50 percent but imposing a minority control requirement, these definitions take into account the experiences of minority broadcasters who sometimes must sacrifice significant portions of their equity in exchange for the capital they need to grow and compete. Unless carefully crafted, however, such definitions may invite abuse by entities that use the ostensible voting control held by minorities to gain advantages that would otherwise accrue to the intended beneficiaries of such programs -- minority entrepreneurs.

Concerns about such abuse and diminishing minority ownership, may lead some advocates to argue that reliance on majority equity interests greater than 50 percent is most appropriate. Therefore, proponents of an equity-focused definition would assert that minimal equity contributions and majority voting control are insufficient to prove minority ownership. Their view would exclude certain historically minority-owned firms that have obtained funding from public and private capital markets, thus disqualifying those firms' participation in broadcasting opportunities designed especially for minorities. If the government adopts a definition based solely on majority equity ownership, then its policies might focus so narrowly on assisting smaller owners with limited prospects for survival that the policies fail to aid larger entities. These more substantial minority enterprises might compete more effectively than their smaller counterparts in a consolidated broadcasting industry dominated by group owners. In that event, such government policies would be unlikely to broaden minority media ownership and further viewpoint diversity.

NTIA's Definitions

MTDP has used various definitions of minority ownership in its reports. All of the reports from 1990 through 1998, except one, define minority-owned broadcast properties as those in which minorities, such as Blacks, Hispanic Americans, Asian Americans, or Native Americans own more than 50 percent of an entity's stock.⁽²⁾ In 1994, MTDP expanded the definition to include "voting

control in a broadcast partnership."⁽³⁾ MTDP further clarified the definition in the 1996 report by adding stations held by minorities operating sole proprietorships.⁽⁴⁾

In 1995, NTIA issued a report titled Capital Formation and Investment in Minority Business Enterprises in the Telecommunications Industries (Capital Formation Report). That report regards minority control as evidence of minority ownership:

In a stock corporation "minority control" is defined as minority ownership of greater than fifty percent of the corporation's voting stock. In a partnership, "minority control" is defined as minorities having greater than fifty percent of the partnership's voting interests.⁽⁵⁾

This definition appears to be the only one in which MTDP equated minorities' voting control of a corporation's stock with ownership of the entity. Unlike the other reports' definitions, the one set forth in the 1995 report does not specify any level of equity interest that minorities must possess to qualify as owners. Although the reasons for MTDP's departure from its traditional minority ownership definitions are unclear, the voting stock definition's only appearance in a report on capital access for minorities in telecommunications perhaps suggests an awareness that strict equity ownership criteria may have affected minorities' ability to raise capital when minority-targeted programs, such as the FCC's tax certificate program, still existed.

Federal Communications Commission's Definition

The Commission has consistently required minorities to hold both a "substantial" equity interest and to exercise actual control of stations under its definitions of minority-owned and minority-controlled firms. It acknowledges, however, that "the precise combination of equity and control may vary in different contexts."⁽⁶⁾ In 1978, the Commission decided to issue tax certificates to owners who sold their broadcast stations to minorities with an ownership interest in the purchaser that "exceeded 50% or was controlling."⁽⁷⁾ It used the same criteria for authorizing distress sales to minorities.

Several years later, the FCC extended its qualifications for purchasers under the tax certificate and distress sales programs to limited partnerships in which minority general partners owned more than 20 percent of the broadcasting entity.⁽⁸⁾ It recognized the "significant minority involvement" resulting from a minority general partner's ownership interest and complete managerial control of the station, but cautioned that "serious concern would arise where tax certificates are sought for sales to limited partnerships in which minorities exercise control but have no substantial ownership interests."⁽⁹⁾ It also made clear that generally tax certificate transactions should not reduce minority ownership or control of the entity below 51 percent.⁽¹⁰⁾

The Commission later instituted competitive bidding rules for licenses and permits. Congress intended the auction procedures to diversify spectrum ownership by affording opportunities for participation by minority and women-owned businesses.⁽¹¹⁾ Accordingly, the Commission's auction rules govern participation by "designated entities," and cover "businesses owned by minority groups," in which minorities "control the applicant, have at least greater than 50 percent equity ownership and, in the case of a corporate applicant, have a greater than 50 percent voting interest."⁽¹²⁾

Under these competitive bidding rules, qualifying minority partnerships consist of minorities who own and control 100 percent of the entity or at least of 50 percent of the partnership's equity.⁽¹³⁾ Controlling interests include those of individuals or entities with either de jure or de facto control of the auction applicant. Holdings exceeding 50 percent of the voting stock of a corporation or of general partnership interests demonstrate de jure control. The Commission determines de facto control of the applicant on a case-by-case basis using disclosure of an entity's equity interests and a minimum showing that the entity: (1) constitutes or appoints more than 50 percent of the board or management committee; (2) is authorized to appoint, promote, demote, or fire senior executives that control the licensee's day-to-day operations; and (3) plays an integral role in management decisions.⁽¹⁴⁾

