National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions and Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions -- exemption from the requirement to obtain separate minority approval for each class of affected common shares in connection with a proposed business combination transaction so that minority approval would be obtained from the affected classes of securities of the issuer voting together as a single class -- issuer is subject to the Canada Transportation Act and its dual-class share structure has been established solely to ensure that it is compliant with the foreign voting control restrictions in such legislation -- no difference of interest between holders of each class of common shares in connection with a proposed business combination transaction -- requiring a class-by-class vote could give a de facto veto right to a non-Canadian group of security holders.
Applicable Legislative Provisions
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, s. 8.1(1), 9.1(2).
November 12, 2020
IN THE MATTER OF THE SECURITIES LEGISLATION OF QUÉBEC AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF TRANSAT A.T. INC. (the Filer)
The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Makers) have received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption from the requirement that every class of affected securities vote as a separate class for the purpose of obtaining minority approval (the Class Voting Requirement) as set out in Regulation 61-101 respecting Protection of Minority Security Holders in Special Transactions (CQLR, chapter V-1.1, r. 33) (Regulation 61-101) in connection with the Proposed Transaction (as defined below) and that instead, minority approval of the Proposed Transaction be obtained from all of the issued and outstanding Shares (as defined below) voting together as single class (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Autorité des marchés financiers is the principal regulator for the Application;
(b) the Filer has provided notice that Section 4.7(1) of Regulation 11-102 respecting Passport System (CQLR, chapter V-1.1, r. 1) (Regulation 11-102) is intended to be relied upon in each of Alberta, Manitoba and New Brunswick; and
(c) this decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in Regulation 14-101 respecting Definitions (CQLR, chapter V-1.1, r. 3), Regulation 11-102 and Regulation 61-101 have the same meaning if used in this decision, unless otherwise defined. The following terms have the following meanings:
Canadian has the meaning specified in Section 55(1) of the CTA.
CTA means the Canada Transportation Act.
CTA Amendments means the amendments to the CTA which came into force effective June 27, 2018 as a result of the Transportation Modernization Act (Canada).
held or holds, when in reference to the Variable Voting Shares that a person "held" or "holds", shall refer to, and include, the Variable Voting Shares held, beneficially owned or controlled, directly or indirectly by such person.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation governed by the Canada Business Corporations Act (the CBCA).
2. The Filer's head office is located in Québec.
3. The Filer is a reporting issuer in all of the provinces of Canada and is not in default of any requirement of the securities legislation in the jurisdictions in which it is a reporting issuer.
4. The authorized share capital of the Filer consists of an unlimited number of Class A variable voting shares (the Variable Voting Shares), an unlimited number of Class B voting shares (the Voting Shares and, together with the Variable Voting Shares, the Shares), and an unlimited number of preferred shares, issuable in series.
5. As of November 5, 2020, 37,747,090 Shares were outstanding. There are no preferred shares outstanding. In addition, as of November 5, 2020, the Filer had 1,738,570 options outstanding, each entitling a Canadian holder to purchase one Voting Share and a non-Canadian Holder to purchase one Variable Voting Share.
6. As of July 31, 2020, the date of the most recent breakdown of Shares as obtained by the Filer's transfer agent, the Shares were comprised of approximately 85.71% Voting Shares and approximately 14.29% Variable Voting Shares.
7. As the owner of Air Transat A.T. Inc., a licensed air carrier, the Filer is subject to the requirements of the CTA. Notably, Section 61(1)(a) of the CTA includes a condition that an applicant for a domestic service operating licence be a Canadian.
8. As result of the CTA Amendments, Canadian was defined to include:
"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."
9. In order to comply with the CTA Amendments, the Filer amended its articles of incorporation on May 8, 2019 in accordance with a plan of arrangement under the CBCA (the Amended Articles). Pursuant to the Amended Articles, the Voting Shares can only be owned or controlled by Canadians, while Variable Voting Shares can only be owned or controlled by non-Canadians. Issued and outstanding Voting Shares are converted into Variable Voting Shares on a one for one basis, automatically and without any further act of the Filer or the holder, if such Voting Share becomes owned or controlled, by a person who is not a Canadian. Conversely, in the event that a Variable Voting Share becomes owned or controlled by a Canadian it will be converted into a Voting Share on a one for one basis automatically and without any further act of the Filer or the holder.
