Decision No. 511-A-2004

September 29, 2004

September 29, 2004

IN THE MATTER OF the Canadian status of ACE Aviation Holdings Inc. and its subsidiaries Air Canada, Jazz Air Limited Partnership, as represented by its general partner Jazz Air General Partner Inc. carrying on business as Air Canada Jazz and AC Cargo Limited Partnership, as represented by its general partner, AC Cargo General Partner Inc. carrying on business as Air Canada Cargo.

File Nos. M4161/A74
M4161/A939
M4161/A999
M4210/A939-1
M4210/A939-2
M4210/A939-3
M4210/A999-1
M4210/A999-3


BACKGROUND

[1] Air Canada and certain of its wholly-owned subsidiaries, Jazz Air Inc. carrying on business as, among others, Air Canada Jazz (hereinafter Jazz Air Inc.) and ZIP Air Inc. carrying on business as ZIP (hereinafter ZIP), hold various licences issued by the the Canadian Transportation Agency (hereinafter the Agency) authorizing them to operate domestic, scheduled and non-scheduled international air services.

[2] In Decision No. LET-A-247-2004 dated September 3, 2004, the Agency determined that it was satisfied that based on certain information and documentation filed with the Agency, Air Canada, Jazz Air General Partner Inc. carrying on business as Air Canada Jazz (hereinafter Air Canada Jazz) and AC Cargo General Partner Inc. carrying on business as Air Canada Cargo (hereinafter Air Canada Cargo) will meet the Canadian ownership and control requirements as defined in subsection 55(1) of the Canada Transportation Act (hereinafter the CTA) upon emergence from the Companies' Creditors Arrangement Act, R.S.C., 1985 c. C-36, as amended, (hereinafter CCAA) proceedings.

[3] On April 1, 2003, Air Canada and certain of its subsidiaries, including Jazz Air Inc. and ZIP, filed for and obtained from the Ontario Superior Court of Justice (hereinafter the Court) protection from their creditors under the CCAA to restructure their operations, cost structure and capitalization and to provide for the compromise and settlement of claims of creditors pursuant to a consolidated plan of reorganization, compromise and arrangement (hereinafter the Plan). The implementation of the Plan is targeted for September 29, 2004 (hereinafter the implementation date), with CCAA proceedings expected to terminate September 30, 2004.

[4] On August 23, 2004, the Court sanctioned the Plan following the approval of the Plan by persons with claims against one or more of the applicants (Affected Unsecured Creditors) on August 17, 2004. As a result, ACE Aviation Holdings Inc. (hereinafter ACE), incorporated under the Canada Business Corporations Act, R.S.C., 1985, c. C-44, as amended, will become, upon the implementation date, the holding company under which the reorganized Air Canada and its subsidiaries will be held. Pursuant to the Plan, Air Canada will be directly held by ACE and will continue to operate publicly available air services. The Plan also provides that Zip will be wound-up and dissolved while Air Canada Jazz and Air Canada Cargo, both indirectly wholly-owned by ACE, will also operate publicly available air services. To this end, Air Canada and Air Canada Cargo filed applications for licences in respect of proposed operations by Air Canada Jazz and Air Canada Cargo.

[5] In addition to the above, key aspects of the Plan include the following which are relevant to this Decision:

