Proposed Fisheries Regulation Amendments Target Fish Processors & Buyers

Publication

Proposed Fisheries Regulation Amendments Target Fish Processors & Buyers

January 15, 2020

By Sarah Campbell, Partner at McInnes Cooper,
Daniel Watt, Partner at McInnes Cooper

The Fall 2019 re-election of the Liberal government means the proposed amendments to federal fisheries regulations remain a concern for industry participants. The federal Minister of Fisheries, Oceans and the Canadian Coast Guard published the draft text of proposed amendments to the Atlantic Fishery Regulations (AFR) and the Maritime Provinces Fishery Regulations (MPFR) along with a Regulatory Impact Analysis Statement on July 6, 2019. However, the government has, to date, not implemented the amendments. The delay was due, in part, to the intervening federal election. But with the government that proposed the amendments still in power (albeit now sitting as a minority government), the amendments are still in play.

Here are three key issues the proposed amendments to the Regulations raise for fish harvesters, processors and buyers.

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

The proposed amendments target arrangements that transfer license rights and privileges from license holders to third parties. In the Statement, the Minister notes the perceived narrowness of the definition of “Controlling Agreement” under the DFO’s Policy for Preserving the Independence of the Inshore Fleet in Canada’s Atlantic Fisheries (PIIFCAF) and the evolution of agreements with third parties to achieve PIIFCAF compliance while still maintaining third-party control or influence over the “licence and the activities authorized under it”. DFO’s 2018 consultation paper on proposed amendments to the AFR originally proposed that “Independent Core Licence holders must retain use and control over rights and privileges conveyed by the inshore licence(s) issued in their name”. However, in response to concerns identified in the consultation process, DFO decided to focus the new restrictions specifically on processors and buyers. This would allow for continued flexibility for structuring in corporate groups that don’t involve processors and buyers, but would restrict the types of agreements in which processors and buyers could engage going forward.

Broad Application. The breath of the proposed definitions of “fish buyer” and “fish processor” will likely preclude any conceivable corporate structures that would indirectly make licence rights available to processors and buyers. In addition to the holders of provincial fish buying or processing licences, the definitions also include: a person who holds a right or interest in the licence-holding corporation (which includes, but is broader than, shareholders); a corporation in which a licence holder holds a right or interest; and any person over whom they exercise direct or indirect control. These proposed new restrictions on buyers and processors apply to:

An inshore fishing licence that names an operator and is held by an Independent Core licence holder (other than a license to fish for species excluded in the existing regulations).
An inshore fishing licence that doesn’t name an operator and is held by an Independent Core licence holder.

However, this restriction doesn’t apply where a person exercises their rights as a creditor respecting a security in the licence under provincial laws.

Existing Arrangements. Industry participants will be familiar with the regulatory history under PIIFCAF, under which licence holders had until April 12, 2014 to terminate any Controlling Agreements. If the proposed amendments take effect, parties to any agreements with processors or buyers will need to review arrangements that replaced prior Controlling Agreements, or into which they’ve entered since, to determine if compliance with the amended Regulations. Going forward, parties will need to consider what constitutes “use or control of rights or privileges conferred under a licence” and their transfer, which the proposed Regulations don’t define. The Statement describes the “rights and privileges” under a licence as including (but not limited to) all of these:

A 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 re-issuance or quota transfers.

It is possible that some existing commercial arrangements would violate the amendments, requiring parties to restructure them to comply. However, there are other legitimate arrangements among processors and harvesters that comply with PIIFCAF – and may comply with the (proposed) amendments. In its PIIFCAF – Information Note, DFO notes that PIIFCAF wasn’t designed to hinder the ability of fish harvesters to raise capital, and discusses whether certain commercial arrangements would constitute Controlling Agreements, including: loans requiring payment upon licence transfer; penalty clauses; powers of attorney and rights of first refusal; and supply agreements where a lender loans money on the condition that fish harvesters land their product with the lender. If the amended Regulations are implemented, parties to such arrangements will need to consider if “use or control of the rights or privileges” would occur in the same situations.

