Determination No. A-2022-18
APPLICATION by Drone Delivery Canada Corp. (DDC) for an advance Canadian status determination.
BACKGROUND
[1] The Canada Transportation Act, SC 1996, c 10 (CTA) requires that air carriers holding certain licences issued by the Canadian Transportation Agency (Agency) be Canadian, as defined in subsection 55(1) of the CTA. This is a requirement that must be complied with at all times.
[2] On September 9, 2020, DDC applied to the Agency for a licence to operate a domestic service, all-cargo aircraft, using drones.
[3] On November 17, 2020, the Agency issued Determination A-2020-187 (Determination) regarding DDC’s Canadian status and requiring DDC to show cause by January 15, 2021, why the Agency should not confirm its findings that the voting interest and control in fact requirements are not met. In the Determination, the Agency found that:
- as a publicly traded company, DCC’s percentage of voting interests owned by Canadians is subject to constant fluctuations and, consequently, until a security constraint and control system or a variable voting share structure is put into place to ensure that DDC is and will continue to be in compliance with the voting interest requirement, at all times, DDC will not have met the voting interest requirement;
- DDC did not demonstrate that Canadian shareholders have the right to appoint a majority of the board of directors, and
- DDC did not have any provisions that provide for a quorum at shareholders’ and directors’ meetings to be formed only if there are a majority of eligible voting Canadians present.
[4] On June 22, 2021, the Minister of Transport granted DDC a temporary exemption from the application of the Canadian requirement set out in subparagraph 61(a)(i) of the CTA. The exemption expires on June 22, 2022.
[5] On July 21, 2021, in Determination A-2021-115, the Agency issued to DDC a temporary licence to operate a domestic service using all-cargo aircraft. The licence expires on June 22, 2022.
[6] On November 26, 2021, DDC applied to the Agency for an advance Canadian status determination on whether, upon the implementation of its proposed Amended and Restated Articles, DDC would be determined to be Canadian.
[7] The Agency will consider whether the new information provided by DDC addresses the concerns raised in the Determination.
THE LAW AND GUIDANCE MATERIAL
[8] Pursuant to subparagraph 61(a)(i) of the Act, DDC must be Canadian to operate a domestic service.
[9] Pursuant to subsection 55(1) of the CTA, Canadian means:
(a) a Canadian citizen or a permanent resident as defined in subsection 2(1) of the Immigration and Refugee Protection Act,
(b) a government in Canada or an agent or mandatary of such a government, or
(c) a corporation or 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 51% of the voting interests are owned and controlled by Canadians and where
(i) no more than 25% of the voting interests are owned directly or indirectly by any single non-Canadian, either individually or in
affiliation with another person, and
(ii) no more than 25% of the voting interests are owned directly or indirectly by one or more non-Canadians authorized to provide an
air service in any jurisdiction, either individually or in affiliation with another person.
ANALYSIS
[10] Three requirements must be met for an air carrier to be considered Canadian: (1) the incorporation or formation requirement, (2) the voting interest requirement, and (3) the control in fact requirement.
Incorporation and formation requirement
[11] For an entity to be Canadian, it must be formed or incorporated under the laws of Canada or one of its provinces. DDC is incorporated under the Business Corporations Act of British Columbia and, consequently, meets the requirement.
Voting interest requirement
[12] The voting interest requirement is satisfied if at least 51% of the voting interests in the company are owned and controlled by Canadians, with no single non-Canadian or group of non-Canadian air service providers directly or indirectly owning and controlling more than 25% of the voting interests, either individually or in affiliation with another person.
[13] In its Determination, the Agency indicated that, as DDC is a publicly listed corporation, the percentage of its voting interests owned by Canadians can be subject to constant fluctuations. In these situations, to ensure that publicly traded corporations are and continue to meet the ongoing requirement to be Canadian, the Agency requires them to put in place one of the following:
- a security constraint and control system that restricts any purchase or transfer of the corporation’s securities if it would result in a breach of the voting interest requirement; or
- a variable voting system whereby non-Canadians hold variable voting shares, such that when the percentage of the variable voting shares held by non‑Canadians exceeds the maximum allowable percentage of the total voting shares, the vote attached to each variable voting share automatically decreases to ensure that the maximum allowable threshold is not exceeded.