Finally, in its rules on minority cable programming, the Commission allows cable operators to designate channel capacity to a qualified minority programming source for commercial use. In this context, the Commission defines such a minority programmer as one which devotes "substantially all" of its coverage to minority viewpoints, or programs to minority members and "is over 50 percent minority owned."⁽¹⁵⁾

Small Business Administration's Definition

The Small Business Administration (SBA) also examines both equity interests and control. It uses these criteria to determine eligibility for its Section 8(a) program for disadvantaged small business development. Only small businesses "unconditionally owned and controlled by one or more socially and economically disadvantaged individuals" may participate in the program.⁽¹⁶⁾ The rules provide a rebuttable presumption of social disadvantage for members of designated groups including Black Americans, Hispanic Americans, Native Americans, and Asian Pacific Americans.⁽¹⁷⁾ Such individuals must directly and unconditionally own at least 51 percent of the disadvantaged small business.⁽¹⁸⁾ Therefore, they must own 51 percent of each class of a corporation's voting stock outstanding and 51 percent of the aggregate of all shares outstanding, or 51 percent of every class of partnership interest.⁽¹⁹⁾

In addition, SBA rules regard control as establishing strategic policy for the small disadvantaged business through its board, as well as management and administration of day-to-day operations.⁽²⁰⁾ Therefore, socially disadvantaged individuals must manage the 8(a) program participant or applicant on a full-time basis, and hold the firm's highest officer position, which is usually the president or chief executive officer.⁽²¹⁾ SBA considers qualifying disadvantaged individuals to control the board in several enumerated situations, including: when a single such person owns 100 percent of all the voting stock or owns a minimum of 51 percent of all the voting stock and is a member of the board and no super majority voting requirements exist; or when two or more disadvantaged board members together own at least 51 percent of all the voting stock, no super majority voting requirements exist, and they have enforceable agreements allowing one of them to vote the stock as a block without a shareholder meeting. In the event of any super majority requirements, disadvantaged individuals must hold the requisite percentage of stock to overcome the requirement.⁽²²⁾

The Telecommunications Ownership Diversification Act's Definition ⁽²³⁾

In October 2000, Senators John McCain and Conrad Burns introduced a bill to defer capital gains on sales of telecommunications businesses to "eligible purchasers." The purpose of the legislation was to facilitate voluntary transactions that will "promote diversification in, and broaden the participation in, the telecommunications industry by small businesses, and businesses owned or controlled by members of minority groups and women."⁽²⁴⁾ The bill also proposes a tax credit to promote ownership diversity.⁽²⁵⁾

Section 3 of the proposed law would amend Section 1071 of the Internal Revenue Code to permit non-recognition of gain on any qualified telecommunications sale to an eligible purchaser. It defines an "eligible purchaser" as a U.S. citizen, or a U.S. citizen who is a "woman; a Black or African American; a Latino or Hispanic American; an Asian American, Native Hawaiian or other Pacific Islander; or an American Indian, Alaskan Indian, American Eskimo, or an Aleut" or as an entity controlled by those citizens.⁽²⁶⁾ "Control" of an entity under the bill's provisions requires eligible purchasers to own at least 30 percent of a corporation's outstanding stock (or 30 percent of a partnership's capital and profit interests) and more than 50 percent of the "combined voting power of all classes of stock" (or 50 percent of the partnership interests).⁽²⁷⁾ Eligible purchasers' ownership interests may drop to 15 percent if no other person owns more than 25 percent of the outstanding stock or partnership interests.⁽²⁸⁾ Publicly traded corporations may qualify as an entity controlled by eligible purchasers if such individuals own more than 50 percent of all classes of voting stock. Further, their stock may not be subject to any limitations that would impair the eligible purchasers from voting the stock or to any agreement that permits any other person from acquiring voting power.⁽²⁹⁾ The 106^th. Congress adjourned without action on this measure.

National Minority Supplier Development Council's (NMSDC) Definition

NMSDC is a private national minority business development organization that for almost three decades has certified minority businesses to participate in corporate supplier diversity programs.⁽³⁰⁾ The Council certifies businesses that are "owned, operated and controlled by" United States citizens who are Asian, Black, Hispanic American, or Native American. Minorities must own at least 51 percent of the business or its stock, and control management and daily operations. In February 2000, NMSDC added "minority-controlled firms" to those eligible for certification to enable companies to accept equity capital from institutional investors while retaining their minority qualification.⁽³¹⁾ According to NMSDC's president, Harriet Michel, the organization's "Growth Initiative" would allow previously certified minority firms to become more competitive by expansion through external financing.⁽³²⁾ Under the initiative, NMSDC certifies on a case-by-case basis firms that create and sell a new class of non-voting stock to "professional institutional investors" approved by the Council's certifying committee. Minority owners, however, must retain at least "30 percent of economic equity" in the firm, control its day-to-day operations, own at least 51 percent of the voting equity, and appoint a majority of the board of directors.⁽³³⁾