The long-awaited amendments to federal fisheries regulations codifying key aspects of the Department of Fisheries & Oceans (DFO) PIIFCAF policies, including prohibitions on “controlling agreements,” are finally final. Anticipated since the June 2019 Fisheries Act refresh, the final amendments to the regulations come with some surprises, often differing significantly from the proposed draft amendments the DFO initially released in July 2019. The amended regulations prohibit the transfer of the use and control of the rights and privileges under a licence to fish, with various exceptions including for creditors, inshore family fishing trusts and corporations.

Here’s how the final amendments to the Atlantic Fishery Regulations (AFR) and the Maritime Provinces Fishery Regulations (MPFR) deal with three key issues, how they differ from the amendments DFO originally proposed, and what they mean for industry participants.

1. Restrictions on Use or Control of Licence by Third Parties

The amendments proposed in 2019 were aimed at codifying into law DFO’s policy prohibiting “controlling agreements” in the inshore fisheries, and included provisions targeting fish buyers and processors in particular. Under “controlling agreements”, inshore licence holders, in return for loans or other financial support, allowed the lender – often a fish processing company – to control the licence holders’ privilege and rights to request DFO to transfer the licences to third parties. In contrast, the final amendments are not specific to processors and buyers and are not limited to prohibiting controlling agreements. The final amendments codify elements of existing fisheries policies and also:

• Prohibit licence holders from transferring the rights and privileges conferred under the licence to any third party.
• Restrict the issuance of inshore licences to licence holders that have not transferred the rights and privileges conferred under the licence.
• Prohibit anyone other than the licence holder from using or controlling the rights and privileges associated with a licence.

The prohibitions against the transfer of the use and control of the rights and privileges under a licence to fish take effect on April 1, 2021. Licence holders and their counterparties should take care to ensure their arrangements comply with the regulations before they come into effect.

Exceptions. The regulations set out a number of exceptions to the prohibition on transfer of rights and privileges, including:

• When a licence is offered as security in a financial agreement under provincial legislation.
• When a creditor that is a recognized financial institution exercises its rights under its security.
• When a creditor that is not a recognized financial institution recommends a license transfer or the reallocation of fishing quota, in order to exercise its rights with respect to security.
• In cases of bankruptcy.
• Crew share agreements.
• When the rights and privileges under the licence have been transferred to the licence holder’s inshore family fishing corporation of which the applicant holds 100% of the voting shares.
• When DFO authorizes the transfer of quota or gear.
• When an organization issued an allocation requires a licence holder to provide some sale proceeds of the catch back to the organization in exchange for additional fish allocation
• Upon the death or incapacity of the licence holder.
• When an authorized substitute operator is fishing the licence.

Lenders. These first four exceptions reflect DFO’s recognition that licence holders need access to capital to support and grow their business. Lenders typically require licence holders to pledge licences as security for repayment of loans. Licence security is ineffective if lenders can’t recover and liquidate the licences after a default in repayment. To do so, lenders must have some ability to control how the licence is used after a default occurs. DFO has indicated how it will interpret and apply the first four exceptions :

• Licences may be offered as security in a financial agreement under provincial legislation, which includes security registered pursuant to various provincial personal property security acts.
• Recognized financial institutions (RFIs) (chartered banks and provincial loan boards) – which DFO says have no interest in accessing the fisheries – will be permitted to use and control licence rights and privileges after the licence holder has defaulted.
• Non-RFIs (which may include fish processors) seeking to collect on licence security will be limited in their ability to influence licence decisions. DFO indicates that – again, only after a default on the loan – non-RFI’s will be permitted to recommend to DFO both the next licence holder and a reallocation of quota to another qualified licence holder.
• On bankruptcy, the use and control of licence privileges will vest in the licence holder’s trustee in bankruptcy. DFO says it “is confident that trustees will not try to gain undue access to the fisheries” and thus it will impose no restrictions on trustees’ use and control of licence assets.

DFO’s commentary on how it will interpret and apply the regulations isn’t necessarily the final word, however. DFO did indeed have extensive discretion when fleet separation and other licence restrictions were imposed by policy. But with the codification of these rules in the form of regulations, the courts, rather than DFO, will be the final arbiter of the regulations’ interpretation and application.

Family Corporations & Trusts. Among the exceptions to the prohibition on transfer of rights and privileges are transfers to the licence holder’s inshore family fishing corporation, a new concept under the regulations. Under the final amendments, an “Inshore Family Fishing Corporation” (IFFC) means a corporation that operates an inshore fishing enterprise in which:

• The licence holder owns 100% of the voting shares;
• The sole director is the license holder (or in the case of a corporate license holder, the sole shareholder is the sole director); and,
• The owner of 100% of the non-voting shares are held by family members of the license holder (or in the case of a corporate license holder, family member of the sole shareholder), or an “Inshore Fishing Corporation”, or an “Inshore Family Fishing Trust” – both of which are also new terms under the regulations.

For the purpose of qualifying as non-voting shareholders, Inshore Fishing Corporations have the same requirements as IFFCs, but don’t operate the fishing enterprise. For Inshore Family Fishing Trusts, the sole trustee must be the licence holder, or in the case of a corporate license holder, the sole shareholder.  Further, beneficiaries of the trust must be family members (which includes a common-law spouse).

