Embraer to Have Some Blocking Power in Boeing Joint Venture

(Bloomberg) -- Embraer SA will have the right to block ten crucial matters in the commercial-aircraft joint venture it’s forming with Boeing Co, according to a Memorandum of Understanding between the two companies.

The document was made available via the website of the Sao Jose dos Campos Metalworkers Union on Sept. 21 after the Labor Prosecutor’s Office requested a copy of the MoU under judicial confidentiality and made it public.

While Boeing will have “full strategic and operational control and management” of the new company, and Embraer will have a non-voting board member on the board, the Brazilian company can block decisions related to any of the following issues, "considering the best interest of the NewCo," as the joint venture is known:

  • Change of NewCo’s use of the Embraer name or logo;
  • NewCo’s dissolution or liquidation, or filing for bankruptcy;
  • Transfer of NewCo’s existing operations, or change in domicile outside Brazil;
  • Change of NewCo’s independent auditor unless to one of the so-called “Big 4” firms;
  • Change of NewCo’s dividend policy;
  • Certain capital contributions (as defined in dilution policy described below) with the clear intent to artificially dilute the minority shares; Embraer would not have the power to veto the amount or timing of funding made for legitimate business purposes, as determined by Boeing in the exercise of its good faith discretion;
  • Certain amendments of NewCo’s bylaws;
  • Change of NewCo corporate form;
  • Change of NewCo’s object or purpose; and
  • Capital reduction

Embraer’s American Depositary Receipts reversed earlier gains after the MoU was reported and were trading down 0.3 percent to $19.72 at 2:08 p.m. in New York.

Boeing and Embraer announced the signature of a preliminary deal in July under which Boeing will pay $3.8 billion to own 80 percent of a partnership controlling Embraer’s commercial airplane and services businesses. The Brazilian manufacturer will hold 20 percent. The final agreement is close to being finalized, Bloomberg reported on Sept. 26.

The preliminary deal, which establishes a lock-up period of ten years for the companies’ stakes in the new venture, also gives Embraer a put option to a cash payment for any portion of its stake in the new venture at the price paid by Boeing at the time of the deal’s signature.

Boeing and Embraer didn’t immediately comment.

The commercial-aircraft venture would be Boeing’s largest operation outside the U.S. by far, and the goal is to expand operations and use some of Embraer’s in-house solutions, such as landing gear and avionics technologies, rather than outsourcing them, according to people close to the negotiations. Embraer’s commercial division would form a new Boeing center of excellence for aircraft with less than 150 seats challenging an Airbus-Bombardier Inc. partnership.

The memorandum provides a glimpse of how operations are intended to come together. An engineering services agreement would include “near term collaboration,” possibly giving Embraer’s designers a role in shaping the so-called 797 aircraft program Boeing is mulling launching next year.

The companies also have a pact to cross-license intellectual property, while a new marketing joint venture for the KC-390 cargo aircraft hints at “industrial collaboration.”

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