  • ACE is a public corporation whose shares will initially trade on the Toronto Stock Exchange.
  • Upon implementation of the Plan, the fully diluted equity of ACE will be held as follows:
    1. 45.77 percent by Affected Unsecured Creditors;
    2. 42.06 percent by Affected Unsecured Creditors who have exercised their subscription rights for ACE shares and/or by Deutsche Bank Securities Inc. (hereinafter Deutsche Bank) pursuant to the Rights Offering;
    3. 9.16 percent by the Equity Investor, Cerberus ACE Investment, LLC, an affiliate of Cerberus Capital Management, L.P. (collectively, Cerberus);
    4. 3.0 percent by persons having been granted equity under the Stock Option Plan; and
    5. approximately 0.01 percent by the existing Air Canada shareholders.
  • ACE's authorized share capital will consist of (i) ACE Variable Voting Shares, which are variable voting and participating; (ii) ACE Voting Shares which are voting and participating, and (iii) ACE Preferred Shares which are voting (on an as-converted basis), participating and convertible, under specified terms and conditions, into Variable Voting Shares or Voting Shares. The Preferred Shares have a liquidation preference.
  • Schedule "A" to the Articles of Arrangement of ACE discloses that the ACE Voting Shares may only be held by Canadians and each Voting Share has one vote at a meeting of shareholders. The ACE Variable Voting Shares may only be held by non-Canadians. Each ACE Variable Voting Share has one vote at a meeting of shareholders, unless:
    1. the number of Variable Voting Shares outstanding (including the Preferred Shares, calculated on an as converted basis, if owned or controlled by persons who are not Canadians) as a percentage of the total number of all voting shares outstanding exceeds 25 percent (or any higher percentage that the Governor in Council may by regulation specify); or
    2. the total number of votes cast by or on behalf of holders of Variable Voting Shares (including the Preferred Shares, calculated on an as converted basis, if owned or controlled by persons who are not Canadians) at any meeting exceeds 25 percent (or any higher percentage that the Governor in Council may by regulation specify) of the total number of votes that may be cast at such meetings.
  • If either of the above-noted thresholds is surpassed, the vote attached to each Variable Voting Share will decrease automatically such that
    1. the Variable Voting Shares as a class (including the Preferred Shares, calculated on an as converted basis, if owned or controlled by persons who are not Canadians) do not carry more than 25 percent (or any higher percentage that the Governor in Council may by regulation specify) of the aggregate votes attached to all issued and outstanding ACE Voting Shares, and;
    2. the total number of votes cast by or on behalf of holders of Variable Voting Shares (including the Preferred Shares, calculated on an as converted basis, if owned or controlled by persons who are not Canadians) at any meeting do not exceed 25 percent (or any higher percentage that the Governor in Council may by regulation specify) of the total number of votes that may be cast at such meetings.
  • Cerberus will hold all of the ACE Preferred Shares on the implementation date. Pursuant to an investment agreement (the Cerberus Agreement) dated June 23, 2004, Cerberus will invest CAD$250 million in ACE in exchange for ACE Preferred Shares initially convertible into 9.16 percent of the fully diluted equity of ACE. The holder of ACE Preferred Shares will be entitled to vote at shareholder meetings on an as converted basis with the common stock of ACE. As a non-Canadian, Cerberus will be subject to the same voting restrictions as the holders of the ACE Variable Voting Shares.
  • Affected Unsecured Creditors are to receive a Rights Offering pursuant to which they will receive subscription rights for ACE Variable Voting Shares or in the case of Affected Unsecured Creditors who are proven Canadians, for ACE Voting Shares. Subscription rights are to be issued for the subscription of 42.5 million ACE Variable Voting Shares or ACE Voting Shares at CAD$20 per share. Only Affected Unsecured Creditors are entitled to participate and only in direct proportion to their proven claims.
  • Air Canada entered into a Standby Purchase Agreement with Deutsche Bank, dated October 29, 2003, which was amended and restated as of April 29, 2004 (the Amended and Restated Standby Purchase Agreement), whereby Deutsche Bank has agreed to purchase all unsubscribed rights at a premium price of CAD$21.50 per share.
  • In conjunction with its CCAA filing, the applicants arranged for debtor-in-possession (hereinafter DIP) financing from General Electric Capital Corporation and/or affiliates (collectively, General Electric). The DIP financing is made up of both a credit advance facility and a letter of credit facility with a maximum combined borrowing under the two facilities of approximately US$700 million. As of May 31, 2004, CAD$300 million was drawn against the credit advance facility and letters of credit totalling CAD$20 million were issued against the letter of credit facility. The DIP is secured by all of the unencumbered assets of Air Canada and its direct and indirect subsidiaries. The DIP financing is not to extend beyond the CCAA proceedings.
  • As part of its new product strategy, Air Canada proposes to purchase new aircraft from Embraer and Bombardier. The aggregate cost of these aircraft approximates US$2 billion. In addition, as of April 1, 2003, General Electric leased, managed the leases or otherwise had an interest in approximately one-third of Air Canada's aircraft fleet. Air Canada conducted extensive negotiations in order to restructure its aircraft ownership costs. As a result, it entered into the Global Restructuring Agreements, dated July 1, 2003 as amended from time to time (hereinafter the GRA), and other agreements with General Electric.
  • The GRA provide, among other matters, for
    1. the restructuring of leases for all General Electric-owned aircraft
    2. exit financing in an amount of approximately US$681 million for use by ACE upon emergence from CCAA proceedings, and
    3. financing in an amount of up to US$950 million to fund the acquisition of new regional jet aircraft. Pursuant to the GRA, Air Canada will issue stock purchase warrants to General Electric for the right to purchase up to four percent of the ACE Variable Voting Shares on a fully diluted basis at a strike price equal to the price paid by the Equity Investor. These warrants will have a term of five years from the date of issuance.
  • Air Canada currently leases and has payment and purchase obligations in respect of two Boeing 747-400 aircraft from General Electric. Upon emergence from the CCAA proceedings, Air Canada will purchase such aircraft from General Electric. This purchase will be financed by Air Canada issuing to General Electric
    1. a limited recourse note in the amount of US$50 million;
    2. a recourse note in the amount of approximately US$96 million as Loan C of the Exit Facility; and;
    3. a convertible note in the amount of approximately US$122 million. The convertible note will be convertible into equity of ACE at General Electric's option at a strike price equal to 125 percent of the price paid by the Equity Investor. If the closing occurs under the Cerberus Agreement, Air Canada shall pay the amount to General Electric in lieu of the issuance of the warrants under the GRA and the convertible note.

THE CANADIAN OWNERSHIP AND CONTROL REQUIREMENT UNDER THE CTA

[6] Air Canada is to continue operating publicly available air services upon emergence from the CCAA proceedings and, as a result, needs to continue to be Canadian as defined in subsection 55(1) of the CTA. The separate limited partnerships of Air Canada Cargo and Air Canada Jazz will also need to be Canadian. ACE, the publicly traded holding company, is to directly or indirectly wholly own the above three air carriers and, accordingly, also needs to be Canadian to effect compliance for the three air carriers. It is for this reason that the Agency has carefully examined the affairs of ACE in order to make the Canadian determination for the air carriers in question.

[7] The Canadian requirement is a market entry requirement as well as an ongoing requirement that must be complied with at all times. "Canadian" is defined in subsection 55(1) of the CTA as "a Canadian citizen or a permanent resident within the meaning of the Immigration Act, a government in Canada or an agent of such a government or a corporation or other entity that is incorporated or formed under the laws of Canada or a province, that is controlled in fact by Canadians and of which at least seventy-five percent, or such lesser percentage as the Governor in Council may by regulation specify, of the voting interests are owned and controlled by Canadians;"

Incorporation or formation requirement

[8] ACE, Air Canada, Air Canada Jazz and Air Canada Cargo have all been incorporated or formed under the laws of Canada or a province. Accordingly, the Agency has determined that ACE and the air carriers proposed under the Plan comply with this part of the Canadian requirement.

Voting interest requirement

[9] In order to be Canadian, 75 percent of an air carrier's voting interests need to be owned and controlled by Canadians. All of the voting interests of Air Canada and the limited partners and general partners of Air Canada Jazz and Air Canada Cargo are to be directly or indirectly wholly owned by ACE. Accordingly, at least 75 percent of the voting interests of ACE also need to be owned and controlled by Canadians.

[10] When the CCAA proceedings terminate, it is anticipated that a large majority of ACE's voting shares will be held by non-Canadians. Such non-Canadian holdings are discussed more fully in the section entitled "Economic interests held by non-Canadians in ACE".

[11] The National Transportation Agency, in Decision No. 297-A-1993 dated May 27, 1993, and the Agency in Decision No. 299-A-2000 dated May 1, 2000, held that the term "voting interests" means voting shares and the votes assigned thereto.

