Foreign Ownership Regulations Consultation Document

Canadian Transportation Agency Team Introduction

Industry Regulation and Determinations Branch

Director General: Ghislain Blanchard

Directors: Carole Girard, Allan Kagedan

Managers: John Touliopoulos, Greg Eamon

Senior Analyst: Allison Fraser

Presentation Agenda

Stage 1: Provide the background for the proposed changes to the Canadian ownership requirement resulting from the implementation of Bill C-10.

Stage 2: Present and solicit stakeholder's input on the content of the proposed regulations.

Stage 3: Present and solicit stakeholder's input on the implementation and potential impacts of the proposed regulations.

Stage 4: Discuss the next steps.

Stage 1: Background

Competition Policy Review Panel

June 26, 2008

Following consultations with industry, the Competition Policy Review Panel, appointed by the Minister of Industry in 2007, released its report recommending policy changes to enhance Canada's competitiveness.

• With respect to the domestic aviation industry, the Panel recommended, that the Minister of Transport increase the limit on foreign ownership of air carriers up to 49% from 25% of voting equity based on reciprocal bilateral agreements which grant this right.

• The Panel did not recommend changes to the requirement that air carriers continue to be "controlled in fact" by Canadians.

European Union and Bill C-10

December 2008

Transport Minister John Baird announces that Canada had successfully concluded negotiations with the European Union (EU) on an air transportation agreement which phases in traffic rights. The phases are triggered by the extent of openness to foreign investment by both parties. The first step in further openness would occur once Canada amends its legislation to enable European investors to own up to 49% of a Canadian carrier's voting interests. The agreement will be formally signed once all language versions are authenticated.

Legislative amendments found in Bill C-10, The Budget Implementations Act, 2009, provides the necessary foundation to enable Europeans to make increased investments in Canadian air carriers.

Bill C-10: Budget Implementation Act, 2009

March 12, 2009

• Bill C-10 receives Royal Assent, permitting increased ownership and keeping de facto control intact.

• Bill C-10 includes a new definition of "Canadian" to be found in subsection 55(1) of the Canada Transportation Act (CTA).

• Bill C-10 empowers the Governor in Council to enact regulations allowing for increased foreign ownership limits, to a maximum of 49%.

• At the Governor in Council's discretion, these new foreign ownership regulations may apply to any class of non-Canadians.

• The new provisions have not yet come into force as the regulations must first be developed.

Stage 2: The Proposed Regulatory Regime

Objectives

Our objectives when creating the regulations for foreign ownership limits are to provide:

• The means to implement the legislative changes found in Bill C-10.

• Canadian licensees with the ability to access increased foreign investment, while maintaining the Canadian control in fact requirement, which remains unchanged in the CTA.

• Regulations that are easy to understand and a process of implementing the regulations that is efficient and transparent while adhering to public accountability requirements.

Content of Regulations

The increase in the allowable non-Canadian investment must be made by way of regulations. The proposed regulations would:

1. Define what constitutes "classes" of non-Canadians.

2. Specify that members of the "49% class" (A) may own and control in the aggregate, up to 49% of the total voting interests in a Canadian carrier.

3. Specify that members of the "25% class" (B) may own and control in the aggregate, up to 25% of the total voting interests in a Canadian carrier.

4. Specify that non-Canadians may own and control in the aggregate, up to 49% of the total voting interests in a Canadian carrier. (A) + (B) must be less than or equal to 49%.

Eligible Countries

The regulations would need to identify the countries that are included within the 49% class of non-Canadians.

• This would be achieved by creating a schedule to the regulations.

• The schedule would identify the 49% class members or eligible countries that Canada has concluded an agreement with, providing for the increased foreign ownership interest.

• All other countries would be included within the 25% class.

Defining the 49% Class of non-Canadians

The regulations would specify that the 49% class would include:

1. Individuals that are citizens of an eligible country.

2. Governments of an eligible country.

3. Corporations and other entities whose voting interests are owned and controlled in the majority (50% plus one share) by citizens and/or governments of an eligible country or eligible countries.

To facilitate implementation, the Agency would only consider voting interest ownership. It would not consider non-voting equity interests, economic interests or control in fact in determining the nationality of all non-Canadians.

