Decision No. LET-A-5-2023

Background

[1] Volatus filed an application with the Agency on November 24, 2022, for a domestic licence to operate an air service using drones.

[2] In order to be issued a licence to operate a domestic service, an air carrier must satisfy the Agency that it meets all of the requirements of section 61 of the CTA, including the requirement to be Canadian, as defined in subsection 55(1) of the CTA. This is a requirement that must be complied with at all times.

The law and guidance material

[3] Pursuant to subparagraph 61(a)(i) of the CTA, the Agency shall issue a domestic licence to a Canadian.

[4] 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.

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

Analysis

[6] 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.

[7] 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.

Incorporation or Formation Requirement

[8] For an entity to be Canadian, it must be formed or incorporated under the laws of Canada or one of its provinces. Volatus is incorporated under the Ontario Business Corporations Act and, as such, meets the incorporation requirement.

Voting Interest Requirement

[9] 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 holding and controlling more than 25% of the voting interests, directly or indirectly, whether individually or in affiliation with another person.

[10] Volatus is a publicly listed company trading on the TSX Venture Exchange. Ian McDougall and Glen Lynch, both Canadians, each own 34% of the voting shares of Volatus. The remaining 32% of the shares are owned by more than 1,000 investors.

[11] Canadian shareholders currently control at least 68% of voting shares. In order for a non-Canadian to control more than 25% of Volatus’ voting shares, close to all of the remaining outstanding publicly traded shares would need to be owned and controlled by non-Canadians and those non-Canadians would need to be affiliated with each other. Likewise, in order for non-Canadians that are authorized to provide air services to own and control more than 25% of Volatus’ voting interest, close to all of the remaining outstanding publicly traded shares would need to be owned and controlled by non-Canadian air service providers in their own right or in affiliation with other non-Canadians.

[12] Given that no non-Canadian shareholder owns more than 1% of the voting interests and that the shares are traded through a Canadian stock exchange, there is no realistic scenario in which a single non-Canadian shareholder or group of air service providers, whether individually or in affiliation with other non-Canadian shareholders, owning greater than 25% of voting shares.

[13] However, as a publicly traded company, its percentage of voting interests owned by Canadians can be subject to constant fluctuations. As indicated in the Guide, to ensure that publicly traded companies are and continue to meet the ongoing requirement to be Canadian, the Agency requires them to put in place one of the following:

I. 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

II. 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] While the Agency is satisfied that Volatus currently meets the voting interest requirement, the Agency finds that, until a security constraint and control system or variable voting share structure is put into place, Volatus could in the future cease to meet the voting interest requirement.

Control in fact Requirement

[15] The control in fact requirement is met when 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 lies with Canadians. The influence needs to be dominant or determining to be considered “control in fact”.

[16] As detailed in the Guide, 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.

[17] The Agency did not identify any shareholder rights that afford non-Canadians the ability to exercise control in fact, any indicators that non-Canadian shareholders have assumed the majority of the risks and/or are entitled to the majority of rewards related to Volatus’ operations, or any debt or other agreements that provide non-Canadians the ability to control in fact the company.

[18] However, in assessing Volatus’ corporate governance structure, the Agency finds that Volatus does not have the necessary controls in place over the election of board of directors and voting at shareholder and board of director meetings to demonstrate that it will always be controlled in fact by Canadians.

[19] The board of directors is elected by the shareholders to govern and manage the affairs of the corporation and, as such, the following conditions must be met for control in fact to be deemed as residing with Canadians:

• Canadian shareholders must have the right to appoint no less than half of the board of directors; and
• No less than half of the board members must be Canadian.

[20] Similarly, for a company to be considered as controlled in fact by Canadians, a corporation’s quorum provisions, which indicate the minimum number of members that must be present at a meeting for the meeting to be considered valid, must always require:

• no less than half of the shareholders or directors present at a shareholder or board of directors meeting be Canadian; and
• no less than half of the members at a board of directors meeting have been appointed by Canadian shareholders.

[21] The Agency finds that Volatus’ board is currently controlled by Canadians as all five appointed directors are Canadian, and Canadian shareholders, holding greater than 51% of the voting interest, elected the current directors.

[22] However, Volatus did not demonstrate that Canadian shareholders will always have the right to appoint a majority of the directors. As an example, for companies that trade publicly, a share constraint system, such as a variable voting regime, can ensure that Canadians always have the ability to cast at least 51% of the votes at any shareholders’ meeting, including for the election of directors.

[23] Further, Volatus does not 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.

[24] While the Agency is of the view that the current board of Volatus is controlled by Canadians, the Agency finds that Volatus is required to amend its articles or by-laws to ensure that the board will always continue to remain Canadian.

Conclusion

[25] The Agency finds that Volatus is Canadian, as defined in subsection 55(1) of CTA, on the condition that Volatus implements a security constraint and control system or variable voting share structure, and requirements for majority Canadian representation on the board. The Agency orders Volatus to demonstrate compliance with these requirements by February 12, 2024.

[26] All correspondence and pleadings should refer to case 22-64704 and be filed through the Agency’s Secretariat email address: secretariat@otc-cta.gc.ca.