[12] In referring to voting shares and the votes assigned thereto, the Agency has traditionally held that, at all times, non-Canadians can own and control no more than 25 percent of the voting shares of the Canadian entity. In other words, no more than 25 percent of the voting shares and the rights attached thereto can be owned by non-Canadians.

[13] Air Canada maintains that the proposed share structure of ACE, as stated in its Articles of Arrangement, meets the requirement that at least 75 percent of ACE's voting interests are to be held by Canadians. Air Canada submits that the proposed structure is consistent with the Agency's historic interpretation in respect of voting interests given that in the past decisions of the Agency, each voting share, whether held by a Canadian or a non-Canadian, carried one equal vote. Air Canada also argues that the implicit assumption of equality among all voting shares is not applicable in the context of ACE. Although a Voting Share, to be held only by Canadians, will at all times carry one vote, a Variable Voting Share, to be held only by non-Canadians, will, in appropriate circumstances, carry a fraction of one vote. This will be as a result of the automatic adjustment mechanism which is described in the section entitled "Background".

[14] Air Canada submits that de jure control rests in the ownership of such number of shares as entitles the holder to cast a majority of the votes normally cast in the election of the board of directors of a particular entity. Air Canada states that the test is exemplified by those statutory provisions which determine control on the basis of a minimum percentage of the votes that may be cast to elect directors of a particular entity.

[15] In terms of past decisions, the Agency notes that its interpretation of the ownership and control of the voting interests of an air carrier was predicated on the fact that each voting share, whether held by a Canadian or a non-Canadian, carried one equal vote.

[16] The principal purpose and intent of the definition of "Canadian" in subsection 55(1) of the CTA is to ensure that air carriers that are required to be Canadian are "controlled" by Canadians. Thus, the requirement for the voting interest to be owned and controlled by Canadians and for the air carrier to be controlled in fact by Canadians is "control" oriented. The requirement to be controlled in fact by Canadians, by nature, focuses on the notion of control. The requirement to be at least 75 percent owned and controlled by Canadians also focuses on the notion of control as it relates to the voting interests of a corporation rather than the corporation itself. As the voting interests in a corporation are the means by which shareholders exercise control over the affairs of the corporation, the intent behind the ownership and control requirements of subsection 55(1) of the CTA is to ensure that such control in a corporation is only exercised by Canadians.

[17] The proposed share structure of ACE is different than the traditional share structures examined by the Agency in the past. While the traditional approach in interpreting the ownership and control of the voting interests of an air carrier in terms of ownership and control of the voting shares is and was warranted in cases where each voting share issued by a corporation equally carried one vote, the Agency finds that this approach cannot reasonably be applied in cases such as the present one where each voting share does not necessarily convey one equal vote.

[18] In the present case, in its Articles of Arrangement, ACE has put into place a mechanism that provides an automatic adjustment of the voting right attached to each voting share held by non-Canadians to ensure that the voting shares issued to non-Canadians would never, as a class, carry more than 25 percent of the aggregate votes attached to all issued and outstanding voting shares of the corporation or 25 percent of the aggregate votes attached to all issued and outstanding voting shares of the corporation at any meeting of shareholders. In other words, while the vote attached to each voting share issued to non-Canadians normally entitles its owner to one vote per share, such one vote will automatically decrease to a fraction of a vote should the number of voting shares held by non-Canadians exceed 25 percent of the corporation's voting shares that are issued and outstanding or 25 percent of the voting shares issued and outstanding of the corporation at any meeting of shareholders. While this structure differs from the traditional structure where each share always carries one vote, it does not depart from the spirit of subsection 55(1) of the CTA which, for all practical purposes, is meant to ensure that when it comes to the control over the affairs of a corporation, Canadians control the corporation.

[19] As a result, the Agency is satisfied that non-Canadian shareholders of ACE will never own and control more than 25 percent of the voting interests in ACE given that non-Canadians, irrespective of their numbers and proportion, will never, as a class, cast more than 25 percent of the aggregate votes attached to all issued and outstanding voting shares of the corporation or 25 percent of the aggregate votes attached to all issued and outstanding voting shares of the corporation at any meeting of the shareholders.

[20] In light of the foregoing, the Agency finds that ACE and the air carriers proposed under the Plan comply with the voting interest requirement set out in subsection 55(1) of the CTA.

Control in fact requirement

[21] In order to be Canadian, ACE, Air Canada, Air Canada Jazz and Air Canada Cargo also need to be controlled in fact by Canadians.

[22] Generally, control in fact is viewed by the Agency as the ongoing power or ability, whether exercised or not, to decide the strategic decision-making activities of an enterprise. It is also viewed as the ability to manage and run the day-to-day operations of an enterprise. Minority shareholders and their designated directors normally have the ability to influence a company as do others such as bankers, lessors and employees. The influence, which can be exercised either positively or negatively, for example by way of veto rights, needs to be dominant or determining, however, for it to result in control in fact. When determining where control in fact lies, the Agency, among other matters, carefully examines all actual and proposed business and other relationships between the shareholders and the company whose ownership is under review. All relationships with lenders are also reviewed. All actual and proposed operational, managerial and financial relationships are considered. The intent and ability of individual shareholders and lenders to influence and control are considered. Agreements, such as shareholder agreements and financial and operational agreements that have been entered into by the company, are of special importance.

[23] The Agency has in its possession the detailed Plan as well as all major agreements that have been entered into or are to be entered into by ACE and/or related companies with each of Deutsche Bank, General Electric and Cerberus. Air Canada has also provided detailed additional information and documentation in respect of this proceeding.

[24] Having examined all of the evidence, the Agency has, for the purposes of this decision, focused on four key matters as such relate to the affairs of ACE and its subsidiary air carriers. These four key matters are: (i) the influence in terms of voting rights that non-Canadian shareholders will have at meetings of shareholders of ACE; (ii) the constitutional, procedural and appointment provisions for the Board of Directors of ACE; (iii) the economic interest in ACE held by non-Canadians; and (iv) the debt structure of ACE and its subsidiaries and the influence of non-Canadian lenders.

The influence in terms of voting rights that non-Canadian shareholders will have at meetings of shareholders of ACE

[25] The Agency has examined the Articles of Arrangement and By-Laws of ACE.