[14] DDC filed its proposed Amended and Restated Articles, which introduce a variable voting system, pursuant to which:
- Common voting shares will be issued to and held by Canadians and will entitle their holder to one vote per share.
- Variable voting shares will be issued to and held by non-Canadians and will entitle their holder to one vote per share, subject to the following adjustments to ensure Canadian control:
- If a single non-Canadian holder (alone or with an affiliate) was to own variable voting shares that exceed 25% of all outstanding
shares or could cast more than 25% of the votes at a meeting of shareholders, the voting rights attached to the variable voting
shares would decrease automatically so that the non-Canadian holders cannot cast more than 25% of the votes at any meeting of
DDC’s shareholders.
- If one or more non-Canadian holders authorized to provide air services, in any jurisdiction, either individually or in affiliation with
another person, own variable voting shares that exceed 25% of all of the outstanding shares or could cast more than 25% of the
votes at a meeting of shareholders of DDC, the voting rights attached to the variable voting shares would decrease proportionately
and automatically so that the non‑Canadian holders cannot cast more than 25% of the votes at any meeting of DDC’s shareholders.
- If one or more non-Canadian holders, along with any affiliates, were to own variable voting shares that exceed 49% of all of the
outstanding shares or could cast more than 49% of the votes at a meeting of shareholders, the voting rights attached to the variable
voting shares would decrease proportionately and automatically so that the non‑Canadian holders cannot cast more than 49% of the
votes at any meeting of DDC’s shareholders.
[15] The Agency finds that, should DDC put into place the voting interest provisions, as submitted, DDC will have addressed the concerns raised in its Determination and would meet the voting interests requirement.
Control in fact requirement
[16] The Agency considers control in fact to be the power, whether exercised or not, to control the strategic decision-making activities of an enterprise and to manage and run its day-to-day operations. Those with power to influence a company include minority owners, designated representatives, financial institutions and employees. If such influence is dominant or determining, then it is considered to be control in fact.
[17] The Agency considers the following four factors in assessing control in fact: i) corporate governance, ii) shareholder rights, iii) risk and rewards, and iv) business affairs and activities.
[18] The Agency, in its Determination, stated that it did not identify any concerns in respect of the shareholder rights, risks and rewards, and business affairs and activities factors. However, in assessing DDC’s corporate governance structure, the Agency found that DDC did not have the necessary controls in place to demonstrate that it is and will always be controlled in fact by Canadians. Specifically, DDC did not:
- demonstrate that Canadian shareholders have the right to appoint a majority of the directors; and
- have any provisions within its articles or other corporate governance documents that provide for a quorum at shareholders’ and directors’ meetings to be formed only if there are a majority of eligible voting Canadians present.
[19] DDC’s proposed Amended and Restated Articles put in place a variable voting system that would ensure that Canadian shareholders will always have the ability to cast at least 51% of the votes at any shareholders’ meeting, including for the election of directors. Consequently, Canadian shareholders will be in a position to appoint a majority of the directors.
[20] DDC’s proposed amendment, in its Amended and Restated Articles, for a quorum requires that the majority of the shareholders or directors present at a shareholders’ or board of directors’ meeting be Canadian for a meeting to take place.
[21] The Agency finds that DDC has addressed the concerns raised by the Agency in respect of the corporate governance factors and, consequently, DDC has met the control in fact requirement.
[22] In light of the foregoing, the Agency finds that DDC would be Canadian, as defined in subsection 55(1) of the Act, should it adopt the Amended and Restated Articles, as filed with the Agency.
[23] The Agency orders DDC to file with the Agency its approved Amended and Restated Articles that are, in all material respects, the same to those filed with the Agency on November 26, 2021, within 30 days of their approval and no later than June 1, 2022. The Agency will then, if staff are satisfied that there have been no material changes to the corporate documents, amend DDC’s licence accordingly to note that the requirement to be Canadian pursuant to subparagraph 61(1)(a) of the CTA is met. This will result in the licence no longer being temporary, and the licence expiration date of June 22, 2022, will be removed.
Member(s)
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