3. The Merger Application

A. Issue Presented

Public Utilities Code § 854 (a) provides in pertinent part:¹

"No person or corporation, whether or not organized under the laws of this states shall merge, acquire, or control either directly or indirectly any public utility organized and doing business in this state without first securing authorization to do so from the commission. ... Any merger, acquisition, or control without that prior authorization shall be void and of no effect. No public utility organized and doing business under the laws of this state, and no subsidiary or affiliate of, or corporation holding a controlling interest in a public utility, shall aid or abet any violation of this section."

According to the application filed by the applicants, the merger of LAE into LAEAC occurred before the filing of the application on July 3, 2000. There are two issues raised by the application and the response to the ALJ ruling. The first issue is whether § 854 applies to this transaction since LAE allegedly was not doing business in California. The second issue is, if § 854 applies to this transaction, should the merger be approved on a nunc pro tunc basis, or should it be declared void since the applicants did not seek Commission approval before the merger was consummated? If § 854 does not apply to this merger, then there is no need to address the second issue.

B. The Applicability of § 854 to This Transaction

Section 854 applies to this transaction if the public utility being acquired or merged is "organized and doing business in this state." (See 71 CPUC 206, 209.) The argument in favor of applying § 854 to this transaction is that by virtue of LAE applying for and receiving a CPCN from this Commission in 1997 as a NDIEC, that LAE was "organized and doing business in this state." This is further bolstered by the acceptance of the CPCN in October 1998 when LAE's consultant expressly stated that LAE "has begun offering service in the state effective immediately."

Another reason for finding that § 854 applies is found in the Form S-3 Registration Statement that Ursus filed with the Securities and Exchange Commission (SEC) on September 28, 1999. In that filing, Ursus acknowledged that the state Public Service Commissions regulate intrastate long distance service. Ursus also acknowledged that:²

"The FCC [Federal Communications Commission] and certain state agencies must approve assignments and transfers of control. An assignment is a transaction in which an authorization is moved from one entity to another. A transfer of control is a transaction in which the authorization remains held by the same entity, but there is a change in the entities that control the authorized carrier. The approval requirements may delay, prevent or deter a change in control or an acquisition of another company."

Thus, Ursus knew in advance that the acquisition of LAE might require this Commission's approval.

The argument against applying § 854 to this transaction is contained in the applicants' November 3, 2000 response to the ALJ ruling. According to the response:

"At the time it commenced operations, LAE's business plan contemplated that it would provide international prepaid calling card services both in Latin America and to the United States Spanish-speaking population. In furtherance of that plan, LAE obtained authorization as a reseller of international services from the FCC and as a reseller of intrastate interexchange services in various states, including California, that have large Latino populations.

"Because of subsequent changes in the telecommunications industry and its business model, LAE increasingly focused on the provision of international services outside the United States. As a result, it has never fully developed its operations in the United States. LAE does provide limited international services under its FCC Section 214 authorization. However, in the majority of states in which it obtained resale authority, including California, LAE does not currently provide services and never has provided services." (Response, pp. 2-3.)

As for Ursus, the response describes its United States operations as "limited to the provision of services between the United states and international points," and that it "does not provide United States interstate or intrastate services." (Response, pp. 2-3.)

"Since Ursus understood that LAE did not provide U.S. domestic services and because Ursus' business plan is not focused on the United States domestic telecommunications market, LAE's state certificates were not a factor in its decision to acquire LAE. In fact, it was not until immediately before the merger closed that Ursus discovered that LAE had been certificated in any state."

According to the response, LAE's authority to transact business in California was forfeited on June 1, 2000, and LAE never sought to reinstate its corporate status with the California Secretary of State. The response also states:

"As noted above, LAE did not operate in California following the lapse of its authority to transact business and derived no revenues in California during that period. Therefore, the Parties do not believe that LAE had failed to file any required reports or to pay any required taxes, including franchise taxes, in California."

Since no revenues were generated from operations in California, the response states that "the Parties understand that no regulatory fees are currently owed or past due by LAE in California."

Section 5.17(a) of the merger agreement, which was attached to Ursus response to the ALJ ruling, represents that LAE filed all returns that it was required to file with any taxing authority.

According to recent filings that Ursus made with the SEC,³ Ursus expanded its retail customer subscriber base by "purchasing a customer base from Justice Telecom Corporation" (JTC) on June 1, 2000. This purchase also

apparently included points of presence in Los Angeles, Nigeria, and Gibraltar. According to the SEC filings, the point of presence in Los Angeles provided Ursus with a "Los Angeles Switch operation."⁴

Ursus described its operations in those SEC filings as follows:

"Ursus is a facilities-based provider of international telecommunications services and offers a broad range of discounted international and enhanced telecommunication services, including U.S. originated long distance service and direct-dial international service, Internet telephony and voice over the Internet protocol (`VOIP'), typically to small and medium-sized businesses and travelers. Our primary service is call reorigination; however, we have increasingly been migrating calls to direct access, VOIP and other methods of transmission. We also sell services to other carriers and resellers on a wholesale basis in the US as well as abroad. Our retail customer base, which includes corporations and individuals, is located in South Africa, Latin America, the Middle East (Lebanon and Egypt), Europe (Germany and Spain), New Zealand and other parts of the world. We operate a switched-based digital telecommunications network out of our primary switching hub located in Sunrise, Florida. ...

"We expanded our reach into Latin America and Spain through the acquisition of Latin America Enterprises (and several affiliated companies ... on June 1, 2000. LAE is [a] provider of international long distance telecommunication services, primarily through the sale of prepaid calling cards in airports, railroad stations and other highly visible locations in the United States, Latin America and Spain. The prepaid calling cards are distributed through manned kiosks and vending machines. LAE supports the marketing efforts through branch offices and affiliated companies located in 13 countries. LAE operated a switching facility in Miami, Florida, which has since been consolidated into our Sunrise, Florida hub."

Based upon the representations contained in the response to the ALJ ruling, it appears that LAE did not transact any business, or generate any revenues, in California, from the time that LAE was certificated by the Commission to be a NDIEC. Instead, it appears that LAE's base of operations was located in Florida, and that LAE marketed its prepaid calling cards in certain cities on the east coast, and in South America, the Dominican Republic, Puerto Rico, and Spain. All that LAE appears to have done in California was to apply for the CPCN and to accept it. Based on the information before us, LAE does not appear to have engaged in any intrastate telecommunication activities within California.

Although LAE had a CPCN issued by this Commission, we cannot conclude that LAE was "doing business in this state" as contemplated by § 854. Therefore, § 854 does not apply to the merger between LAE and Ursus because LAE was not doing business in this state. Thus, there is no need to address whether the merger should be approved on a nunc pro tunc basis. The application should therefore be dismissed.⁵