[26] The Articles of Arrangement provide that ACE will have three classes of shares which are Voting Shares, Variable Voting Shares and Preferred Shares. The ACE Voting Shares may only be held by Canadians and the Variable Voting Shares may only be held by non-Canadians. The ACE Variable Voting Shares and the ACE Voting Shares will publicly trade as one class. The ACE Preferred Shares will not trade publicly. All three classes of ACE shares are participating and as such, each class is entitled to, among other matters, dividends and distributions and to participate in the proceeds upon liquidation, dissolution or winding-up of ACE. The ACE Preferred Shares have a liquidation priority. In addition, the ACE Preferred Shares are convertible at the option of the holders into ACE Variable Voting Shares, if the holder is a non-Canadian, or into ACE Voting Shares if held by a Canadian. The ACE Preferred Shares also have mandatory conversion requirements attached to them.

[27] Pursuant to the Plan, Affected Unsecured Creditors, Deutsche Bank and others, depending on whether they are Canadian or non-Canadian, will receive Voting Shares or Variable Voting Shares, respectively.

[28] The Articles of Arrangement of ACE disclose, among other matters, that the holders of the ACE Voting Shares are entitled to attend and vote at meetings of shareholders and each such share confers the right to one vote in person or by proxy.

[29] The Articles of Arrangement of ACE also disclose, as described in the section entitled "Background", the voting restrictions to be placed on the non-Canadian shareholders of ACE in specific circumstances.

[30] The ACE Preferred Shares are owned by Cerberus. The Articles of Arrangement provide that the holder of the Preferred Shares will be entitled to vote at shareholder meetings of ACE on an as converted basis with the ACE Voting Shares and Variable Voting Shares. To the extent that the Preferred Shares are held by persons who are non-Canadians, they shall be subject to the same proportionate reduction in voting percentage as if, for voting purposes only, the ACE Preferred Shares had been converted into ACE Variable Voting Shares. As a result, Cerberus, as a non-Canadian, will be subject to the same voting restrictions as the holders of the ACE Variable Voting Shares.

[31] A form of declaration of Canadian status will be used at all meetings of shareholders to determine the Canadian status of all shareholders who propose to cast a vote, including a proxy vote, at such meetings. The first meeting of shareholders will occur sometime during the year 2005. The filing of the form of declaration of Canadian status by those proposing to cast a vote and associated procedures to be implemented at meetings of shareholders will allow ACE to apply the aforementioned provisions of the Articles of Arrangement to appropriately limit the exercise of votes cast by or on behalf of non-Canadians.

[32] The Agency has also examined the By-Laws of ACE, specifically By-Law No. 1, and is satisfied that the voting provisions are consistent with the Articles of Arrangement.

[33] In light of the urgent nature for an Agency determination in respect of the subject matter, the Agency has not examined the proposed form of declaration of Canadian status and the full and complete process to be administered at meetings of shareholders. ACE will provide disclosure to the Agency, in advance of the first meeting of shareholders, of the proposed form of declaration and the process to satisfy the Agency that non-Canadians may never exercise more than 25 percent of all votes cast at such meetings. The definition of Canadian to be used in a form of declaration will be consistent in all respects with the definition of Canadian as contained in subsection 55(1) of the CTA.

[34] As a result of the above, Canadian shareholders will always be able to cast at least 75 percent of the votes at meetings of shareholders and will, therefore, always be in a position to exercise control in terms of votes cast at such meetings. As such, Canadian shareholders will have de jure control in that they will have the ability, by virtue of their Voting Share holdings, to elect the majority of the ACE Board of Directors.

[35] The Agency has also examined whether there exists a sufficient common connection between the individual non-Canadian shareholders which would allow them to act in concert by voting as a block in the election of directors and other important matters relating to control of the company. The Agency is satisfied that there is no evidence that would suggest that any two or more of Deutsche Bank, Cerberus or General Electric would vote as a block in the election of the directors of ACE or in other important matters relating to control of ACE. Consequently, the Agency is satisfied that control in fact would be exercised by Canadians.

The constitutional, procedural and appointment provisions for the Board of Directors of ACE

[36] In general terms, when conducting a Canadian ownership review, it is important to establish that non-Canadian shareholders do not have the right to appoint the majority of the members of the Board of Directors. It is also important that the majority of Board members be Canadian as defined in subsection 55(1) of the CTA. In terms of Canadian compliance, non-Canadian shareholders can have the right to appoint a minority number of directors to protect the investment of the non-Canadian shareholders. For investment protection purposes, such directors can have certain veto rights, otherwise referred to as Board Consensus provisions, at board meetings. The Agency examines veto rights to ensure that such do not result in the non-Canadian appointed directors being able to exercise control over the affairs of the enterprise in question. Director appointment and veto right provisions are normally found in Shareholders' Agreements or Unanimous Shareholders' Agreements. Other agreements entered into by the company may also contain such provisions.

[37] With respect to the review in this matter, the Agency has considered how members to the original Board of Directors were appointed under the Plan as well as how future members are to be appointed at meetings of shareholders of ACE. ACE is to have key relationships with Cerberus, Deutsche Bank and General Electric, all non-Canadians. These relationships are stipulated in various agreements that ACE has entered into or proposes to enter into with such parties. The Agency has examined all pertinent agreements that ACE has entered into to determine if such contain appointment or similar provisions. The Agency notes that ACE has not entered and does not intend to enter into a Shareholders' Agreement or a Unanimous Shareholders' Agreement with its shareholders.

[38] The ACE Board of Directors has 11 members. ACE By-Law No. 1 discloses that a majority of directors need to be resident Canadians and a majority cannot be officers or employees of ACE or its affiliates. A majority of the number of directors in office or such greater or lesser number as the directors may determine from time to time, constitutes a quorum at any meeting. A majority of the directors present at Board meetings need to be resident Canadians. The chair of any meeting of directors is the first mentioned of the following officers that is a director and is present at the meetings:

  1. the chair of the Board; or
  2. the chief executive officer; or
  3. the president; or
  4. any other person designated to be the chair by the chair of the Board or the chief executive officer.

[39] Every question is decided by a majority of the votes cast.

