WestJet and Onex

[Guest]

Onex's Proposed Acquisition of WestJet and Swoop: Canadian Transportation Agency issues determination Français

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NEWS PROVIDED BY

Canadian Transportation Agency 

Dec 10, 2019, 17:30 ET

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GATINEAU, QC, Dec. 10, 2019 /CNW/ - The Canadian Transportation Agency (Agency) issued today its determination that  WestJet and Swoop Inc. would continue to meet the Canadian ownership and control requirements following the proposed acquisition of WestJet Airlines Ltd. by an affiliate of Onex.

The Agency's determination that WestJet and Swoop Inc. would remain Canadian is on the condition that Onex amends its by-laws to ensure that any matters pertaining to and affecting WestJet Airlines Ltd, WestJet and Swoop Inc, are voted on at Board of Directors' meetings where a majority of Canadian directors are present.

The Agency has directed Onex to provide copies of any document, previously submitted as draft, in their final executed form, within 60 days of the completed transaction.

The Agency reminded Onex that the requirement to be Canadian is an ongoing requirement, and that for WestJet and Swoop Inc. to remain Canadian, Onex must remain Canadian. WestJet and Swoop Inc. must notify the Agency of any change to their Canadian status.

Background

On May 31, 2019, Onex, a publicly-traded company and asset manager, filed an application with the Agency requesting an advance determination as to whether WestJet and Swoop Inc. would continue to meet the Canadian ownership and control requirements following the proposed acquisition. WestJet Airlines Ltd. is the parent company to WestJet and Swoop Inc., which hold Agency licences. Onex proposed to acquire 100% of the company through an affiliate company.

After careful deliberation, the Agency concluded that the proposed transaction satisfied Canadian ownership and control in fact requirements, as defined in the Canada Transportation Act (Act), subject to certain conditions.

As stated in the Act, carriers must be Canadian and controlled in fact by Canadians in order to hold a domestic licence.

For more information, consult the Agency's Guide to Canadian Ownership and Control in Fact for Air Transportation and frequently asked questions on air licencing.

About the Agency 

Canadian status determination for its proposed transaction with Onex

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NEWS PROVIDED BY

WESTJET, an Alberta Partnership 

Dec 10, 2019, 19:00 ET

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CALGARY, Dec. 10, 2019 /CNW/ - WestJet Airlines Ltd. (TSX: WJA) ("WestJet") WestJet Airlines Ltd. (TSX: WJA) ("WestJet") acknowledges the issuance today by the Canadian Transportation Agency of its Canadian status determination in respect of WestJet's proposed transaction with Onex Corporation ("Onex") (TSX: ONEX) and is in the process of reviewing the determination.

[Guest]

WestJet shareholders won’t get December dividend as Onex acquisition closes

BY STAFF THE CANADIAN PRESS

Posted December 11, 2019 10:56 am

WestJet Airlines Ltd. shareholders won’t be receiving a quarterly dividend this month after Onex Corp. announced the completion of WestJet and Onex say the payment won’t be made because the deal has closed before Dec. 18.

The airline’s board of directors had declared a 14 cents per share dividend on Oct. 28 to be paid on Dec. 31 to shareholders of record next week.

The Toronto-based private equity firm and its affiliated funds say the deal closed following a final regulatory approval Tuesday by the Canadian Transportation Agency that found WestJet continued to meet Canadian ownership and control requirements following its purchase by Onex.

Onex says its portion of the total equity investment is about $345 million as a limited partner and largest investor in Onex Partners V. It declined to disclose further terms of the transaction.

WestJet shareholders will receive $31 in cash for each share and the shares will be delisted from the Toronto Stock Exchange within a few trading days.

The Canadian Transportation Agency required Onex to amend its bylaws to ensure that matters related to WestJet be voted by the board of directors where a majority of Canadian directors are present.

Analyst Chris Murray of AltaCorp Capital says the transportation regulator’s conditions were “not unexpected but should be manageable.”

“While the review by the CTA has taken longer than our initial expectations, the determination that Onex needs to operate as Canadian as the parent company of Kestrel Bidco, the vehicle created to facilitate the takeover transaction, does not appear onerous,” he wrote in a report.

