Letter Decision No. LET-A-33-2020

BACKGROUND

The CTA requires air carriers holding domestic licences issued by the Canadian Transportation Agency (Agency) to be Canadian, as defined in subsection 55(1) of the CTA. This is a requirement that must be complied with at all times.

On June 27, 2019, Air Canada and Transat entered into an Arrangement Agreement, under which Air Canada proposes to acquire all of the outstanding shares of Transat.

On August 26, 2019, the Minister of Transport informed Air Canada and Transat that the proposed transaction raises issues with respect to the public interest. Pursuant to section 53.3 of the CTA, the Agency must therefore determine if the transaction would result in an undertaking that is Canadian.

Air Canada is a publicly traded air carrier that holds Agency licences. Transat is publicly traded and the parent company to Air Transat A.T. Inc. (Air Transat), which holds Agency licences.

THE LAW AND GUIDANCE MATERIAL

Pursuant to subsection 55(1) of the CTA, Canadian means:

1. a Canadian citizen or a permanent resident as defined in subsection 2(1) of the Immigration and Refugee Protection Act,
2. a government in Canada or an agent or mandatary of such a government, or
3. 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.

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, “Application Process for Canadian Ownership Determinations for Air Transportation”.

ANALYSIS AND DETERMINATION

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.

The first requirement is met if the company is incorporated or formed under the laws of Canada or one of its provinces. 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. 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”.

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.

Air Canada

Incorporation or Formation Requirement

For an entity to be Canadian, it must be formed or incorporated under the laws of Canada or one of its provinces. Air Canada is incorporated under the Canada Business Corporations Act.

Voting Interest Requirement

Air Canada’s variable voting share structure ensures that Canadians will always cast at least 51% of the votes at any shareholders’ meeting and that any individual non-Canadian or group of non-Canadian air service providers cannot cast more than 25% of the votes and, therefore, the requirement is met.

Control in Fact Requirement

The Board of Directors 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 of directors and (ii) at least half of the board members must be Canadian.

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

Air Canada’s by-laws require that a majority of its board be composed of Canadians and, for a quorum to be established, a majority of Canadian directors must be present. In this way, Canadians will always cast at least 51% of the votes at any shareholders’ meeting, including the election of directors.

As Air Canada is a publicly listed company, the Agency considered whether there are any non-Canadian shareholders that hold a large voting interest. There is no known non-Canadian shareholder that holds more than 6 percent of Air Canada’s issued and outstanding voting shares.

The majority of Air Canada’s debt is issued by major financial institutions or raised from public facilities that do not raise control in fact concerns.

Air Canada has entered into joint venture agreements with Lufthansa and United Airlines and with Air China, each a non-Canadian air carrier. The Agency reviewed the agreements which provide for the parties to cooperate on scheduling, revenue management, sales and marketing activities regarding covered routes, while retaining their individual corporate identities, brands and product offerings and did not identify any control in fact concerns.

In light of the foregoing, the Agency finds that Air Canada is controlled in fact by Canadians.

Transat/Air Transat

Air Canada anticipates finalizing the corporate structure of Transat shortly before closing the Transaction. Air Canada has, however, indicated that it expects that Transat will become a direct or indirect wholly-owned subsidiary of Air Canada and that Transat will be delisted from the TSX as promptly as practicable after completion of the Transaction.

Transat and Air Transat are incorporated under the Canada Business Corporations Act and, as such, meet the incorporation requirement. The Agency notes, however, that should Air Canada’s ownership of Air Transat be held indirectly through one or more subsidiary companies, each of these companies will also need to be formed or incorporated under the laws of Canada or one of its provinces.

Air Canada will ultimately own all of the voting and economic interest in Transat and, as Air Transat is wholly owned by Transat, both Transat and Air Transat will meet the voting interest requirement and will also meet the control in fact requirement, as long as their corporate governance structures provide for at least half of board members to be Canadian and for their quorum provisions to require no less than half of the directors present at any Board of Directors meeting be Canadian. As Air Canada has yet to finalize its post-acquisition corporate structure, the Agency is not able to confirm whether these governance factors would be met.

DETERMINATIONS

In light of the foregoing, the Agency determines that Air Canada is Canadian as defined in subsection 55(1) of the CTA. The Agency also determines that Air Transat will be Canadian after the proposed acquisition is completed on the conditions that any entities in the direct line of control:

1. meet the incorporation/formation requirement;
2. have provisions that ensure that no less than half of their board members, at any point, be Canadian; and
3. have quorum provisions that require no less than half of the directors present at any board of directors’ meeting be Canadian.

The Agency directs Air Canada to provide the appropriate incorporation or formation documents along with any by-laws that demonstrate compliance with the above, to the Agency, within sixty (60) days of the completion of the proposed transaction.