[40] Cerberus and Air Canada have entered into the Cerberus Agreement. The Agreement discloses that Cerberus proposes to invest CAD$250 million in ACE in exchange for the purchase of ACE Preferred Shares. It further discloses that the Board of Directors of ACE shall be comprised of eleven members. Three of the 11 initially designated members, who may or may not be independent or related, will be those identified by Cerberus. No more than two of these three shall be non-residents of Canada. Cerberus shall maintain the right to designate three of the eleven members of the Board of Directors of ACE for a minimum of two years. The Cerberus designation right remains at three members for as long as Cerberus holds at least 75 percent of its equity (by way of Preferred Shares or converted Variable Voting Shares in ACE.) This right to designate nominees is non-transferable and reduces as the amount of its initial investment reduces. Specifically, the designation rights decrease to two members when Cerberus holds at least 50 percent but less than 75 percent of its original equity. Such rights decrease to a one-member designation when Cerberus holds at least 25 percent but less than 50 percent of the original equity. For as long as Cerberus maintains a 2.5 percent economic interest in ACE, it shall have access to the management of ACE and to all financial and operational information of ACE in order to consult with management and express its views on the business and affairs of ACE and its subsidiaries including business plans, budgets and quarterly results.

[41] The word "designate" is not defined in the Cerberus Agreement. Its meaning is uncertain as the designation right could be or could not be equivalent to an appointment right. The Agency has obtained detailed clarification from Air Canada on this designation right. Having examined all of the evidence, the Agency concludes that it is likely that all proposed Board members designated by Cerberus will be appointed to the ACE Board of Directors. This conclusion is supported by the constitution of the original Board of Directors of ACE. Three Cerberus designees have been appointed to the initial ACE Board. All are, directly or indirectly, related to Cerberus. Two of the members are Canadian citizens and one is a non-Canadian. It is important to note that the Cerberus designated directors do not have and will not have veto rights at meetings of the Board of Directors of ACE.

[42] Deutsche Bank and Air Canada have entered into an Amended and Restated Standby Purchase Agreement. The Agreement discloses that the initial Board of Directors of ACE shall consist of 11 members who shall be designated in the Plan and shall be acceptable to Deutsche Bank. The Amended and Restated Standby Purchase Agreement further discloses how the initial members of the Board of Directors of ACE are to be nominated. One shall be the Chief Executive Officer of Air Canada and the remaining 10 directors shall be provided for and designated in the Plan and Deutsche Bank will have the right, but not the obligation, to nominate four of such nominees.

[43] The word "nominate" is not defined in the Amended and Restated Standby Purchase Agreement. Its meaning is also uncertain. The Agency has again obtained clarification from Air Canada on this nomination right. Having examined the evidence, the Agency concludes that the Deutsche Bank nomination right only applies to the initial Board of Directors to be appointed under the Plan. Additionally, the Agency concludes that the Deutsche Bank nomination right as stated in the Amended and Restated Standby Purchase Agreement is not equivalent to assignment or appointment rights. In practice, these provisions, including the provision that states that the eleven members of the Board shall be acceptable to Deutsche Bank, have only allowed Deutsche Bank to be involved in the selection process so as to be satisfied with the quality, independence and experience of the Board as a whole. The Agency notes that none of the members of the initial Board of Directors have a substantial direct or indirect relationship with Deutsche Bank. The Agency also notes that the Agreement does not include veto right provisions for any Deutsche Bank director nominees.

[44] The Agency is of the opinion that there is no evidence to indicate that General Electric has a right to nominate, appoint or designate any directors to the Board of Directors of ACE.

[45] The initial Board of Directors of ACE has now been appointed under the Plan and has been sanctioned by the Court. Nine members of the Board are Canadian citizens. Eight members of the Board are independent of Deutsche Bank, Cerberus and General Electric with no substantive direct or indirect relationships. Three members are Cerberus assignees and have a direct or indirect relationship with the equity partner. These three members do not have veto rights at Board meetings.

[46] The Agency is of the opinion that Cerberus obtained the designation rights, in part, so that it could monitor the activities of ACE and so that it could influence proceedings at Board of Director meetings. The Agency views such minority member designation rights as normal, given the nature and magnitude of the Cerberus equity investment.

[47] Cerberus, as a result of its equity investment and its initial three member designation right, will be able to influence the affairs of ACE and its subsidiary air carriers. The Agency is of the opinion that such influence is normal and not dominant or determining. The influence does not result in Cerberus being able to exert control in fact over the affairs of ACE. The Agency is also of the opinion that Deutsche Bank will have a lesser and more short-term influence over ACE as a result of its nomination right.

[48] In the future, Cerberus, depending on its equity investment level, will continue to have a right to designate one to three Board of Director members. In the year 2005 and thereafter, the members to the Board of Directors will be elected by ACE shareholders at meetings of shareholders. Canadians will always be able to cast at least 75 percent of the votes at such meetings.

[49] In light of the above, the Agency concludes that a majority of the Board of Directors of ACE are Canadian and is satisfied that the constitutional, procedural and appointment provisions for the Board of Directors disclose that such is controlled by Canadians. Future members of the Board will be appointed at meetings of shareholders of ACE where Canadians will exercise control in terms of the votes cast.

[50] The Agency is also satisfied that the Board of Directors of Air Canada and the Board of Directors of each of the general partners of Air Canada Jazz and Air Canada Cargo, all wholly-owned companies of ACE, are also controlled by Canadians.

The economic interest in ACE held by non-Canadians

[51] The Agency is of the opinion that as the economic interest of a shareholder increases above 25 percent, such shareholdings become of increased importance in determining where control in fact lies. The greater the economic interest, the greater the likelihood that the owner of that economic interest will be able to exercise control in fact over the affairs of the enterprise.

[52] In the case of ACE, the economic interest refers to the ownership of Voting Shares, Variable Voting Shares and Preferred Shares.

[53] Air Canada has advised that a substantial majority of Air Canada's debt is held by non-Canadians today. As a result of the compromise and settlement of proven claims, Canadian and non-Canadian Affected Unsecured Creditors will hold approximately 46 percent of the economic interest in ACE (on a fully diluted basis).