[MD2]

Good for them. Curious why Encore is not mentioned in that report?!

[Guest]

30 minutes ago, MD2 said:

Good for them. Curious why Encore is not mentioned in that report?!

 

The complete release can be viewed at: https://www.onex.com/static-files/ec52f08e-603a-499d-8353-37bd68e584e7

It includes the following: About WestJet The WestJet Group of Companies including regional airlines, WestJet Encore and WestJet Link, and ultra-low-cost carrier Swoop, offer scheduled service to more than 100 destinations in North America, Central America, the Caribbean and Europe and to more than 175 destinations in over 20 countries through our airline partnerships. WestJet Vacations offers affordable, flexible vacations to more than 60 destinations and the choice of more than 800 hotels, resorts, condos and villas. Members of the WestJet Rewards program earn WestJet dollars on flights, vacation packages and more. Members use WestJet dollars towards the purchase of flights and vacations packages to any WestJet destination with no blackout periods and have access to Member Exclusive fares offering deals to WestJet destinations throughout our network and those of our partner airlines. 

[QFE]

Not surprised about the dividend as ocx only pays 0.05% on their shares.

[Guest]

Here is the complete ruling:

Letter Decision No. LET-A-99-2019

December 10, 2019

 

Application by Onex Corporation (Onex) to the Canadian Transportation Agency (Agency) for a determination as to whether WestJet and Swoop Inc. would continue to meet the Canadian ownership and control requirements, as defined in the Canada Transportation Act, S.C., 1996, c. 10, as amended (CTA), following the proposed acquisition of WestJet Airlines Ltd. by an affiliate of Onex (proposed transaction).

 

Case number: 

19-02542

 

BACKGROUND

[1] The CTA requires air carriers holding domestic licences issued by the 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.

[2] On May 31, 2019, Onex filed an application with the Agency requesting an advance determination as to whether the proposed transaction would result in WestJet and Swoop Inc. continuing to be Canadian within the meaning of subsection 55(1) of the CTA.

[3] Onex is a publicly traded company and asset manager, founded in 1984 by Gerry Schwartz, who is Chairman and Chief Executive Officer. Onex proposes, through an affiliate company, to acquire 100% of WestJet Airlines Ltd.

[4] WestJet Airlines Ltd. is the parent company to WestJet and Swoop Inc., air carriers that hold Agency licences.

THE LAW AND GUIDANCE MATERIAL

[5] 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[.]

[6] 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

[7] There are three requirements that 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.

[8] 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”.

[9] 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.

[10] The company at the top of the ownership chain that will ultimately hold a majority interest in the voting rights of WestJet and Swoop Inc. will be Onex. Onex will, through a subsidiary company, Kestrel Holdings Inc. (Kestrel Holdings), have voting control of Kestrel Topco Inc. (Kestrel Topco), which will ultimately own and control WestJet and Swoop Inc. The Agency assessed whether Onex and all of the other companies and partnerships in the ownership chain that could have an ability to control WestJet and Swoop are Canadian.

[11] The Agency considered ownership information for the companies involved in the proposed transaction, as well as information provided through articles of incorporation, corporation by-laws, partnership agreements, debt agreements, shareholders’ agreements and other relevant information.

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. According to the Articles of Incorporation provided by the applicant, all corporations in the direct line of control of WestJet and Swoop Inc., as detailed later in the analysis, are incorporated under either the Ontario Business Corporations Act, the Alberta Business Corporations Act or the Canada Business Corporations Act.

Onex

Voting Interest Requirement

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

[13] 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.

[14] Mr. Schwartz presently owns approximately 12% of the SVS or an additional 4.8% of the voting interests in Onex. Canadian directors and executives of Onex are known to own another approximately 16% of the outstanding SVS, or an additional 6.4% of the voting interests, raising the percentage of the voting interest in Onex that is known to be owned and controlled by Canadians to 71.2%.

[15] Securities reporting requirements require shareholders that control securities that carry more than 10% of the voting interests of a publicly traded company to disclose their ownership interest. Mr. Schwartz is the only shareholder who has made such a report.

