Letter Decision No. LET-A-44-2022

Background

[1] The 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] Onex Corporation (Onex) is a publicly traded company that, through its affiliates, owns and controls WestJet Airlines Ltd., the parent company to WestJet and Swoop Inc. (Swoop). The latter are air carriers that hold licences authorizing domestic, scheduled international, and non-scheduled international air services and that, accordingly, must be Canadian.

[3] On January 27, 2022, Onex, through its subsidiary companies, and Sunwing Travel Group Inc. (STGI) and its subsidiary companies entered into a Share Purchase Agreement under which an affiliate of WestJet Airlines Ltd. proposes to indirectly acquire all of the issued and outstanding shares of Sunwing (Proposed Transaction). Sunwing holds licences authorizing domestic, scheduled international, and non-scheduled international air services and, accordingly, must be Canadian.

[4] On April 8, 2022, in accordance with paragraph 53.1(1)(b) of the CTA, WestJet notified the Agency of the Proposed Transaction.

[5] On May 19, 2022, the Minister of Transport informed WestJet Airlines Ltd. that the Proposed Transaction raises issues with respect to the public interest. Under section 53.3 of the CTA, the Agency must, therefore, determine if the Proposed Transaction would result in an undertaking that is Canadian as defined in subsection 55(1) of the CTA.

[6] In Letter Decision LET-A-99-2019, released on December 10, 2019, the Agency found that when acquired by Onex, WestJet and Swoop would remain Canadian within the meaning of the CTA; and that as long as Mr. Gerry Schwartz, a Canadian, continues to hold at least 60% of the voting interests in Onex, Onex would remain Canadian. No changes that affect the Canadian status of WestJet, Swoop or their controlling entities have occurred since that decision.

[7] Sunwing is wholly owned by STGI, which is controlled by the Hunter family—Canadians who hold a 75% voting interest and a 51% economic interest in STGI. TUI, a non-Canadian, is a minority shareholder in STGI with a 25% voting interest and a 49% economic interest. In Decision 10-A-2010, released on January 13, 2010, the Agency found that all entities in the ownership chain of control over Sunwing are Canadian and that, therefore, Sunwing meets the Canadian requirement of the CTA.

Summary

[8] For the reasons set out below, the Agency determines that the Proposed Transaction would result in an undertaking that is Canadian.

The law

[9] Under 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.

[10] Canadian status determinations are based on the Agency’s application of the definition of “Canadian” found in the CTA to information that an applicant provides about matters such as its corporate ownership structure, governance, service agreements, debt and equity. This application of the statutory definition to information submitted is assisted by the considerations laid out in the Guide to Canadian Ownership and Control in Fact for Air Transportation (Guide).

Analysis and determination

[11] 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.

[12] Where the ownership of the licence holder resides with one or more entities, the definition of Canadian is also applied to each of those entities. If, in turn, they are owned by other entities, the Agency must determine who controls the company up to the top of the ownership chain, applying the definition of Canadian at each level of the corporate ownership structure.

[13] The company at the top of the ownership chain that will ultimately hold a majority interest in the voting rights of WestJet, Swoop and Sunwing is Onex. Onex, through its subsidiary company, Kestrel Holdings Inc. (Kestrel Holdings), has voting control of Kestrel Topco Inc. (Topco). Topco will own and control Kestrel Topco Sub Inc. (Topco Sub), which will own and control WestJet Airlines Ltd., which will ultimately own and control WestJet, Swoop and Sunwing. The Agency assessed whether Onex and all of the other entities in the ownership chain that could control WestJet, Swoop and Sunwing are Canadian.

Incorporation or formation requirement

[14] For an entity to be Canadian, it must be incorporated or formed under the laws of Canada or of one of its provinces. All entities to be in the ownership chain of control—including WestJet, Swoop and Sunwing—will be incorporated under either the Ontario Business Corporations Act,^{Note 1}< the Alberta Business Corporations Act^{Note 2} or the Canada Business Corporations Act.^{Note 3} Therefore, the incorporation requirement is met.

Voting interest requirement

[15] The second 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.