[54] Affected Unsecured Creditors are to receive subscription rights for ACE Variable Voting Shares or, in the case of Affected Unsecured Creditors who are proven Canadian as a result of certifying that they are Canadian, for ACE Voting Shares. Subscription rights are to be issued for the subscription of 42.5 million ACE Variable Voting Shares or ACE Voting Shares at CAD$20 per share. Only Affected Unsecured Creditors are entitled to participate and only in proportion to their proven claims. Deutsche Bank has entered into the Amended and Restated Standby Purchase Agreement whereby it has agreed to purchase all unsubscribed rights at a price of CAD$21.50 per share. As a non-Canadian, Deutsche Bank is to receive Variable Voting Shares. The Rights Offering will result in Affected Unsecured Creditors and/or Deutsche Bank and its syndicate participants holding approximately 42 percent of the economic interest in ACE.

[55] As result of its equity investment, Cerberus will initially hold an approximate 9 percent economic interest in ACE. It is likely that the remaining 3 percent economic interest in ACE will primarily be held by Canadians.

[56] The economic interest in ACE to be held by non-Canadians may vary depending on the percentage of claims held by Canadians and non-Canadians. It may also vary depending on which Affected Unsecured Creditors exercise their subscription rights and the number of unsubscribed rights that need to be purchased by Deutsche Bank.

[57] The exact number of ACE Voting Shares that are to be issued to Canadians and the exact numbers of Variable Voting Shares that are to be issued to non-Canadians have not yet been established under the Plan. It is clear to the Agency, however, that a large majority of ACE's economic interest will likely be held by non-Canadians when the CCAA proceedings terminate.

[58] As a result of the Plan being approved at the Creditors' Meeting on August 17, 2004, Affected Unsecured Creditors must accept ACE capital stock in settlement of proven claims. The shares issued to Affected Unsecured Creditors are likely to be widely held and certain Affected Unsecured Creditors who normally do not hold publicly traded shares for investment purposes may dispose of their ACE shares when market conditions are perceived to be at their optimum.

[59] Under the terms of the Rights Offering, Affected Unsecured Creditors have the option to subscribe for up to CAD$850 million of equity of ACE. Pursuant to the Amended and Restated Standby Purchase Agreement, Deutsche Bank is the exclusive standby purchaser for all unsubscribed Rights Offering ACE shares and thus has made a substantial equity commitment that could, potentially, lead to Deutsche Bank holding a significant economic interest in ACE.

[60] The Agency notes that Deutsche Bank is a global investment bank based in Germany. It is one of the world's leading financial service providers serving customers in numerous countries. There is nothing to indicate to the Agency that the financial transactions contemplated in the Amended and Restated Standby Purchase Agreement are anything but normal Deutsche Bank business transactions.

[61] Air Canada has advised the Agency that Deutsche Bank is unlikely to be a long term investor in ACE. This disclosure is supported by several facts, including the fact that Deutsche Bank has the right and has exercised its right to syndicate its participation in the Rights Offering. Air Canada estimates that immediately after completion of the Rights Offering, Deutsche Bank will not hold more than 15 percent of the aggregate shares issued under the Rights Offering. This disclosure is also supported by the fact that the shares to be purchased by Deutsche Bank need to be eligible for resale by Deutsche Bank for the transactions to close. The Agency is also mindful of the temporary nature of Deutsche Bank's nomination rights in respect of the Board of Directors of ACE.

[62] General Electric is an Affected Unsecured Creditor in addition to being a key financier of ACE. General Electric is a multi-business public corporation shares of which trade on U.S. and other stock exchanges. Its major business enterprises include commercial finance, consumer finance and transportation services. With respect to commercial financing, General Electric, in part, offers loans and financing services for major capital assets, including aircraft fleets. In the past it has also provided credit support on behalf of certain customers using arrangements such as standby letters of credit and performance guarantees.

[63] General Electric has waived its right to receive a distribution on claims with respect to the General Electric-owned aircraft. Air Canada advised that while General Electric will be entitled to receive Variable Voting Shares in respect of managed aircraft, it is premature to determine the number of such shares until all proven claims are tallied. This said, the Agency estimates that any distribution to General Electric based on such claims would likely not be significant. The Agency has also taken into consideration that it is the intention that General Electric will receive no equity or rights to equity in ACE, as otherwise provided for in the GRA and in the delivery of the convertible note refinancing existing obligations to General Electric in connection with the two Boeing 747-400 aircraft, upon emergence from the CCAA proceedings if the Cerberus Agreement closes. The Agency is of the opinion that these facts indicate that it is not the intention of General Electric to hold an equity interest in ACE but rather to provide services to ACE in the normal course of its business.

[64] Because of the variable voting nature of the Variable Voting Shares, non-Canadian Affected Unsecured Creditors, Deutsche Bank and all other non-Canadians holding such shares will not be able to cast more than 25 percent of the votes at ACE's meetings of shareholders and, as a result, will not be in control at such meetings. Having examined the Amended and Restated Standby Purchase Agreement and all other matters relating to this issue, the Agency concludes that non-Canadian Affected Unsecured Creditors and Deutsche Bank will not have the ability or the interest to control the affairs of ACE and its subsidiary entities.

[65] Pursuant to the Cerberus Agreement, Cerberus will invest CAD$250 million in ACE in exchange for ACE Preferred Shares. These Preferred Shares are convertible into Variable Voting Shares at any time. Cerberus is to be a long-term ACE equity partner and its ACE Preferred Shares or its ACE Variable Voting Shares cannot be sold for a period of two years (50 percent of the shares can be sold under certain circumstances). An initial conversion would result in Cerberus holding approximately 9 percent of the fully diluted equity of ACE. The ACE Preferred Shares have attached to them detailed conditions dealing with such matters as conversion price, mandatory conversions and mandatory redemptions. These provisions have been reviewed by the Agency.

[66] Cerberus is a New York-based private investment firm which manages billions of dollars of capital. This capital is invested in holdings in the United States of America, Canada and elsewhere. Its equity investments are typically focused on underperforming, financially distressed companies exhibiting the potential for business improvements. The Agency concludes that the Cerberus investment in ACE is a normal and routine business transaction for the asset management firm.

