The Power of Perspectives

The Canadian Bar Association

Kim Covert

Bill C-49 sends mixed messages to foreign investors

March 27 2018 27 March 2018

 

You can attract flies with honey, but if you stand there swatting at them they might not stick around.

That’s essentially the message from the CBA’s Air and Space Law Section in response to Bill C-49, which would increase foreign ownership limits of air carriers.

As it stands, in order to qualify as “Canadian” and operate a domestic or international air service, foreign ownership and de facto control of the corporation is limited to 25 per cent of the voting interest.

In order to attract more foreign investment and encourage growth in the aviation sector, the government is proposing to increase the level of foreign ownership allowed in the Canadian market to 49 per cent from 25 per cent.

But at the same time it’s adding a couple of caveats that might have the effect of driving that investment away again: no single non-Canadian may hold more than 25 per cent of the voting interests, either individually or in affiliation with another person in a Canadian air operator, and foreign investors may not, in the aggregate, hold more than 25 per cent of the voting interests in a Canadian air operator. The de facto control requirement therefore remains.

The Air and Space Section says these caveats, or sub limits, could “erode any stimulus that the liberalization of foreign investment limits may have generated,” for two reasons: blocking fundamental changes to a corporation requires approval of at least one-third of shareholders, so limiting ownership to 25 per cent means that enhanced shareholder protection isn’t available to that investor. As well, Canadian carriers looking to gain network connectivity, operational support and competitive access to support services may not be able to attract interest from a foreign carrier seeking a bigger ownership stake or more influence than the law would allow.

“Since the de facto control test remains in place and the Agency makes this determination after a detailed analysis to protect against undue foreign influence, the proposed sub-limits on foreign ownership are of debatable value and may in fact be counterproductive to the amendments’ objective,” the Section writes. “It is difficult to see how the sub limits enhance Canadian control requirements.”

The Section recommends reviewing the definition of “Canadian” and considering either dropping the sub-limits or clarifying the extent to which unaffiliated entities can agree to cooperate, where that cooperation would not result in the exercise of control by foreign interests.

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