Letter Decision No. Épurée-Redacted-A-2010
CHC Helicopters Canada Inc. – Canadian Status
The Canada Transportation Act, S.C., 1996, c. 10, as amended (CTA), requires that air carriers operating or proposing to operate publicly available air services be Canadian within the meaning of subsection 55(1) of the CTA.
CHC Helicopters Canada Inc. (CHC Canada), by letter dated December 2, 2008, applied to the Canadian Transportation Agency (Agency) for a licence to operate the service set out in the title. CHC Canada proposes to purchase the Canadian helicopter operations of CHC Global Operations (2008) Inc. (CHC Global). Upon completion of the proposed transaction, 75 percent of the voting shares and 60 percent of the overall equity shares in CHC Canada will be owned by 7080751 Canada Inc. (Allard Holdco), whose sole shareholder is Sylvain Allard, a Canadian, with the balance of shares to be owned by CHC Global, a non-Canadian.
The proposed reorganization and asset purchase will be executed in two main steps:
- The assets of the Halifax helicopter business will be transferred from CHC Global to CHC Canada, including all interests, rights and obligations of CHC Global under the ExxonMobil contract that expires on September 30, 2010; and
- Allard Holdco will acquire a 75 percent voting interest and 60 percent economic interest in CHC Canada.
Further to its review of CHC Canada's complete application, the Agency, by confidential show cause letter dated July 21, 2010, identified questions and concerns with respect to the proposed transaction and afforded CHC Canada with thirty days to respond. CHC Canada responded to the Agency's letter, by confidential letter dated July 23, 2010 along with amendments and clarifications (the July 23 submission).
Canadian ownership and control requirement
Pursuant to subsection 55(1) of the CTA, a Canadian means "a Canadian citizen or a permanent resident within the meaning of subsection 2(1) of the Immigration and Refugee Protection 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."
In order to be Canadian, as defined under subsection 55(1) of the CTA, CHC Canada must be incorporated under the laws of Canada or a province and at least 75 percent of its voting interests must be owned and controlled by Canadians. CHC Canada must also be controlled in fact by Canadians.
The Agency has reviewed all of the submissions made by CHC Canada concerning its Canadian status, including the information contained in the application and all documentation in support.
Incorporation and voting interest requirement
The Agency is satisfied that CHC Canada is incorporated or formed under the laws of Canada or a province.
The voting interest requirement necessitates that at least 75 percent of CHC Canada's voting interests be owned and controlled by Canadians. The Agency finds that Allard Holdco, which is owned by Sylvain Allard, a Canadian, would ultimately own and control 75 percent of the voting interests in CHC Canada. The remaining 25 percent voting interests in CHC Canada would be owned by CHC Global, a non-Canadian. The Agency is satisfied that if the proposed transaction were to be effected as filed, at least 75 percent of the voting interests would be owned and controlled by Canadians.
Control in fact requirement
Control in fact is generally viewed by the Agency as the ongoing power or ability, whether exercised or not, to determine or 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 and employees. The influence, which can be exercised either positively or negatively by way of veto rights, needs to be dominant or determining, however, for it to translate into control in fact.
When determining where control in fact lies, the Agency examines all actual and proposed business and other relationships between the various shareholders, and between the shareholders and the company whose ownership is under review. All actual and proposed operational, managerial and financial relationships are considered. The intent and ability of individual shareholders to influence and control are considered. Agreements, such as shareholder agreements and commercial contracts between the shareholders and the company, are of special importance.
The Agency's analysis with respect to control in fact focussed on all actual and proposed business relationships between CHC Canada and its proposed shareholders and their related companies.
The Agency, in its analysis, focussed particularly on the following matters:
- Quorum at shareholders' meetings;
- Composition of the board of directors and quorum at directors' meetings;
- Matters requiring majority approval of directors;
- Distribution of dividends between individual shareholders;
- Matters requiring unanimous approval of directors: veto rights;
- Business relationships and agreements; and
- Intent and ability of individual shareholders to influence and control.
Quorum at shareholders' meetings
The proposed Amended By-Law No.1 of CHC Canada provides that a quorum at shareholders' meetings shall be, irrespective of the number of persons present, at least one individual present in person and holding or representing by valid proxy not less than 75 percent of the shares entitled to vote at such meeting. Given the proposed ownership structure of CHC Canada, the above quorum provision will ensure that resolutions at shareholders' meetings will require the affirmative vote of the Canadian shareholder, Allard Holdco, before they can pass.
Composition of the Board of Directors and quorum at directors' meetings
The proposed Unanimous Shareholders' Agreement (SA) between CHC Canada and its proposed shareholders provides that CHC Canada shall have three directors. The majority Canadian shareholder, Allard Holdco, is entitled to nominate two directors and CHC Global, the non-Canadian, shall be entitled to nominate one director. It also provides that, at all times, the majority of the board of directors of CHC Canada (Board) will be Canadians, who will be nominated by Allard Holdco. Further, the Chairman of the Board must be Canadian and must be nominated by the Canadian shareholder. It further provides that the number of directors shall not be increased without the parties to the proposed SA agreeing to do so. The Agency also notes that unless otherwise agreed to in writing by all of the directors of CHC Canada, a quorum for a meeting of directors shall consist of three directors, two of which shall be directors nominated by Allard Holdco.
Matters requiring majority approval of directors
The proposed SA provides that for the approval of, or any amendment to, the annual operating and capital expenditure budgets or the business plan of CHC Canada requires the majority approval of its directors. Similarly, any change in its signing officers, the appointment, hiring, and termination of its officers or other senior management as well as any material change to their compensation package will also require the majority approval of the directors of CHC Canada.