[67] The Agency is of the opinion that Cerberus will influence the affairs of ACE and its subsidiary entities. That is the intent. As previously stated, such influence will primarily be exercised at meetings of the ACE Board of Directors by its representative members. As a result of the equity investment, influence will no doubt also be exercised through various consultative processes with ACE and its subsidiary entities. Cerberus will be subject to the same voting restrictions at the meetings of shareholders of ACE as are the other non-Canadians. The Agency has examined the Cerberus Agreement and it concludes that the Cerberus influence will not be dominant or determining and will not result in Cerberus being able to exercise control over the affairs of ACE and its subsidiary entities.

[68] A large majority of the ACE economic interest will initially be held by non-Canadians. It could be argued that normally such large non-Canadian holdings by themselves would likely result in non-Canadian control. The ACE circumstances are unusual and not typical. As part of the CCAA proceedings and in settlement of claims, a large percentage of ACE equity ownership will be held by Affected Unsecured Creditors, the majority of which happen to be non-Canadian. As a result of important refinancing and capitalization requirements, such Affected Unsecured Creditors have been offered rights to purchase additional ACE shares and such have been underwritten by Deutsche Bank, a non-Canadian. The Agency has given consideration to these unusual and special circumstances when conducting its Canadian ownership review.

[69] Air Canada maintains that, over time, a substantial percentage of ACE shares will flow back to Canadians in terms of ownership. The Agency finds these arguments convincing. It is likely that the large ACE economic interest owned by non-Canadians will substantially decrease in the short or medium term.

[70] Lastly, the Agency notes that the economic interests held by non-Canadians have no special rights or privileges that would enable them to exercise control in fact over ACE and its subsidiaries.

[71] For all of the above reasons, the Agency finds that the large ACE economic interest owned by non-Canadians does not result in ACE and its subsidiaries falling under non-Canadian control.

The debt structure of ACE and its subsidiaries and the influence of non-Canadian lenders

[72] It is not unusual for air carriers to finance aircraft acquisitions through foreign financial institutions. The financing of aircraft has an international aspect to it and an attempt to impose a Canadian financing requirement on air carriers would result in severe and unacceptable restrictions. Aircraft financing can occur in conjunction with the lease, capital lease or purchase of aircraft. Major aircraft manufacturers can have related financial institutions that provide financing for the aircraft to be acquired.

[73] Aircraft financing agreements and other financial agreements that are entered into by air carriers and large financial institutions contain many standard provisions. Such agreements normally contain security, covenants, default and other provisions that place restraints on and influence air carriers. The agreements, however, do not normally result in financial institutions controlling air carriers. Financial institutions normally have no such interest. Among other matters, they are interested in placing secure loans.

[74] Financing agreements and associated lease, capital lease and aircraft purchase agreements can, however, contain provisions that potentially could result in the lender gaining control over the affairs of an air carrier. This is most likely to occur when the lender and borrower are not operating on an arm's length basis or when the lender is not a financial institution. It is for this reason that the Agency examines documents of this type for control in fact implications.

[75] General Electric has been and will continue to be the key financier of Air Canada and of ACE and its subsidiaries upon emergence from the CCAA proceedings.

[76] Air Canada has obtained DIP financing from General Electric during the CCAA proceedings. Under DIP financing, Air Canada obtained a secured revolving credit facility from General Electric made up of a credit advance facility and a letter of credit facility with a maximum combined borrowing of up to US$700 million. As of May 31, 2004, CAD$300 million was drawn against the credit advance facility and letters of credit totalling CAD$20 million were issued against the letter of credit facility. On day one following the emergence from the CCAA proceedings, the DIP financing is to be converted to a loan under General Electric exit financing arrangements with ACE.

[77] General Electric leases, manages the leases of, or otherwise has an interest in, approximately one-third of Air Canada's aircraft fleet and it has entered into the GRA with Air Canada.

[78] The GRA provides for the restructuring of leases for all General Electric-owned and General Electric-managed aircraft. The GRA provides for the restructuring of 106 operated, parked and undelivered aircraft. Included are lease rate reductions on 51 aircraft, cash flow relief for 29 aircraft, termination of obligations with respect to 20 parked aircraft, the cancellation of four future aircraft lease commitments and the restructuring of the overall obligations with respect to two aircraft.

[79] The GRA also provides for exit financing in an amount of approximately US$681 million for use by ACE upon emergence from the CCAA proceedings. These financing arrangements are specified in the comprehensive Exit Facility on file with the Agency.

[80] The Exit Facility is comprised of a US$425 million non-revolving multicurrency term loan facility (Loan A), an approximate US$160 million non-revolving multiple draw credit facility (Loan B) and an approximate US$96 million term loan facility (Loan C) which will be used to fund the purchase of the two Boeing 747-400 aircraft from General Electric. Loan A and C are to be advanced in one draw upon emergence from the CCAA proceedings. Loan A matures on March 31, 2011 and no principal payments are required until June 30, 2007. Draws on Loan B are to be made in accordance with a specific schedule and Loan B matures on March 31, 2013 with principal repayments commencing on March 31, 2009. Loan C matures on September 30, 2008 and principal payments begin on December 31, 2004. The Exit Facility is secured against substantially all of the assets of ACE and its subsidiaries. The Exit Facility also contains a number of liquidity, EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rent) and collateral financial covenants as well as restrictive covenants.

[81] The GRA also provides for the financing in an amount of up to US$950 million to fund the acquisition of new regional jet aircraft in the context of Air Canada's new product strategy. Such financing arrangements are specified in the RJ Financing Agreement. The funds may be used in connection with up to 25 operating leases provided that the aircraft models and types are acceptable to General Electric with the remainder to be provided in the form of debt financing.

[82] Agreements, and their amendments, in respect of the above have been provided to the Agency on a confidential basis. Accordingly, such are not further summarized in this Decision. All of these documents have been reviewed in detail by the Agency during the course of its ownership and control review.

[83] By way of the Exit Facility and the RJ Financing Agreement, General Electric has or proposes to provide substantial corporate and aircraft financing to ACE and its subsidiaries.

