Air France-KLM et al. - MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- relief from the registration and prospectus requirements in respect of certain trades made pursuant to an employee share offering by a control block shareholder, the French state, of a French issuer -- employee share offering involves the use of a collective employee shareholding vehicle, a fonds commun de placement d'enterprise (FCPE) -- relief granted to trades in shares by the controlling shareholder to Canadian participants, trades in shares by Canadian participants made to or with the FCPE, and trades in units of the FCPE made to or with Canadian participants subject to resale restrictions -- relief granted to the manager of the FCPE from the adviser registration requirement.

Applicable Ontario Statutory Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25, 53 and 74(1).

February 1, 2005

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO AND QUEBEC (THE JURISDICTIONS)

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM FOR

EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

AIR FRANCE-KLM,

THE REPUBLIC OF FRANCE,

AEROACTIONS 2 ENTERPRISE MUTUAL FUND AND

HSBC CCF ASSET MANAGEMENT (EUROPE) S.A.

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from Air France-KLM (the Filer) for a decision under the securities legislation of the Jurisdictions (the Legislation) for:

(a) an exemption from the dealer registration requirements and the prospectus requirements of the Legislation with the result that those requirements shall not apply to:

(i) trades in ordinary shares of the Filer (the Shares) by the control block shareholder of the Filer, the Republic of France (the Controlling Shareholder), to current employees of Air France (a wholly-owned subsidiary of the Filer) and its affiliates (the Qualifying Employees) who choose to participate in a global employee offering of Shares (the Employee Offering) and are resident in Canada (collectively, the Canadian Participants);

(ii) trades in Shares (including Bonus Shares as defined in paragraph 10 hereof) acquired by the Canadian Participants pursuant to the Employee Offering to a collective employee shareholding vehicle, the Aéroactions 2 Enterprise Mutual Fund, a "Fonds Commun de Placement d'Enterprise" or "FCPE" (the Fund);

(iii) trades in securities of the Fund (the Units) made to or with the Canadian Participants;

(iv) the distribution of Units by the Fund to the Canadian Participants in connection with the Employee Offering; and

(v) the redemption of the Units by the Fund; and

(b) an exemption from the adviser registration requirements and dealer registration requirements of the Legislation with the result that those requirements shall not apply to the manager of the Fund (the Manager), where applicable,

(collectively, the Requested Relief).

Under the Mutual Reliance Review System for Exemptive Relief Applications

(a) the Ontario Securities Commission is the principal regulator for this application, and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 - Definitions or in Quebec Commission Notice 14-101 have the same meaning in this decision unless they are defined in this decision.

Representations

This decision is based on the following facts represented by the Filer:

1. Air France-KLM is a corporation governed by the laws of France. Its head office is located at 2, rue Esnault-Pelterie, 75007, Paris, France. Air France-KLM is not, and has no intention of becoming, a reporting issuer under the Legislation. The Shares are posted and listed for trading on the Euronext Paris and Amsterdam stock exchanges and the New York Stock Exchange (in the form of American Depository Shares).

2. The Controlling Shareholder is the Republic of France. The Controlling Shareholder beneficially owns 70,965,384 Shares, representing approximately 26.3% of the issued and outstanding Shares. The Controlling Shareholder is not, and has no intention of becoming, a reporting issuer under the Legislation.

3. The Fund is a "Fonds Commun de Placement d'Enterprise" or "FCPE", an employee shareholding vehicle established pursuant to the laws of France. The Fund has been organized by the Manager to facilitate the participation of Qualifying Employees in the Employee Offering and to simplify custodial arrangements for employee participation in the Employee Offering. The Fund has been established for the sole purpose of providing Qualifying Employees with an opportunity to indirectly acquire an interest in the Shares. The Fund is not, and has no intention of becoming, a reporting issuer under the Legislation. The Fund will not engage in any of the investment practices described in Part 2 of National Instrument 81-102 -- Mutual Funds, except as described herein.

4. The Manager, HSBC CCF Asset Management (Europe) S.A., is a leading portfolio management company governed by the laws of France. The Manager is registered with and authorized by the Autorité des Marchés Financiers (the AMF), the French securities regulatory authority, to manage French investment funds and is required to comply with the rules of the AMF. The Manager may, for the Fund's account, acquire, sell or exchange all securities in the Fund's portfolio and make all reinvestments. The Manager may also hold cash in accordance with the rules of the Fund to satisfy redemption requests. The Manager is also responsible for the preparation of accounting and periodic information reports as prescribed by the rules of the Fund. The Manager's activities will not affect the underlying value of the Units and will not involve providing investment advice to any Canadian Participants. The Manager is not, and has no intention of becoming, a reporting issuer under the Legislation.

