Air Canada (AC, Montréal Trudeau) has sent a letter to the Canadian Transportation Agency (CTA) challenging the proposed takeover of rival WestJet (WS, Calgary) by Onex Corp. on the grounds of foreign ownership rules, The Canadian Press has reported.

The flag carrier has pointed out that due to the "opaque structure" and "flexibility" of Onex's capital structure, there is a risk that the majority of co-investors in Kestrel Bidco Inc., the subsidiary buying WestJet, will come from outside Canada.

Kestrel Bidco intends to take full ownership of WestJet. Canadian law limits foreign ownership of airlines to a maximum of 49%, with no one investor holding more than a 25% stake.

Air Canada said that despite the general rule that co-investors would not hold majority stakes in the fund's structure, "Onex lacks the necessary internal controls to ensure that WestJet remains Canadian".

In particular, the carrier raised a concern about the outstanding multiple voting shares (MVS) held by Onex CEO Gerry Schwartz, which entitle him to elect 60% of the fund's board. Air Canada pointed out that once Schwartz steps down - which should not be considered a "remote eventuality" due to his age of 77 - these shares would lose most of their rights.

The CTA told Reuters that "the process underway will allow the CTA to determine whether the proposed transaction will result in an undertaking that is Canadian". Air Canada itself did not comment on the letter, which has not been made public, while Onex said it was "engaged" with the agency on "the regulatory approval process of our transaction".

In May, the Toronto-based private equity firm proposed acquiring the carrier for CAD31 Canadian dollars (USD23.6) per share or around CAD3.5 billion Canadian dollars (USD2.7 billion) in total. The offer was approved by 92.5% of WestJet shareholders during a special meeting on July 23, 2019, and the deal has been already approved by the Canadian Competition Bureau.