10. In order to comply with the Canadian ownership requirements, the Variable Voting Shares carry one vote per share unless either
(a) any single non-Canadian, either individually or in affiliation with any other person, holds a number of Variable Voting Shares that exceeds 25% of either the total number of the Filer's issued and outstanding Shares or the number of votes that would be cast at a given meeting of the holders of the Shares (the Shareholders);
(b) all non-Canadians authorized to provide air services, together with such persons in affiliation with them, hold in the aggregate, a number of Variable Voting Shares that exceeds 25% of either the total number of the Filer's issued and outstanding Shares or the number of votes that would be cast at a given meeting of Shareholders;
(c) the number of issued and outstanding Variable Voting Shares exceeds 49% of either the total number of all of the Filer's issued and outstanding Shares or the number of votes that would be cast at a given meeting of Shareholders.
In the event that any of the applicable aforementioned limits are exceeded, the votes attributable to Variable Voting Shares will be affected as follows:
(i) if required, a reduction of the voting rights of any single non-Canadian (including a single non-Canadian authorized to provide air service), either individually or in affiliation with any other person, carrying more than 25% of the aggregate votes of the issued and outstanding Shares to ensure that such non-Canadian (and the persons in affiliation with them) never carry more than 25% of the votes which holders of Shares cast at any meeting of Shareholders;
(ii) if required and after giving effect to the first proration set out in (i) above, a further proportional reduction of the voting rights of all non-Canadians authorized to provide an air service (including such persons in affiliation with them) to ensure that such non-Canadian authorized to provide air service (and the persons in affiliation with them), in the aggregate, never carry more than 25% of the votes which holders of Shares cast at any meeting of Shareholders;
(iii) if required and after giving effect to the first two prorations set out in (i) and (ii) above, a proportional reduction of the voting rights for the Variable Voting Shares to ensure that non-Canadians never carry, in aggregate, more than 49% of the votes which holders of Shares cast at any meeting of Shareholders.
11. The formal identification of the Voting Shares and Variable Voting Shares as separate classes of shares, as well as the variability in the voting rights associated with the Variable Voting Shares, exist solely for the purposes of facilitating compliance with the Canadian ownership and control requirements of the CTA, with both classes of Shares having identical economic attributes and being listed and traded on the Toronto Stock Exchange as a single class of shares.
The Proposed Transaction
12. On October 9, 2020 the Filer and Air Canada (the Purchaser), entered into an arrangement agreement (the Arrangement Agreement) providing for the Purchaser's acquisition of all of the issued and outstanding Shares of the Filer (the Proposed Transaction). The Arrangement Agreement terminated and replaced a previous arrangement agreement entered into between the parties dated June 27, 2019 in respect of the same subject matter, as subsequently amended on August 11, 2019 (the Prior Agreement). The material changes between the Arrangement Agreement and the Prior Agreement are as follows:
(a) the outside date for the closing of the transaction set forth in the Arrangement Agreement is an extended date of February 15, 2021;
(b) the purchase price for the issued and outstanding Shares of the Filer is now $5.00 per Share (the Purchase Price);
(c) the Purchase Price is payable at the holder's option either in cash or shares of the Purchaser (whereas the Prior Arrangement was cash only);
(d) the termination fee payable by the Filer to the Purchaser pursuant to a Termination Fee Event (as defined in the Arrangement Agreement) is reduced to $10,000,000 from $15,000,000 previously, except in certain circumstances under the Arrangement Agreement in connection with a new concept of an Intervening Event (as defined in the Arrangement Agreement) where the termination fee is $30,000,000;
(e) the reverse termination fee payable by the Purchaser to the Filer pursuant to a Reverse Termination Fee Event (as defined in the Arrangement Agreement), which was $20,000,000 or $40,000,000 previously depending on the circumstances, is reduced to $10,000,000 or $30,000,000 in the same circumstances under the Arrangement Agreement;
(f) the Arrangement Agreement contains a new closing condition that the Filer's level of net indebtedness on closing not exceed a certain specified threshold on closing.
13. On July 18, 2019, the Decision Makers issued a decision granting the Exemption Sought in respect of the transaction set out in the Prior Agreement, conditional upon the Safeguard Measures (as defined below) being implemented and remaining in place.
14. The Proposed Transaction is structured as an arrangement to be carried out in accordance with Section 192 of the CBCA. The Arrangement Agreement requires that the Proposed Transaction be subject to the approval of 66 2/3% of the votes cast by the holders of the outstanding Voting Shares and Variable Voting Shares voting together as a single class in person or by proxy at a special meeting (the Special Meeting) to be held to consider the Proposed Transaction.
15. The Proposed Transaction is a "business combination" (as such term is defined in Regulation 61-101) and is therefore subject to the applicable requirements of Regulation 61-101.
16. Mr. Jean-Marc Eustache, the Chairman of the Board and the President and Chief Executive Officer of the Filer will receive, as a result of the Proposed Transaction, payments which may be characterized as "collateral benefits" (as such term is defined in Regulation 61-101) as (a) he beneficially owns more than 1% of the issued and outstanding Shares of the Filer, and (b) such payments, net of any offsetting costs, would represent more than 5% of the amount of the consideration that Mr. Eustache would otherwise expect to be beneficially entitled to receive under the terms of the Proposed Transaction in exchange for the Voting Shares that he beneficially owns.