[84] The Plan discloses that as part of its new fleet strategy, Air Canada proposes to purchase new aircraft with a total cost approximating US$2 billion dollars. Air Canada proposes to purchase aircraft from Bombardier, Embraer, Airbus and perhaps others. Air Canada has received confirmation from Embraer that the aircraft manufacturer has secured financing on commercial terms satisfactory to Air Canada for certain Embraer aircraft. Additionally, Air Canada has received confirmation from Bombardier Inc. that the aircraft manufacturer had received financing on satisfactory commercial terms to Air Canada for the carrier's entire firm order of Bombardier aircraft. Air Canada and Airbus have reached an agreement that provides for the purchase of two Airbus A340-500 aircraft and their financing. Based on the above, the Agency notes that General Electric is not to be the sole financial service provider for ACE and its subsidiaries.

[85] In considering this matter, the Agency has given weight to the fact that General Electric is not a foreign air carrier and that it has an arm's length relationship with ACE and its subsidiaries. General Electric is a diverse enterprise and one of its major business activities is commercial financing including the financing of aircraft. Its actual and proposed business relationships with ACE and Air Canada do not appear to be unusual. The Agency is of the opinion that General Electric's size and financial strength, by itself, will not result in it being able to exert undue influence over the affairs of ACE and related entities as the various agreements will primarily determine the relationship between the parties. Having examined the agreements that General Electric has entered into and proposes to enter into, the Agency concludes that such are reflective of an arm's length relationship. The agreements also reflect marketplace terms and conditions.

[86] Certain of the new financing agreements to be entered into with General Electric contain restrictive covenants which affect and, in some cases, significantly limit or prohibit, among other matters, ACE's and its subsidiaries' ability to incur indebtedness, make prepayments of certain indebtedness, create liens, sell assets, make capital expenditures and engage in acquisitions, mergers, amalgamations and consolidations. Additionally, certain of the agreements require ACE and Air Canada to maintain certain financial ratios. If ACE or Air Canada fails to comply with the various covenants of its indebtedness, it will be in default under the terms thereof, which could permit holders of such indebtedness to accelerate the maturity of such indebtedness and could cause defaults under other indebtedness or agreements. In such circumstances, General Electric could foreclose upon all or substantially all of the assets of ACE and its subsidiaries, which secure the obligations of ACE and Air Canada.

[87] With respect to the above, the Agency notes that General Electric is not in a position to control proceedings at meetings of shareholders of ACE nor at meetings of the ACE Board of Directors. General Electric has no veto rights over the appointment of ACE officers and it does not have the right to approve ACE's business plans. It has no control over day-to-day operations and cannot decide where the air carriers operate, the frequency of such operations and the fare structures associated therewith.

[88] The Agency is of the opinion that the covenants and other requirements contained in the agreements are intended to protect General Electric's financial interest in ACE and its related entities and to protect the collateral that underpins the loans. They are not intended to control the affairs of the borrower. The Agency concludes that the covenants are, as are the agreements themselves, reflective of an arm's length relationship and of marketplace terms and conditions.

[89] It is clear to the Agency that the financial relationships that exist or are to exist will result in General Electric exerting substantial influence over the affairs of ACE and its related air carriers. The Agency concludes, however, that such influence will not be dominant or determining and will not result in General Electric being able to exercise control in fact.

Other matters relating to control

[90] As in previous cases, the Agency has not only looked at individual arrangements to determine where control in fact lies but has also examined all arrangements taken together to make the determination. The Agency concludes that there is no evidence to indicate that Deutsche Bank, Cerberus and General Electric are acting jointly or in concert with each other. Even if the parties acted jointly, however, the Agency is of the opinion that the nature of the individual influence is such that it could not be combined and augmented so as to result in them being able to jointly exercise control in fact over the affairs of ACE and its subsidiaries.

CONCLUSION IN RESPECT OF THE CANADIAN OWNERSHIP AND CONTROL REQUIREMENT

[91] Having examined all of the Canadian ownership and control in fact evidence, both individually and collectively, the Agency is satisfied that upon emergence from the CCAA proceedings, ACE, Air Canada, Air Canada Jazz and Air Canada Cargo will be incorporated or formed under the laws of Canada or a province and will be controlled in fact by Canadians. Additionally, at least 75 percent of their voting interests will be owned and controlled by Canadians. Accordingly, the Agency concludes that ACE, Air Canada, Air Canada Cargo and Air Canada Jazz will be Canadian as defined in subsection 55(1) of the CTA.

[92] ACE and its related air carriers must ensure compliance with the Canadian requirement, along with all other licensing requirements, on an ongoing basis. The Agency will monitor the affairs of ACE and its related air carriers to ensure such compliance. ACE has provided certain undertakings to the Agency on a confidential basis to assist the Agency in this function. As well, the Agency will ensure that the Plan and all other organizational proposals including all arrangements with Deutsche Bank, Cerberus and General Electric are consummated as proposed and have not changed in any material or substantial way from that reported to the Agency. To this end, the Agency ordered ACE, in Decision No. LET-A-247-2004 dated September 3, 2004, to file with the Agency, upon signing, all the final closing documents including final and signed agreements and other documentation implementing these proposals.

[93] As part of ACE's filing pursuant to the Agency Decision and in advance of the meeting of shareholders of ACE to be held sometime during 2005, the Agency will examine the proposed form of declaration of Canadian status and the full and complete process to be utilized by ACE at meetings of shareholders to ensure compliance with the voting right provisions. In providing such advance disclosure, ACE is to provide the proposed form of declaration and process as soon as practicable and not less than sixty (60) days prior to the first meeting of shareholders.

[94] Lastly, the Agency will monitor ACE Board of Director matters to ensure ongoing compliance with the Canadian ownership and control requirement.

OTHER LICENCE RELATED MATTERS

[95] Lastly, with respect to the applications by Air Canada and Air Canada Cargo in respect of proposed operations by Air Canada Jazz and Air Canada Cargo, the Agency will deal with these applications separately.

[96] This Decision takes effect on September 3, 2004, the date on which its content was communicated by Decision No. LET-A-247-2004.

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