Why Richard Branson Could Not Stop Alaska Airlines From Taking Over Virgin America

When I first heard that Alaska Airlines would be taking over Virgin America, I was puzzled because Virgin has built a very distinct brand that spans other product categories. I also assumed that any acquisition would have the support of Sir Richard Branson, the Founder of Virgin Group.

However, in his post On Virgin America, Branson provides the backstory on the creation of Virgin America and offers an interesting comment about the Alaska Airlines takeover:

I would be lying if I didn’t admit sadness that our wonderful airline is merging with another. Because I’m not American, the US Department of Transportation stipulated I take some of my shares in Virgin America as non-voting shares, reducing my influence over any takeover. So there was sadly nothing I could do to stop it.

Virgin America has its principal executive offices in Burlingame, California. In Silicon Valley, many companies are started by foreign-born founders. Some companies even have multiple classes of stock to maintain voting control in the hands of its founders. So, what was different about Virgin America that the US Department of Transportation required Richard Branson to take some of his shares as non-voting shares?

The answer resides in how the Department of Transportation treats domestic carriers versus foreign carriers. In the United States, foreign civil aircraft may not take on passengers for compensation from one place in the United States to another place in the United States except in a few limited circumstances.

To determine whether a carrier is domestic or foreign, the US Department of Transportation looks beyond the carrier’s principal place of business. 49 U.S.C. § 40102(a)(15) defines a “citizen of the United States” as:

a corporation or association organized under the laws of the United States or a State, the District of Columbia, or a territory or possession of the United States, of which the president and at least two-thirds of the board of directors and other managing officers are citizens of the United States, which is under the actual control of citizens of the United States, and in which at least 75 percent of the voting interest is owned or controlled by persons that are citizens of the United States.

So, if Sir Richard Branson had more than 25 percent of the voting interest in Virgin America, the company would not be considered to be a citizen of the United States and would have been ineligible to transport passengers domestically within the United States.