17. Consequently, and as a result of the applicable requirements of Regulation 61-101, the Filer is subject to the Class Voting Requirements and is required to obtain approval of the Proposed Transaction by a majority of votes cast by Shareholders, in each case voting separately as a class, excluding the votes attached to applicable Shares beneficially owned, or over which control or direction is exercised, by any party specified in Section 8.1(2) of Regulation 61-101 (the Disinterested Shareholders) at the Special Meeting. The Disinterested Shareholders in respect of the Proposed Transaction include all of the holders of Shares except Mr. Eustache.
18. Regulation 61-101 was adopted to ensure the fair treatment of all security holders in the context of a business combination.
19. The following procedural steps have been or will be taken to ensure that the collective interests of the Shareholders are protected in light of the Proposed Transaction:
(a) Negotiation of the Proposed Transaction was conducted by a special committee of the Filer's board of directors (the Special Committee), which was comprised solely of directors who are independent of the Purchaser and Mr. Eustache.
(b) The Special Committee, after having consulted with independent financial and legal advisors and with the assistance of management of the Filer, unanimously determined that the Proposed Transaction is in the best interests of the Filer and is fair to the Shareholders and recommended to the Filer's board of directors that it approve the Proposed Transaction.
(c) The Special Committee of the Filer's board of directors did not include Mr. Eustache.
(d) The Special Meeting will be called to consider and, if deemed advisable, approve the Proposed Transaction, and subject to the interim order of the Superior Court of Québec (the Court) in connection with the Proposed Transaction and the Exemption Sought being granted, the approval threshold for the Proposed Transaction will be (i) 66 2/3 % of the votes cast by holders of Shares present in person or represented by proxy at the Special Meeting, and (ii) a majority of votes cast by disinterested holders of Shares present in person or represented by proxy at the Special Meeting voting together as a single class.
(e) The board of directors of the Filer received opinions dated October 9, 2020 from National Bank Financial Inc. and BMO Capital Markets Inc. (collectively, the Financial Advisor Opinions) to the effect that the consideration to be received by Shareholders in the Proposed Transaction was fair, from a financial point of view, to such holders (in each case subject to the respective limitations, qualifications, assumptions and other matters set forth in such opinions).
(f) The Filer will prepare and deliver to the Shareholders an information circular (the Information Circular) prepared in accordance with applicable securities legislation and the interim order of the Court in order to provide sufficient information to allow the Shareholders to make an informed decision in respect of the Proposed Transaction. The Financial Advisor Opinions will be included in the Information Circular.
(g) If the Proposed Transaction is approved by Shareholders at the Special Meeting, it will be subject to the final approval of the Court. All affected Shareholders will receive notice of and be entitled to appear at the hearing for the final Court order.
(h) The Filer will grant dissent rights to the registered Shareholders.
(collectively, the Safeguard Measures).
20. The Filer's articles provide that holders of Shares are entitled to vote at all meetings of shareholders of the Filer, except at any meeting where the holders of a specified class of Shares are entitled to vote separately as a class as provided in the CBCA.
21. The CBCA does not require a separate class vote in respect of the Proposed Transaction, as holders of Voting Shares and Variable Voting Shares are entitled to receive the same consideration per share upon completion of the Proposed Transaction.
22. With regards to the accounting treatment of the Variable Voting Shares and the Voting Shares, there is no distinction between the two classes of shares. The Shares are treated as common share capital and presented in the aggregate in shareholders' equity as share capital on the Filer's consolidated statement of financial position. For earnings per share purposes, the Shares are presented together as outstanding shares and earnings per share is calculated based on the weighted average of issued and outstanding aggregate number of Shares.
23. Without the Requested Relief, the Filer would, in addition to the 66 2/3% Shareholder approval of the Proposed Transaction, be required to satisfy the Class Voting Requirements and obtain additional approval from a majority of the Disinterested Shareholders who hold Variable Voting Shares, voting separately as a class (the Additional Approval).
24. Granting the holders of the Variable Voting Shares a separate class vote on the Proposed Transaction would be inconsistent with the policy objectives of the CTA, which seek to ensure that Canadians retain control over licensed air carriers at all times. Absent the Exemption Sought, the Additional Approval would provide the non-Canadian holders of Variable Voting Shares with the ability to prevent the Proposed Transaction. Such an outcome would deprive Canadians of de facto control over the Filer.
The Decision Makers are satisfied that the decision meets the test set out in the Legislation for the Decision Makers to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that the Safeguard Measures are implemented and remain in place as described herein.