[16] Mr. Schwartz, a Canadian, owns and controls, through a group of wholly owned private companies, 100% of the Multiple Voting Shares in Onex. These shares carry a 60% voting interest in Onex; therefore, the requirement that at least 51% of the voting interests be owned and controlled by Canadians is met.

[17] Onex’s Subordinate Voting Shares (SVS), which are publicly traded on the Toronto Stock Exchange, account for the remaining 40% of the total voting interests in Onex. For a shareholder, other than Mr. Schwartz, or a group of shareholders to own and control 25% or more of the voting interests in Onex, they would need to own and control 62.5% or more of the outstanding publicly traded SVS.

[18] Given that no non-Canadian shareholder owns more than 10% of the voting interests and that the SVS are traded through a Canadian stock exchange, there is no realistic scenario in which Canadians—including Mr. Schwartz, the Onex directors and executives, and investors—would own and control less than 75% of Onex’s voting interests.

[19] The Agency is satisfied that Onex meets the requirement that no more than 25% of Onex’s voting interests are owned directly or indirectly by any individual non-Canadian or by one or more non-Canadians authorized to provide an air service, either individually or in affiliation with another person.

[20] Kestrel Holdings will be wholly owned by Canadians, with Onex holding the majority of its voting interests. Kestrel Holdings will hold 99.9% of the voting interests in Topco. Topco will wholly own and control Topco Sub, which will wholly own and control WestJet Airlines Ltd., which will ultimately wholly own and control WestJet, Swoop and Sunwing. Consequently, the Agency is satisfied that the voting interest requirement would be met.

Control in fact requirement

[21] The third requirement typically entails the most analysis. Control in fact is 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. The influence needs to be dominant or determining to be considered “control in fact”.

[22] The Guide explains the factors the Agency considers in assessing control in fact: corporate governance; shareholder rights; risks and rewards; and business affairs and activities.

[23] The Agency considers and weighs all facts together to make a determination. Control does not need to be exercised for a person to have control in fact. When a person has the ability to control, whether they use it or not, they are considered to have control in fact.

(i) Corporate governance

[24] Corporate governance relates to whether non-Canadians are able to influence decision-making through the board of directors (board) or officers of the company, and whether quorum provisions for shareholder and board meetings could allow non-Canadians to control decision-making.

[25] The board is elected by the shareholders to govern and manage the affairs of the corporation. For control in fact to reside with Canadians, (i) Canadian shareholders must have the right to appoint no less than half of the board; and (ii) at least half of the board members must be Canadian.

[26] The Agency generally expects a corporation’s quorum provisions to require (i) no less than half of the shareholders or directors present at a shareholder or board meeting to be Canadian, and (ii) no less than half of the members at a board meeting to have been appointed by Canadian shareholders.

[27] Mr. Schwartz holds at least 60% of the voting interest in Onex, is in a position to exercise voting control at Onex’s shareholders’ meetings, and is entitled to nominate 60% of Onex’s board. Onex’s board consists of 12 directors, 8 of whom are Canadian.

[28] Onex’s quorum provisions for board meetings require that 40% of directors be present. Accordingly, it is possible to form a quorum where the majority are non-Canadian. Moreover, in the event of a tie, Onex’s by-laws require that the Chair cast the deciding vote, but do not specify that the Chair must be Canadian.

[29] In light of this, to ensure that decisions made by Onex’s board in respect of WestJet and Swoop are made by a group of directors that is in majority Canadian, Onex’s by-laws were amended as a condition of the Decision LET-A-99-2019. As a result, the quorum rules for any board meeting require that a majority of directors voting on or signing a written resolution in respect of WestJet Airlines Ltd., WestJet or Swoop be Canadian.

[30] While the Onex by-laws satisfy the requirement that affairs of WestJet and Swoop handled by the board be conducted by a group of directors that is in majority Canadian, they are insufficient in scope as they do not include Sunwing. A change to Onex’s by-laws is required to ensure decisions regarding Sunwing are made by a group of directors that is in majority Canadian.

