Telecom and VoIP provider due diligence in Canada

Due diligence on a provider can be organized around whether three sets of records agree with each other: what the billing system says subscribers pay, what the contracts say the provider is entitled to and obliged to do, and what the regulatory file says about its standing. Where they agree, that supports what the seller described. Where they do not, the gap is a finding to explain. This is a verification list for a buyer; it does not explain what the business is worth, how to finance it or whether to proceed.

Reconcile the subscriber file three ways

Ask for the subscriber list as exported from the billing system, and tie it first to the signed contracts and then to bank deposits. Then compare the traffic on the upstream carriers’ invoices with the usage you would expect from that subscriber base. Ask the seller to explain any difference: traffic higher than the billing explains could reflect unbilled usage, resold traffic or fraud, and traffic far lower could reflect lines that are billed but dormant. Look separately at prepaid balances, deposits and credits owed to customers, which are obligations that a headline revenue figure does not show.

Read every carrier, platform and number agreement

For each upstream, wholesale, interconnection, platform and colocation agreement, record the term, minimum commitments, termination charges, service levels, and the language on assignment and change of control. Ask who holds each block of telephone numbers, whether the provider could move numbers if it had to, and what the agreement says about porting them out. Ask each key carrier whether the account is in good standing and whether anything is in dispute; ask for the answer in writing. The explanation of an anti-assignment clause shows what a consent requirement means in practice.

Ask for the whole regulatory file

Request every registration, filing, approval and piece of correspondence with the CRTC, together with a log of consumer complaints and how each closed. An active enforcement matter, or a pile of unresolved complaints, is a finding in its own right. Ownership is the other half of the file. The CRTC’s policy explains that a common carrier’s Canadian ownership and control is judged both on paper and in fact, and that the CRTC may run a public, multi-party process for complex or novel ownership or financing structures. If your own structure could fall into that category, find out before the closing date is fixed, because the timetable of a public review may not be yours to set.

Check emergency calling and number records

Ask for the records that show 911 calling works the way subscribers have been told it does: test logs, the address data collected from customers on hosted lines, incident reports, and any complaint involving a failed emergency call. Ask the same of number portability: logs of ports in and out, and any rejected or delayed requests. If a provider cannot produce these, ask counsel whether the missing records should be dealt with before closing.

Run the registry searches

In Ontario, the Personal Property Security Registration system allows a notice of security interest or lien on personal property to be registered, and Access Now lets a user find out whether a lien has been filed. A search against the provider and each former name can show who has registered a claim over its equipment, receivables and other assets, such as an equipment lessor, a carrier or a bank. The Personal Property Security Act defines an “account” as a monetary obligation not evidenced by chattel paper or an instrument, whether or not it has been earned by performance, but not including investment property; subscriber billings can fall within that definition. A provider based elsewhere is searched in its own province’s registry, so have your lawyer confirm which applies. Add corporate, litigation, trademark and domain-name searches for the brand customers know.

Test privacy and security records

The Privacy Commissioner’s guidance says an organization must keep a record of every breach of security safeguards involving personal information under its control, whether or not it reached the threshold for reporting, and that the Commissioner can ask to see those records. Ask for the log. An empty log needs an explanation, since it can mean either no incident or no process for noticing one. Quebec’s privacy commission describes a similar duty to keep a register of confidentiality incidents. Check also where call detail records are stored and who at the vendors can reach them. Remember too that section 7.2(3) of PIPEDA requires you to comply with any data-room agreement you enter under section 7.2(1)(a), which requires the recipient to use the information solely for purposes related to the transaction, protect it, and, if the transaction does not proceed, return or destroy it within a reasonable time.

What a finding means

• A carrier will not confirm consent in writing: closing is exposed to that carrier’s timetable and terms, so the structure or the date may have to change.
• Traffic that does not reconcile to billing: reported revenue cannot be relied on until the difference is explained.
• Unresolved complaints or an open enforcement matter: in a share purchase the company carries that history into your ownership, so ask counsel whether the price or an indemnity should address it.
• Emergency-calling tests missing: remediation is a cost, and counsel can advise whether it should be a closing condition.
• A registered security interest the seller never mentioned: someone holds rights over assets you are buying, and the claim must be discharged or accepted.