Stage 3: Implementation and Impacts

• Implications for Private Corporations.

• Implications for Public Corporations.

• New Agency Guidelines.

Private Companies

Private company carriers would be required to ensure they remain controlled in fact by Canadians, and file the same documentation and information currently required by the Agency in its application guidelines.

In addition to the requirements above, and as a part of the new regime, private carriers would be required to:

• Ensure that no more than 49% of their voting interests are owned  and controlled by non-Canadians  in the aggregate.

• Verify and monitor the nationality of the 49% class owners when the 25% voting interest level is exceeded.

Public Companies

Public company carriers would be required to ensure they remain controlled in fact by Canadians, and file the same documentation and information currently required by the Agency in its application guidelines.

In addition to what is required by the private carriers under the new regime, public carriers would also be required to:

• Modify existing share monitoring and control systems in order to ensure that the carrier's ownership adheres to the regulatory changes (i.e. 49% class members are identified). Certain amendments may be required to:
  1. Variable Voting regimes
  2. Broker Survey regimes
  3. Shareholder meeting procedures

How can the Agency assist?

How can we assist carriers in accomplishing compliance with the new regime?

• Keep an up-to-date "eligible countries" list on the Agency's website in order to inform carriers and investors who are eligible to hold more than 25% of the voting interests of their business.

• Work with public company carriers and their transfer agents, as they adjust their share monitoring systems in order to take advantage of the new regime.

• Other Suggestions?

Agency Guidelines for the New Regime

Carriers requesting a licence would continue to file the same basic information regarding their Canadian and non-Canadian owners.

Under the new regime, licensed carriers whose voting interests are more than 25% owned and controlled by non-Canadians would need to  distinguish the non-Canadian owners that are members of the 49% class from all other non-Canadian owners.

Documentary evidence and information would be filed by the carrier when the 25% threshold is exceeded.  The evidence would be used to demonstrate that the voting interests owned and controlled above the 25% limit would rest with members of the 49% class.

The type of documentary evidence to be filed in respect of each applicable 49% class voting interest owner, would depend on whether the holders are individuals or governments or whether they are corporations or other entities.

Documentary Evidence

Individuals and Governments

Once the 25% ownership level is exceeded, an authorized signatory of the carrier would be required to provide the following information for each 49% class individual or government owner, under oath attesting to its truth and accuracy:

• The full name of the 49% class individual or government.

• If the holder is an individual, state the citizenship of the individual.

• If the holder is a government, state the country in which it is located.

Documentary Evidence

Corporations and Other Entities

Once the 25% ownership level is exceeded, an authorized signatory of the carrier would be required to provide the following information for each 49% class corporation and other entity owner, under oath attesting to its truth and accuracy:

1. Information on the total number of issued and outstanding voting interests for each class of voting securities issued by the corporation or other entity.

2. The name, citizenship and total number of voting interest(s) owned and controlled by each owner of voting securities.

3. A current and updated register of all voting interests outstanding.

Country of Incorporation

We are looking to develop a policy perspective on whether corporations and other legal entities that would qualify to be included within the 49% class should be incorporated in an eligible country.

Option (a): Do not require that they be incorporated in an eligible country. Eligibility for the 49% class would be based on the nationality of the owners.

Option (b):  Require that they be incorporated in an eligible country.

Our preferred option would be (a) as it adheres to the spirit of the new regulatory regime by providing a larger potential pool of investment by entities that are incorporated in non-eligible countries, but are owned by nationals of eligible countries. This option would also result in lower administrative costs by not requiring evidence of 49% class member incorporation.

Potential Impacts

The Agency believes the regulations may impact industry stakeholders in the following ways:

• Increase the pool of capital available to Canadian carriers and thereby decrease financing costs.

• Increase international market share for the Canadian aviation industry as a whole.

• Increase administrative costs for the Canadian carriers that take advantage of and benefit from the increased foreign ownership limits.

Stage 4: Next Steps

Feedback Solicited

The Agency would like to receive stakeholder comments on the following:

• The content of the proposed regulations

• The process of implementing the proposed regulations

• The anticipated impacts of the proposed regulations

Written comments must be submitted by November 28, 2009

Key Dates and Activities

Questions?

Comments?