5. Banque CCF is the custodian (the Custodian) through which the Shares purchased by Qualifying Employees pursuant to the Employee Offering will be deposited in the Fund. The Custodian executes orders to purchase and sell Shares in the Fund's portfolio and takes all necessary action to allow the Fund to exercise the rights relating to the Shares held in the portfolio. Under French law, the Custodian must be selected by the Manager from a limited number of companies authorized by the French Minister of the Economy, Finance and Industry, and its appointment must be approved by the AMF.

6. HSBC CCF Epargne Enterprise is the transfer agent (the Transfer Agent) responsible for maintaining and administering the accounts in respect of Units of the Fund. The Transfer Agent receives requests for the subscription and redemption of Units.

7. On December 9, 2004, the Controlling Shareholder sold 47,680,883 Shares to institutional investors on an accelerated book building (ABB) basis, following which the Filer and the Controlling Shareholder will effect the Employee Offering, all of which will be undertaken in accordance with the laws of France, including French privatization law.

8. The Qualifying Employees will be invited to participate in the Employee Offering. There are 263 Qualifying Employees resident in Canada in the provinces of Ontario (33) and Quebec (230) who, in the aggregate, represent less than 0.37% of the total number of Qualifying Employees worldwide (71,654).

9. The Canadian-resident Qualifying Employees will not be induced to participate in the Employee Offering by expectation of employment or continued employment.

10. Under the terms of the Employee Offering:

(a) the purchase price for the Shares will be the ABB price of €14.30 (approximately CDN$22.77) less a 20% discount for a net purchase price to Qualifying Employees of €11.44 (approximately CDN$18.22);

(b) payment for the Shares may be made in full on delivery of the Shares or in three instalments over a two-year period, with 30% of the purchase price payable on delivery of the Shares, 30% of the purchase price payable one year from the date of delivery of the Shares and 40% of the purchase price payable two years from the date of delivery of the Shares;

(c) the Shares cannot be resold for a period of two years from the date of delivery of the Shares (the Hold Period); and

(d) Qualifying Employees who hold their Shares for a period of three years will receive from the Controlling Shareholder one free Share (the Bonus Shares) for each Share purchased and held, up to a limit of €610 (approximately CDN$970) ascribed to the aggregate value of the Bonus Shares. Beyond the €610 (approximately CDN$970) limit and up to a maximum aggregate ceiling of €1,258 (approximately CDN$2,000) of Bonus Shares, Qualifying Employees will be entitled to receive one Bonus Share for every four Shares purchased and held.

11. A default in respect of the first of the three instalment payments will result in a cancellation of the entire subscription for Shares. A default in respect of either of the second or third instalment payments will result in a cancellation of the purchase and sale of the Shares. All right and entitlement to the Bonus Shares and the discounted purchase price for the Shares will be forfeited and a recovery procedure will be implemented. Specifically, the Shares will be sold on the Euronext Paris stock exchange and the proceeds will be applied to repay, first, any amounts owed to the Controlling Shareholder (up to the full value of the Shares including any discount), and second, costs and expenses in connection with the sale of the Shares equal to 5% of the proceeds from the sale. The balance, if any, will be paid to the defaulting Qualifying Employee who subscribed for Shares.

12. The Canadian-resident Qualifying Employees will receive an information package in the English and French languages that will include: (a) a summary of the terms and conditions of the Employee Offering; (b) an instruction form explaining how to subscribe for Shares under the Employee Offering; (c) a subscription form; and (d) a summary of the Canadian income tax considerations relating to the purchase of Shares under the Employee Offering.

13. The Canadian Participants who subscribe for Shares under the Employee Offering will also receive copies of all continuous disclosure materials relating to Air France-KLM that are furnished to shareholders of Air France-KLM.

14. In the event of an over-subscription of the Shares by Qualifying Employees, the Shares will be offered to Qualifying Employees on a pro rata basis. After the close of the subscription period, the Controlling Shareholder will reduce the number of Shares which would otherwise be allocated to each subscriber of Shares in proportion to the amount of the subscriber's initial subscription.

