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A WestJet plane at the Ottawa/Macdonald–Cartier International Airport on June 26, 2019. THE CANADIAN PRESS/Adrian Wyld

Adrian Wyld/The Canadian Press

Air Canada has filed a challenge with federal regulators to Onex Corp.’s takeover of WestJet Airlines Ltd., arguing that the deal could give foreign investors majority ownership of the Calgary-based airline, in violation of Ottawa’s rules.

Onex, a Toronto-based private-equity firm, announced a friendly $3.5-billion takeover of WestJet this spring. The airline’s shareholders voted in July to approve the deal, but it now must be approved by regulators.

Onex, like most companies in its industry, takes money from foreign investors into its funds, and in a letter sent to the Canadian Transportation Agency, Air Canada said Onex’s “opaque” private-equity structure and the “fluidity” of its shareholder base could make it difficult for WestJet to stay onside ownership limits. Federal rules cap the total foreign ownership of any Canadian airline at 49 per cent. No single foreign investor may hold more than 25 per cent, and a maximum of 25 per cent of the equity can be owned by foreign airlines.

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If the deal is completed, Onex will control a company that controls WestJet, but it will have other investors in the deal, Air Canada says in its filing. The structure of the deal raises the risk that “co-investors will participate in a manner that provides them with control in fact” over WestJet, the Montreal-based airline said.

“We urge the agency to carefully consider whether the transaction will result in an undertaking that is Canadian and to use its powers to investigate and uphold the act as necessary,” Air Canada’s general counsel David Perez said in the letter, referring to the law that regulates foreign ownership in Canadian airlines.

Air Canada declined any further comment.

Onex, which had $23.2-billion of capital invested at the end of 2018, is controlled by Canadian chief executive officer Gerry Schwartz.

In its letter, Air Canada argues that foreign co-investors could take larger stakes in Onex subsidiary Kestrel Bidco Inc. − which is the actual purchaser − and take on greater control of the Canadian airline. “The opaque nature” of the private-equity structure “obfuscates where actual control in fact will, in fact, rest,” Air Canada said.

Air Canada also argues that Onex does not have sufficient controls in place to assure WestJet remains Canadian. For instance, it says that although Mr. Schwartz indirectly holds 100 per cent of Onex’s multiple voting shares (MVS), “the MVS structure provides no assurance that this will continue to be the case. The potential for the MVS extinguishment is real given Mr. Schwarts’ current career stage. At 77 years old and having served as CEO since 1983, his eventual retirement should not be considered a remote eventuality.”

Air Canada said in its letter to Canada’s transportation regulator that “due to the structure of the transaction and the capital and corporate governance structure of Onex, the transaction may result in an undertaking that is not ‘Canadian.’ "

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In a second letter, addressed to Transport Canada deputy minister Michael Keenan and CTA chief executive Scott Streiner, Air Canada said that all air carriers should be subject to the same limitations, regardless of its ownership structure.

“For some airlines to be required to operate under one set of rules and others under a different one, would not only unfairly skew competition, but would harm the interest of Canadians,” Mr. Perez said in the letter.

WestJet declined to comment on Air Canada’s letters to the federal authorities.

“The arrangement is still subject to the receipt of the Canadian Transportation Agency’s review of ownership structure,” WestJet spokeswoman Lauren Stewart said in an e-mail. “Assuming the timely receipt of this approval, the transaction is expected to close in the fourth quarter of 2019. As the deal remains under regulatory review, we will not be providing further comment.”

The deal was approved by federal Transport Minister Marc Garneau on July 24 and the Canadian Competition Bureau on Aug. 13. Its final regulatory hurdle is a review by the CTA, according to Onex.

“Onex is pleased to have received approval from the Minister of Transport and the Competition Bureau for the WestJet transaction,” the private-equity firm said in an e-mail statement on Monday. “Onex is engaged with the CTA on the regulatory approval process of our transaction.”

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