A Way To Dodge Foreign Ownership Limits?

Fri Jan 18, 2002 7:37 am

Though there has been some loosening of airline ownership rules in recent years, particularly in the European Union and in Australia and New Zealand, foreign ownership limits are still in place in a number of countries, usually set at 25% or 49%.

Is there a way to do an end-run around these restrictions?

Imagine if a foreign company were interested in acquiring a majority stake in an airline, and a majority of shareholders were interested in selling -- but faced with the brick wall of foreign ownership restrictions prohibiting the transaction.

But instead of walking away, the foreign company quietly approached shareholders with an agreement: the shareholders would continue to be the legal owners of their shares, but the foreign company would assume the costs and risks associated with owning those shares if the shareholders agreed to do the foreign company's bidding. The agreement could include a provision allowing the shareholders to keep a percentage of any dividends for themselves, or receive a fee or other benefits for acting as the foreign company's proxy.

Would it work?

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RE: A Way To Dodge Foreign Ownership Limits?

Fri Jan 18, 2002 5:53 pm

Basically I don't think so.
1. You'd need an extensive documentation of such a transaction structure, that outlays pretty clearly the economic substance of the whole thing, therefore it could be identified as fraudulent evasion of governing law.
2. There'd be an accounting problem: The foreign company would under several standards (US-GAAP, IAS, even German Trade law) be forced to consolidate the airline, as these standards "look through" the formal structure into the substance (form over substance), and the so-called control concept would have to be applied (if you are the one who takes all chances and all risks, you're considered to be the real owner of the company, formal shareholding notwithstanding).

Of course it would be fun to come up with a structure to evade this, which btw is my job, and I could think of a few things to evade the accounting problem, but there's another problem coming up: Law changes to render my solution ex post worthless.

So, I'd say: No, not before some laws are abolished or at least changed!
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