Enforcement. By effecting the proposed amendments as regulations rather than policy, the proposed restrictions will be enforceable under the Fisheries Act. DFO’s ability to enforce PIIFCAF, which is departmental policy rather than law, is limited to imposing conditions on, suspending or terminating licences of harvesters that are party to Controlling Agreements. However, once the proposed restrictions are effected, entering into prohibited agreements with processors and buyers will constitute an offence under the Fisheries Act. As a result, harvesters, processors and buyers that enter into non-compliant agreements could, if convicted, be subject to sanctions including fines or imprisonment, in addition to any restrictions on or loss of licences. In the Statement’s commentary, the Minister notes the prohibition against the transfer of rights and privileges under a licence to buyers and processors would be “enforced though established departmental enforcement approaches and procedures.”

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

The proposed amendments will codify DFO’s existing Owner-Operator policies requiring that DFO issue licences in the inshore and coastal sectors only to individual fish harvesters (or wholly owned companies) and that licence holders personally fish the license. The Minister cited this as a response to stakeholder interest in DFO adopting a more stringent approach to upholding the Owner-Operator Policy and the Fleet Separation Policy.

Existing Policy. DFO’s Owner-Operator Policy is embedded in Sections 5 and 8 of the Maritimes Region Commercial Fisheries Licensing Policy and in Section 22 of the Commercial Fisheries Licensing Policy for the Gulf Region. These policies currently 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”.

Codification of Policy. The proposed amendments mandate that non-exempted licences can only be issued to: an individual, or their estate or succession; or a corporation, all of the shares of which belong to one individual. The amendments go on to require that in respect of non-exempted licences (or an inshore licence in which an operator is not named that is held by an Independent Core licence holder), the licence holder, the operator named in the licence, or a substitute operator must personally carry out the activities authorities authorized under the licence.

Enforcement. These requirements will similarly be enforceable under the Fisheries Act. The Statement notes that fishery officers would enforce the proposed amendments pertaining to the Owner-Operator provision through regular on-the-water inspections, ensuring the licence holder is present on the vessel or DFO has authorized a substitute-operator.

3. Exempted Licences & Grandfathering

The Statement confirms that all existing exemptions under the current policies will be maintained – and confirms when grandfathering will be lost.

Categories. To manage the existing exemptions and specify application of the new prohibitions, the proposed Atlantic Fishery Regulations (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 ITQ <65, swordfish longline and certain tuna, bluefin tuna, and sculpin.

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

(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 an operator is not named that is held by the head of a non-core enterprise.

(f) Inshore licence for a pre-1989 company, unless an operator is not named in the licence, or the corporation held an inshore fishing licence before January 1, 1979.

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

Exceptions & Grandfathering. The carve outs in paragraph (a) to the AFR categories codify the existing exempted fleets under PIIFCAF, plus certain tuna, bluefin tuna and sculpin. Paragraph (f) to the AFR categories recognizes the existing grandfathering for pre-1979 corporations and pre-1989 companies. The categories also ensure the proposed Regulations maintain the existing exceptions for: licence holders that were authorized to designate an operator; fish harvesters associations that receive allocations; Eastern Nova Scotia snow crab multi-shareholder companies; and certain Indigenous organizations. Midshore and offshore licences are not subject to the proposed amendments.

Loss of Grandfathering. In relation to loss of grandfathering, the Statement notes that many of the existing exceptions granted over the years are only valid as long as the particular licence holder remains the holder of the excepted licence. This means that, eventually, most licences would be issued to an Independent Core licence holder, and be subject to all of the proposed amendments. Specifically, the Statement notes that the licences described in categories (c), (d) and (e) will not continue to be exempted when transferred, namely any:

Inshore Independent Core Licence in which an operator is not named.
Inshore Licence in which an operator is named that is held by the head of a non-core enterprise.
Inshore Licence in which an operator is not named that is held by the head of a non-core enterprise.

With respect to pre-1989 companies (category (f)), the Statement notes that the 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.

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

McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

© McInnes Cooper, 2020. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at [email protected] to request our consent.

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