Boeing’s termination annoucement of the Joint Venture (JV) entered into in 2019 with Embraer evidences the importance of consistent contracts to document JVs and equity-related transactions between foreign entities and Brazilian counterparts.
JV is a legal format widely used by small to large size companies to structure co-investments in Brazil.
In the case of the two aviation companies, the parties signed a Master Transaction Agreement which was terminated on April 25th by the american corporation on the grounds, according to the public note, that “Embraer did not satisfy the necessary conditions.” In response, Embraer declared publicly that Boeing “manufactured false claims as a pretext to seek to avoid its commitments to close the transaction” and that “Embraer will pursue all remedies against Boeing for the damages”.
Based on public information available, the litigation (if initiated) will likely to be concentrated in the section of the contract named “Conditions Precedent to Closing”, where the parties list which conditions are to be satisfied by each company in order to close the transaction.
Market practice of conditions precedent used in JVs and other equity transactions includes corporate approval, transfer of strategic assets, capital infusion, and local and foreign authorities approval.
The negotiation process of JVs follows a standard script, which encompasses the execution of (i) Memorandum of Understanding (MoU), designed to list the key corporate and commercial terms and conditions, and (ii) Joint Venture Agreement, Shareholders Agreement, Commercial and Technology Agreements, and other ancillary contracts.
There are multiple examples of successful JVs that last for years. However, the case of the two giant aviation companies evidences the importance that co-investment transactions involving foreign and Brazilian counterparties are documented by solid and well structured contracts, containing clauses to cover the shareholders’ relationship, management, covenants to each party, and, also, the conditions precedent to be fulfilled by the future shareholders in order for the business to close and become effective.
Being minded about the above is key to mitigate risks associated with JVs as adverse times such as the current one will happen and test what has been signed and will provide the direction to solve doubts, loopholes, and eventual litigation.