15. The Fund is a collective employee shareholding vehicle established under the laws of France to facilitate the participation of Qualifying Employees in the Employee Offering and to simplify custodial arrangements for employee participation in the Employee Offering. The Fund has been established for the sole purpose of providing Qualifying Employees with an opportunity to indirectly acquire an interest in the Shares.

16. The Fund's portfolio will consist entirely of the Shares and cash. Only Qualifying Employees will be permitted to hold Units of the Fund in an amount proportionate to the number of Shares that Qualifying Employees deposit in the Fund.

17. Qualifying Employees who intend to purchase Shares pursuant to the Employee Offering will be required to complete and deliver to Air France a subscription form to be provided by Air France.

18. Upon completion and delivery of the subscription form and the applicable payment for the Shares, the Canadian Participants will cause their purchased Shares to be deposited in the Fund.

19. In consideration for the deposit of the Shares with the Fund, the Canadian Participants will receive a number of Units corresponding to the number of Shares subscribed for.

20. Any Bonus Shares acquired by the Canadian Participants pursuant to the Employee Offering will be automatically deposited in the Fund.

21. At no time will Qualifying Employees who subscribe for Shares (and who are entitled to receive Bonus Shares) be issued share certificates evidencing ownership in the Filer. Units will be issued and registered in the names of the Canadian Participants, who will in turn receive a statement from the Transfer Agent that evidences ownership interests in the Units. The Units will not be listed for trading on any stock exchange.

22. Units of the Fund are not tradeable other than for redemption purposes and there is no public market for the Units. The initial value of a Unit will be equal to the purchase price of a Share acquired pursuant to the Employee Offering. The Unit value of the Fund will be calculated and reported to the AMF, based on the quotient obtained by dividing the net assets of the Fund by the number of Units outstanding. The number of Units will be adjusted on the basis of the market price of the Shares, effective from the first date on which the net asset value of the Fund is calculated and whenever dividends are paid on the Shares or Bonus Shares or other assets are contributed to the Fund.

23. Dividends, if any, will be automatically reinvested in the Fund. Upon the payment of any dividends, a Unitholder will be credited with additional Units or thousandths of a Unit corresponding to the value of the dividend. In addition, any reinvestment of income from the Fund's assets may result in a holder being credited with additional Units or thousandths of a Unit.

24. Subject to the Hold Period restrictions described in paragraph 10, the Fund will redeem the Units at the request of the Unitholder. To dispose of one's Units, the Unitholder will be required to complete a form of "redemption request" to be delivered to the Transfer Agent. The Transfer Agent will then deliver the redemption request to the Manager who will execute the order by selling the applicable number of Shares through the facilities of the Euronext Paris stock exchange on the most favourable terms to the Unitholder. The Manager will then credit the Unitholder in accordance with the payment and delivery instructions that will have been delivered by the Unitholder with the redemption request.

25. Where a redemption request is delivered to the Transfer Agent, the holder will be paid in cash on the basis of the net market sale price of the Shares corresponding to the holder's Units, and will be adjusted by payment in cash, where necessary. A redemption charge of 0.50% is charged to the holder. All management and administration charges relating to the Fund and the Manager will be paid by the Filer.

26. Canadian Participants will be paid in cash upon the redemption of the Units and will not be given the choice of receiving underlying Shares corresponding to the Units held by Canadian Participants.

27. The Fund, due to board lot sizes, will be able to liquidate positions in the Shares more readily and at a better price than an individual investor.

28. None of the Filer, Air France or the Controlling Shareholder or any of their employees, agents or representatives will provide investment advice to the Canadian Participants with respect to an investment in the Shares or the Units.

29. At the distribution date, after giving effect to the distribution of Shares in connection with the Employee Offering, Canadian-resident holders of Shares will not beneficially own more than 10% of the Shares and will not represent in number more than 10% of the total number of holders of Shares as shown on the books of the Filer.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.

The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that:

1. the first trade (alienation) in any Shares (including Bonus Shares) or Units acquired by the Canadian Participants pursuant to this decision in a Jurisdiction shall be deemed a distribution to the public under the Legislation of such Jurisdiction; and

2. the first trade in Shares acquired by the Canadian Participants pursuant to this decision is executed through an exchange, or a market, outside of Canada, or to a person or company outside of Canada.