[16] In order for a non-Canadian to control more than 25% of Onex’s voting interests, close to all of the remaining outstanding publicly traded SVS 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 Onex’s voting interest, close to all of the remaining outstanding publicly traded SVS would need to be owned and controlled by non-Canadian air service providers in their own right or in affiliation with other non-Canadians.

[17] 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 – will own and control less that 75% of Onex’s voting interests.

[18] Consequently, 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. As such, Onex complies with the voting interest requirement, in all respects.

Control in Fact

[19] Mr. Schwartz holds at least 60% of the voting interest in Onex and is in a position to exercise voting control over Onex, including at shareholders’ meetings.

[20] The Agency did not identify any business relationships or information indicating that anyone other than Mr. Schwartz is in a position to exercise control in fact over Onex.

[21] 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. Mr. Schwartz, through his ownership of the MVS, is entitled to nominate 60% of Onex’s Board. Onex’s Board presently consists of twelve directors, of whom nine are Canadian.

[22] 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 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. In addition, when there is an equal number of Canadians and non-Canadians present, there must be a provision to ensure that the director allowed to cast the deciding vote is a Canadian appointed by Canadian shareholders.

[23] Onex’s quorum provisions for Board meetings require that 40% of directors, or five out of the twelve directors, constitute a quorum. It is therefore possible to form a quorum where three of the five directors are non-Canadian. Similarly, in the event of a tie, the by-laws require that the Chair cast the deciding vote, but do not specify that the Chair must be Canadian.

[24] To address concern that the existing quorum rule is inadequate to ensure that decisions made by Onex’s board in respect of WestJet and Swoop Inc. will be made by a group of directors that is majority Canadian, Onex has adopted a formal board resolution that provides that, for any vote of the Onex Board relating to the business of WestJet and Swoop Inc. (i) a majority of the Onex directors participating in the vote must be Canadian; (ii) the Chair of the meeting must be a Canadian; and (iii) if the vote is a tie, the Chair must cast the deciding vote.

[25] While these conditions would satisfy the requirement that affairs of WestJet and Swoop Inc. handled by the Board be made by a group of directors that is in majority Canadian, such a resolution may be reversed or suspended relatively easily. As well, the resolution is insufficient in scope and should also include WestJet Airlines Ltd. A change to Onex’s by-laws is required to provide greater certainty and a stronger safeguard against the identified risk.

[26] In light of the foregoing, the Agency finds that only Mr. Schwartz, a Canadian, will have the means to exercise control in fact over Onex and is satisfied that Onex will be controlled in fact by Canadians should the proposed transaction be executed as filed. However, the Agency’s determination is on the condition that Onex, at its earliest opportunity, and no later than June 1, 2020, amends its by-laws to ensure that the quorum rules for any Board of Directors’ meeting require that a majority of directors voting on or signing a written resolution in respect of any matters pertaining to or affecting WestJet Airlines Ltd., WestJet and Swoop Inc. be Canadian.

Kestrel Holdings

[27] Kestrel Holdings is the company through which voting control over WestJet will be exercised, as it will control Kestrel Topco, which will own 100% of the interest in WestJet and Swoop Inc. Kestrel Holdings will be wholly owned by Canadians with Onex holding the majority of the voting interests, with the remaining voting interests held by companies and individuals that the Agency has confirmed are also Canadian. In respect of control in fact, Kestrel Holdings has provisions in place to ensure a majority of its Board of Directors will, at all times, be Canadian and that the quorum rules for meetings of the Board will require a majority of the directors present be Canadian. There are no non-Canadian interests in Kestrel Holdings. Kestrel Holdings will, therefore, be controlled by Canadians. The Agency is satisfied that Kestrel Holdings will be Canadian should the proposed transaction be executed as filed.

Kestrel Topco

[28] Kestrel Topco is the company through which investment in WestJet and Swoop Inc. will be made and that will, through a number of wholly owned companies, own and control WestJet and Swoop Inc.