The Agency considers the approval of the annual operating and capital expenditure budgets or the business plan or the nomination of senior management to be important strategic components of operating a business. The ability to approve the annual operating and capital expenditure budgets or the business plan are important indicators of who is exercising control in fact. The Agency notes that the Canadian shareholder (Allard Holdco), through the Board, has the ability to approve the annual operating and capital expenditure budgets and the business plan of CHC Canada.
The ability to hire or nominate the senior management of the company is also an indicator of who exercises control in fact. The Agency notes that Allard Holdco, through the Board, has the ability to control the senior management of CHC Canada. The Agency further notes that the proposed officers of CHC Canada will all be Canadian, including Sylvain Allard, who will be President and Chairman of the company.
In light of the quorum rules, these key decisions will always require approval by a majority of the Board that will be nominated by Allard Holdco.
Distribution of dividends between individual shareholders
The Agency normally expects, consistent with control in fact resting in the hands of Canadians, that the majority of the benefits would also reside with the Canadian shareholder. The Agency notes that the SA provides for the majority (60 percent) of dividends to be paid to the Canadian shareholder.
Matters requiring the unanimous approval of directors: Veto rights
The Agency recognizes that all shareholders, including minority and non-Canadian shareholders, have a right and an obligation to protect their investment. This can be achieved by giving minority shareholders veto rights. A veto right allows a shareholder or a director to veto a resolution if they determine it would be detrimental to the corporation and the shareholder. Non-Canadian shareholders or their designated directors should be allowed veto rights to protect their investments. The veto rights, however, cannot be so comprehensive so as to bestow control over the company.
The Agency finds that certain matters in Appendix A to the proposed SA require the unanimous approval of the directors of CHC Canada, effectively providing each of Allard Holdco and CHC Global with veto rights.
The Agency, in its July 21, 2010 confidential show cause letter to CHC Canada, expressed concerns with the minority non-Canadian shareholder, CHC Global, having veto rights over certain decisions affecting the strategic direction or day-to-day operations of CHC Canada. CHC Canada, in its July 23 submission, responded addressing each of the Agency's concerns.
The Agency finds that the proposed changes adequately address the concerns it raised in the confidential show cause letter to CHC Canada.
Business relationships and agreements
The Agency considered the business relationships between CHC Canada, CHC Global and CHC Helicopter Corporation (CHC Corp) related companies, as well as the past relationships between the senior officers and senior management of CHC Canada and CHC Global.
The Agency notes that Sylvain Allard has formally retired from Heli-One Canada Inc., a CHC related company. The Agency also notes that Sylvain Allard no longer has any employment or similar agreements with any of the CHC related companies and that his compensation, as part of his retirement, was in accordance with his pre-established employment agreement. The Agency is of the opinion that these relationships do not present any control in fact issues.
The Agency also examined the proposed Aircraft Lease, Technical Support and Services Agreements and the Intellectual Property Licensing Agreement (agreements) between CHC Canada and CHC related companies. The Agency notes that these agreements are consistent with normal market terms and conditions and do not, in and of themselves, present any control-in-fact issues. The Agency recognizes, however, that CHC Canada, as is demonstrated through these agreements, may be dependent on CHC Global and its related companies for the provision of certain services and has taken this into account in forming its decision.
Intent and ability of individual shareholders to influence and control
The Agency examined whether CHC Global might have the motive and ability to exert significant influence over the affairs of CHC Canada. The Agency finds that CHC Global, through its large economic interest in CHC Canada, would have the motive to exercise its influence over CHC Canada's strategic direction and / or day-to-day operations.
The Agency considers the business activity of individual shareholders to be an indicator of which shareholders are in a position and / or have the ability to influence or possibly exercise control in fact. CHC Global is indirectly owned by CHC Corp, a provider of helicopter services to the offshore oil and gas industry, with approximately 250 aircraft operating in more than 30 countries worldwide. CHC Global's operation in Canada includes a contract with Exxon Mobil Canada Limited in support of its offshore oil and gas operations near Sable Island, Nova Scotia. The Agency finds that CHC Global has the required business expertise to influence CHC Canada's strategic direction and/or day-to-day operations.
The Agency also examined whether Allard Holdco, the majority Canadian shareholder, would have the intent and ability to influence the affairs of CHC Canada. The Agency notes that Sylvain Allard, through Allard Holdco, will acquire a 60 percent economic interest in CHC Canada. Furthermore, Mr. Allard has the business knowledge and expertise to operate the business and will oversee its management. The Agency finds that, under the proposed transaction, Allard Holdco will have the intent and the means to control CHC Canada.
The Agency finds that while CHC Global might have the motive and the business knowledge to exert significant influence over the affairs of CHC Canada, it does not have the means through which to exercise any intent in a dominant or determinative way, given the Agency's findings with respect to the other relevant control in fact matters addressed above.
The Agency has considered the above-noted factors, including the materials submitted to the Agency by CHC Canada, both individually and collectively, and concludes that if the proposed transaction were to be effected as filed, the relationships and provisions described above would not result in CHC Global being able to exert control over the affairs of CHC Canada.
Accordingly, the Agency has determined that CHC Canada would be Canadian as defined in subsection 55(1) of the CTA should the proposed transaction be completed as filed.
In filing the final signed and executed documents related to the proposed transaction, CHC Canada shall confirm that the transaction was effected as was proposed and has not changed in any material or substantial way from that described in the evidence presently on file with the Agency.
The Agency also requires that CHC Canada provide it with an undertaking, as signed by a director of CHC Canada, which provides that CHC Canada will file with the Agency, within thirty days, any further amendments to the SA and By-Law No.1.
This is a public redacted version of a confidential decision that issued on August 6, 2010 which cannot be made publicly available.