The Brazilian manufacturer called investors to a conference call on Monday morning to discuss the matter; the litigation is expected to be one of the largest in the world

One of the decade’s largest legal disputes in the world, between Brazil’s Embraer and U.S.-based Boeing, if confirmed, will be heard in the U.S. courts, specifically the Southern District of New York, as the parties agreed in the memorandum of understanding signed more than two years ago and obtained by Estadão/Broadcast.

The Brazilian aircraft manufacturer called investors to a conference call at 9 a.m. this Monday, the 27th, when it is expected to step up its rhetoric against Boeing after the company canceled the deal valued at USD 4.2 billion.

The application of New York law to the dispute would be unfavorable to the Brazilian company, according to sources who spoke on condition of anonymity. “New York law tends to protect what is in the contract. It is much more difficult to declare a clause void. In Brazil, if it were proven that Boeing acted with gross negligence or willful misconduct, there would be a very good chance that any damage limitation clauses would be overturned”, said one of the sources.

All the clauses of the contract, however, are still unknown. “There are some contracts in which even the costs of the merger and acquisition transaction cannot be recovered if the deal does not go through”, the source explained.

In any event, experts expect a long litigation process between the competitors, precisely at a time of widespread difficulties in the face of the consequences of the crisis brought by the covid-19 pandemic, which hit the aviation sector hard.

When contacted, Embraer said it would not comment on the forum chosen for any litigation. The company added that it ended 2019 with a solid cash position and has no significant debt maturing in the next two years. “Even so, we will adopt additional measures to preserve our liquidity and maintain our solid finances during these turbulent times, including inventory and production adjustments, extension of payment cycles, reduction of expenses and capex, and access to complementary sources of financing.”

Embraer had already begun moving to complete the deal and spent around BRL 485 million to separate its commercial division. The company also moved its headquarters from Avenida Brigadeiro Faria Lima, in São José dos Campos, to the Eugênio de Melo district in the same city. According to Embraer executives, in a conference call to present fourth-quarter results, the delay in closing the deal represents an additional monthly cost of between USD 10 million and USD 15 million.

Shortly after the deal was announced, the transaction structure was heavily criticized by Embraer’s minority shareholders, who claimed the format concealed a change of control of the company. At the time, minority shareholders turned to the European Commission to try to prevent the sale of control of Embraer’s commercial aviation division as proposed by Boeing, since, according to the group, the most profitable part of the company would be sold, leaving the rest struggling.

The Brazilian Investors Association is now expected to challenge Embraer in the Brazilian courts, mainly over the expenses already incurred for the transaction that never materialized.

In canceling the transaction, Boeing said Embraer had not met the “necessary conditions” for the deal to be completed. Asked by reporters what these were, Boeing merely said they were “key elements of the terms of the partnership”.

Embraer, in turn, harshly criticized the U.S. company and signaled that a dispute is imminent, stating that Boeing had engaged in a systematic pattern of delaying and breaching the agreement because it intended not to complete the transaction due to its “reputational problems” involving the 737 MAX crisis and financial difficulties.

According to Giamundo Neto Advogados partner and arbitration specialist Camillo Giamundo, the pandemic crisis would not be a justification for breaking the contract. “It is a long agreement. Over these almost two years, a series of costs have been incurred.”

According to Felipe Sperandio, an international commercial arbitration specialist at Clyde & Co LLP, many questions still hang over the future of this dispute. The main lines of argument are likely to be the condition precedent of the agreement (which Boeing says Embraer did not meet, which Embraer denies) and whether Boeing acted in bad faith by allegedly stalling the process to justify the cancellation.

Report originally published by Cristian Favaro and Fernanda Guimarães in Jornal Estadão (in Portuguese), on 04.27.2020.