Existing Arrangements. The regulations don’t define what constitutes “use or control of rights or privileges conferred under a licence” or their transfer. DFO, however, describes rights and privileges as:

• The decision-making over fishing activities authorized by the licence as well as the right to engage in an exclusive fishery under the conditions imposed by the licence.
• A proprietary right to the fish caught under the licence and the decision-making over benefits resulting from their catch.
• Privileges granted through policy, such as the ability to make requests for substitute operators, licence renewal, licence reissuance or quota transfers.

As anticipated, parties will need to consider, in future, what constitutes “use or control of rights or privileges conferred under a licence” and their transfer.

Enforcement. The amended regulations are enforced under the Fisheries Act. It was anticipated that entering into agreements with processors and buyers prohibited by the regulations would constitute an offence under the Fisheries Act. Absent the proposed restrictions on agreements with processors and buyers, breach of the prohibition against any third party using or controlling the rights and privileges of a licence can result in sanctions including fines or imprisonment, in addition to restrictions or loss of licences. A licence holder that has been denied the issuance of a licence or has had a licence suspended or cancelled will be ineligible to ever hold the same type of licence again, unless the licence holder resolves the reason for the denial, suspension or cancellation within 12 months from the denial, suspension or cancellation. This appears to allow licence holders to avoid permanent ineligibility for future licences by exiting the arrangement that violated the regulations.

2. Issuance of Licences Only to Individuals (or Wholly Owned Corporations) Who Personally Fish the Licence

As in the proposed amendments, under the final amendments a licence holder is the one who personally fishes and retains the benefit of the licence. This codifies DFO’s existing Owner-Operator policies, currently embedded in the Maritimes Region Commercial Fisheries Licensing Policy and the Commercial Fisheries Licensing Policy for the Gulf Region, which provide that licences are issued in the name of an individual fish harvester (or, for the inshore, their wholly owned company in accordance with the Policy on issuing licences to companies) and that the harvester must “personally fish the licences issued to them”. Sections related to the prohibitions against the transfer of the use and control of the rights and privileges under a licence to fish take effect on April 1, 2021.

Codification of Policy.  Consistent with the proposed amendments, non-exempted licences can be issued to an individual, their estate, or succession, or to a corporation if all shares belong to one individual.

Enforcement. Also consistent with the proposed amendments, fishery officers will enforce Owner-Operator provisions through inspections, both dockside and on-the-water, similarly enforceable under the Fisheries Act. These inspections ensure the licence holder or an authorized substitute operator is present on the vessel. Formal investigations may result in charges and prosecution.

3. Exempted Licences & Grandfathering

The final amended regulations confirm that most existing exemptions under the current policies will be maintained and when grandfathering will be lost.

Categories. Many of the licence categories remain the same as those proposed. The final AFR amendments set out the following categories of licences:

(a) Inshore Independent Core Licence other than groundfish fixed gear ITQ 45-65’, groundfish mobile gear ITQ <65’, herring purse seine, Full Bay scallop, Scotian Shelf shrimp mobile gear in Areas 13 to 15, swordfish longline and certain tuna, bluefin tuna, sculpin, as well as squid jigger or handline, and by other trawl and purse seine if also used in certain licences above. Use or control of licence cannot be transferred.

(b) Coastal Licences, other than certain herring or mackerel.

(c) Inshore Independent Core Licence in which a designated operator status is held by a licence holder in (a). Use or control of licence cannot be transferred.

(d) Inshore Licence in which an operator is named that is held by the head of a non-core enterprise.

(e) Inshore Licence in which a designated operator status is held by the head of a non-core enterprise.

(f) Inshore Licence held by an organization issued an allocation for the benefits of its membership.

(g) Inshore licence for a pre-1989 company, unless “designated operator status” appears on the licence, or the corporation held an inshore fishing licence before January 1, 1979.

The activities under paragraphs (a), (b), (d), and (g) must be carried out personally by the licence holder.

The Maritime Provinces Fishery Regulations (MPFR) amendments set out the same categories of licences for paragraphs (c) to (g), but the exceptions in paragraphs (a) and (b) differ.

Exceptions & Grandfathering. The final amendments maintain many of the proposed exceptions. In particular, paragraph (g) to the AFR categories recognizes the existing grandfathering for pre-1979 corporations and pre-1989 companies.

Loss of Grandfathering. The final amendments with respect to the loss of grandfathering of existing exceptions are as proposed. This means eventually, most licences will be issued to Independent Core licence holders who will be subject to all of these amendments. The amendments provide for two types of licences that will not continue to be exempted when transferred:

• Inshore Independent Core Licence on which “designated operator status” appears.
• Inshore Licence on which “designated operator status” appears, held by the head of a non-core enterprise (for Maritimes Region).

Consistent with the proposed amendments with respect to pre-1989 companies (category (g)), a corporation’s majority shareholder can’t change and must fish the licence personally. Upon reissuance to a new licence holder, these licences can be reissued to another pre-1989 corporation, or to an Independent Core licence holder.

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Please contact your McInnes Cooper lawyer or any member of the Ocean Economy Team @ McInnes Cooper to discuss this topic or any other legal issue.

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