Air charter operator due diligence

Under a letter of intent, the useful question for a buyer is which findings would end the deal, and a few documents are the place to begin. Section 57 of the Canada Transportation Act says no one may operate an air service without a licence under that Part, a Canadian aviation document and the prescribed liability insurance, subject to the exclusions in section 56. If any of the three is missing or doubtful, resolve that first. This guide orders the requests so the items that could end a deal surface first.

Start with the three conditions of operating

Request the licence, the Canadian aviation document and the insurance policy, and ask your lawyer to confirm each against the regulator’s records. Ask for the application file and any correspondence about conditions or changes. Section 61 also requires that the Agency be satisfied that the applicant has not contravened section 59 in respect of a domestic service within the preceding twelve months. Section 59 bars selling, causing to be sold or publicly offering for sale in Canada an air service unless, if required under Part II, a person holds a licence for that service and the licence is not suspended. Ask the seller to confirm in writing that it has not offered service it was not licensed to provide, and ask whether the Agency has ever questioned its marketing or its operations.

Rebuild the Canadian-ownership test from the share register

Test the seller’s statement that the company is Canadian against documents. Under section 63, the Agency must suspend or cancel a domestic licence where it determines that the licensee ceases to meet the Canadian requirement. Ask for the share register, shareholders’ agreements, any voting arrangements, loan agreements that carry control rights, and the minute book. Have counsel test them against the Act’s definition of Canadian, which looks at control in fact and at limits on voting interests held by non-Canadians. Do the same exercise for your own structure after closing.

Sort out which aircraft the company truly controls

List every aircraft the company flies, and for each one obtain the document showing who owns it and on what terms the company uses it. Where another person provides an aircraft with a flight crew, section 60 requires compliance with the Agency’s disclosure regulations and, where prescribed, Agency approval. Ask for those approvals and for the contracts. A flight schedule that rests on an arrangement the Agency has not approved, or that ends on a change of control, is a finding to raise with counsel before closing.

Search for claims against the assets

Ask your lawyer to search for security interests registered against the company and against its aircraft, and to explain which registries apply. Ontario’s Personal Property Security Act, for example, requires a registration system to be maintained for the purposes of that Act; ask your lawyer which province’s statute applies. Ask the seller for its lender agreements, any aircraft lease and any guarantee, and look for terms that react to a change of control. Obtain a payout statement for any debt that will be repaid at closing, and ask the lender to confirm in writing that it will discharge its registration once paid.

Read the crew, client and base documents

For each pilot, ask for the employment terms, the qualification records and the notice period. The Canada Labour Code includes aircraft and a line of air transportation in its definition of a federal work, undertaking or business, so ask counsel whether federal labour rules apply and whether a union is certified. Read the major client contracts for assignment and change-of-control clauses, and read the hangar and base-airport agreements for the same. Ask whether any customer has the right to end a contract on short notice, and whether the owner’s personal relationship is written into a contract. The finding to look for is access or revenue that does not survive the sale. Record each such clause in a list for the negotiation, with the person who must consent and the date by which consent is needed.

Ask whether the deal itself needs approval

Diligence is also the time to ask whether closing needs a government step. Under section 53.1 of the Canada Transportation Act, a person who must notify the Commissioner of Competition of a proposed transaction involving a transportation undertaking must also notify the Minister and, for an air transportation undertaking, the Agency. Section 53.2 bars completion without Governor in Council approval and an Agency determination that the resulting undertaking is Canadian, but under subsection 53.1(4) it does not apply if the Minister gives notice that the transaction raises no public-interest issues for national transportation. The Competition Bureau notes that Part IX of the Competition Act requires notice of certain transactions that are of a specified type, exceed certain thresholds and are not subject to any exemptions. Put the question to counsel before the closing date is fixed, because a required review can move that date.

• Licence, aviation document and insurance: confirmed against regulator records, not only copies from the seller.
• Share register and agreements: tested against the Canadian definition before and after closing.
• Aircraft arrangements: ownership or lease documents, and any Agency approval under section 60.
• Registered claims: search results and lender agreements, with payout letters for debts to be repaid.
• Crew, client and base terms: assignment and change-of-control clauses read in full.