[29] Kestrel Holdings will hold 99.9% of the voting interests in Kestrel Topco. The financial interest as well as the other 0.1% of the voting interest in Kestrel Topco will be held by Onex Kestrel Inc. (Onex Kestrel), OPV Kestrel Aggregator LP (Kestrel Aggregator) and a number of private investors. The Agency has confirmed that the private investors are Canadian. Onex Kestrel and Kestrel Aggregator are not Canadian.

[30] The Agency generally expects that the parties that assume the majority of the risks and are entitled to the majority of benefits related to the air carrier’s operation are also the parties with the ability to exercise control in fact and, as such, it is important to establish that non-Canadian investors are not in a position to exercise control over WestJet and Swoop Inc.

[31] In respect of control in fact of Kestrel Topco, Kestrel Holdings will have the sole authority to nominate and remove directors, the majority of whom must at all times be Canadian. The quorum rule for the Board will require that a majority of the directors present at meetings be Canadian. Kestrel Holdings will, therefore, control Kestrel Topco’s Board, which will have the full power to control the strategic decision making of Kestrel Topco and to manage its affairs, including exercising control over its wholly owned subsidiaries WestJet and Swoop Inc.

[32] 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 one of its provinces.

[33] Kestrel Aggregator is a limited partnership that is not formed under the laws of Canada or one of its provinces through which third parties, including non-Canadians, will, through five limited partnerships, make their investment in the proposed transaction. Each of the limited partnerships will be controlled by its general partner, itself a limited partnership that is ultimately wholly owned and controlled by Onex. The investors in the limited partnerships will, pursuant to the respective partnership agreements, have limited rights consistent with being passive investors who have no ability to exercise control over any of the limited partnerships, including Kestrel Aggregator.

[34] Onex Kestrel’s and Kestrel Aggregator’s rights in Kestrel Topco will essentially be limited to the receipt of dividends, as determined by the Board, and the ability to initiate a sale in respect of Kestrel Topco’s ownership interest in WestJet and Swoop Inc., thereby providing the means through which Onex can sell its interests in the air carriers.

[35] The Agency is satisfied that Kestrel Topco will be Canadian should the proposed transaction be executed as filed, as it will be controlled by Onex through Kestrel Holdings.

DETERMINATION

[36] In light of the foregoing, the Agency determines that WestJet and Swoop Inc. will remain Canadian, as defined in subsection 55(1) of the CTA, following execution of the proposed transaction. The Agency’s determination, however, is on the condition that Onex amend its by-laws, at the earliest opportunity, and no later than June 1, 2020, 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 any matters pertaining to or affecting WestJet Airlines Ltd., WestJet and Swoop Inc. be Canadian, and provided that, in all other respects, the proposed transaction is executed as filed, in all material respects.

[37] The Agency directs Onex to provide copies of any documents, previously submitted as draft, in their final executed form to the Agency within sixty (60) days of the completion of the proposed transaction.

[38] The Agency reminds Onex that the requirement to be Canadian is an ongoing requirement, and that for WestJet and Swoop Inc. to remain Canadian, Onex must remain Canadian. As Onex’s securities are publicly-traded, the percentage of voting interests owned by Canadians can fluctuate. To ensure that a publicly traded company continues to meet the ongoing requirement to be Canadian, the Agency typically requires the company to put in place (i) a security constraint and control system (which 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 (which adjusts the voting interests of non-Canadians down, if required, so that they can never exceed the maximum permitted under voting interest requirement). The Agency has determined that as long as Mr. Schwartz continues to hold at least 60% of the voting interests in Onex, such measures will not be required.

[39] Pursuant to paragraph 82(c) of the CTA, WestJet and Swoop Inc. must notify the Agency if any change occurs that affects, or is likely to affect, the licensees’ status as Canadian. Therefore, WestJet and Swoop Inc. are directed to notify the Agency without delay, in writing, if a change occurs that affects, or is likely to affect, the control of Onex.

[40] All correspondence and pleadings should refer to Case No. 19-02542 and be filed through the Agency’s Secretariat e-mail address: secretariat@otc-cta.gc.ca.

 

Member(s)

Scott Streiner

Elizabeth C. Barker

Heather Smith