[31] Kestrel Holdings, Topco, Topco Sub and the entities it is to control each have provisions in place to ensure that a majority of their boards will at all times be Canadian and that the quorum rules for their board meetings will require a majority of the directors present be Canadian.

(ii) Shareholder rights

[32] The Agency considers several factors when assessing whether shareholders have the power to exert influence over a company’s decisions. Veto rights allow a shareholder to reject a resolution despite the resolution having majority assent of the voting shareholders. Veto rights that enable non-Canadians to veto matters related to day-to-day operations typically raise control in fact concerns. Other shareholder rights, like security or pre-emptive rights, raise control in fact concerns when they are disproportionate with the shareholdings in favour of non-Canadians.

[33] Non-Canadians will have no rights as a result of the Proposed Transaction that enable them to veto decisions related to the day-to-day operations of WestJet, Swoop or Sunwing, and all other shareholder rights will apply to all shareholders in proportion to their ownership percentages. Consequently, shareholder rights do not raise concerns with respect to non-Canadian control in fact.

(iii) Risks and rewards

[34] The Agency generally expects that the parties that assume the majority of the risks and are entitled to the majority of benefits are also the parties with the ability to exercise control in fact.

[35] Kestrel Holdings holds 99.9% of the voting interests in Topco. However, the economic interest as well as the other 0.1% of the voting interest in Topco is held by Onex Kestrel Inc. (Onex Kestrel), OPV Kestrel Aggregator LP (Kestrel Aggregator) and a number of Canadian private investors. Onex Kestrel and Kestrel Aggregator are not Canadian.

[36] Onex Kestrel is 100% indirectly owned and controlled by Onex. Onex Kestrel is considered to be non-Canadian solely because, in the ownership chain, it is wholly owned by a subsidiary of Onex that is not incorporated under the laws of Canada or of one of its provinces.

[37] Kestrel Aggregator is a limited partnership that is not formed under the laws of Canada or of one of its provinces. Through Kestrel Aggregator, third parties, including non-Canadians, invest in WestJet through limited partnerships. Each of the limited partnerships is controlled by a general partner, itself a limited partnership that is wholly owned and controlled by Onex. The investors in the limited partnerships have limited rights consistent with being passive investors who have no ability to exercise control over any of the limited partnerships, including Kestrel Aggregator.

[38] Consequently, the Agency is satisfied that these non-Canadians will not be in a position to influence the affairs of Topco.

[39] Non-Canadians will have a nominal economic interest in Topco Sub and its affiliates. However, they will have no voting interest and will not be in a position to influence the management of the companies.

(iv) Business affairs and activities

[40] The Agency considers whether contractual agreements between the air carrier and non-Canadians enable non-Canadians to exert control over the air carrier, and whether the air carrier is dependent on non-Canadians for financing or airline knowledge and expertise.

[41] The Share Purchase Agreement provides for WestJet to enter into hotel supply and destination management services agreements with entities whose investors include TUI AG, a non-Canadian that will indirectly hold non-voting shares and a nominal economic interest in Topco Sub. The agreements reflect the continuation of existing agreements between Sunwing and these entities, and would account for only a nominal portion of the combined operations of WestJet, Swoop and Sunwing. These management services agreements do not confer the ability to exercise control in fact.

Determination

[42] The Agency determines that the undertaking resulting from the Proposed Transaction would be Canadian, as defined in subsection 55(1) of the CTA. However, the Agency’s determination is conditional on Onex amending its by-laws, at the earliest opportunity, and no later than one hundred eighty (180) days after the closing of the Proposed Transaction. This is to ensure that the quorum rules for any board of directors’ meeting require a majority of directors voting on or signing a written resolution in respect of Sunwing be Canadian. The Agency’s determination is also conditional on the Proposed Transaction being executed as filed, in all material aspects.

[43] The Agency directs WestJet to provide to the Agency a copy of all executed final agreements, within ninety (90) days of the completion of the Proposed Transaction.

[44] All correspondence and pleadings should refer to Case  22-14291 and be filed through the Agency’s Secretariat email address at secretariat@otc-cta.gc.ca.

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