SALE TO BOMBARDIER BY THE ONTARIO AEROSPACE CORPORATION OF A 49 PERCENT INTEREST IN DE HAVILLAND INC

SALE TO BOMBARDIER BY THE ONTARIO AEROSPACE CORPORATION OF A 49 PERCENT INTEREST IN DE HAVILLAND INC.

1. 
   Brazil claims that the sale by the Ontario Aerospace Corporation of its 49 percent share to Bombardier constitutes a prohibited export subsidy contrary to Articles 3.1(a) and 3.2 of the SCM Agreement. We will first examine Brazil's claim that the sale constitutes a "subsidy" within the meaning of Article 1 of the SCM Agreement. Only in the event of an affirmative finding on this claim will we examine the question of export contingency.
   
2. 
   Brazil asserts that in January 1992 Bombardier and the Government of Ontario, through the Ontario Aerospace Corporation ("OAC"), purchased 51 and 49 percent, respectively, of the shares in Boeing's de Havilland Division, for a total purchase price of $100 million. At the same time, Bombardier reserved the option to purchase from the Government of Ontario the latter’s remaining 49 percent share in de Havilland for a total of Cdn $49 million. In January 1997, Bombardier exercised this option, ⁵⁸⁰ issuing to the Government of Ontario and OAC a 15-year promissory note bearing interest at seven percent with annual principal repayments of Cdn $4.9 million in years six through 15.⁵⁸¹ Brazil argues that, during the period 1992-1997, OAC provided to de Havilland four distinct types of subsidies which made the purchase of OAC’s 49-percent interest even more attractive to Bombardier: interest-free shareholder loans in the amount of Cdn $200 million; cash grants of up to Cdn $100 million; sales financing support for de Havilland’s Dash 8 aircraft, including coverage of losses; and, reimbursement of restructuring costs of up to Cdn $370 million. Brazil asserts that "increases in de Havilland's equity … did not accrue to [OAC], whose return was strictly limited to its initial investment in de Havilland."⁵⁸²
   
3. 
   Canada did not submit any arguments on the question of whether the de Havilland sale constitutes a "subsidy" within the meaning of Article 1.1 of the SCM Agreement. Canada explicitly stated that it did not put in a defence on whether the transaction is a "subsidy".
   
4. 
   In response to questions from the Panel, Brazil confirmed that it is not challenging the four distinct types of subsidies allegedly provided by OAC to de Havilland during the period 1992-1997. Rather, Brazil asserts that "the $49 million purchase price represented a major windfall for Bombardier and a subsidy within the meaning of Article 1.1 of the [SCM] Agreement, given that contributions the present value of which constitute $874.7 million were made by the Canadian and Ontario Governments to de Havilland between 1992, when the $49 million purchase price was set, and 1997, when Bombardier completed the purchase of de Havilland."⁵⁸³ According to Brazil, the "benefit" accrued to Bombardier when it purchased the remaining share of de Havilland in 1997 at a price fixed in 1992 that "did not reflect the value added by [the] contributions"⁵⁸⁴ made by the Canadian and Ontario Governments between 1992 and 1997. According to Brazil, "paying this $49 million debt will not bring Bombardier anywhere close to offsetting the tremendous benefit that accrued to it when [Bombardier] purchased the remaining shares of de Havilland in 1997",⁵⁸⁵ because Bombardier "has pledged to pay to Ontario the same amount Ontario paid for its share in de Havilland five years earlier, regardless of any increase in de Havilland's value in the interim."⁵⁸⁶
   
5. 
   In our view, Brazil's claim of "benefit", and therefore subsidization, in the context of the de Havilland sale is based on Brazil's understanding that the value of de Havilland's equity increased between 1992 and 1997. According to Brazil, Bombardier derived a "benefit" from such increase because, in acquiring OAC's 49 percent share in 1997, it was merely required to pay the 1992 value of that share. The "benefit", in other words, resides in the difference between the 1992 value of OAC's 49 percent equity share (i.e., $49 million), and the increased 1997 value of that 49 percent equity share (which the purchase price, fixed in 1992, did not account for).
   
6. 
   On the basis of information in the record, on 27 November 1998 we asked Canada to specify the total value of de Havilland's equity on the date of the sale of OAC's 49 percent share to Bombardier. Canada replied that OAC sold its share in de Havilland as a result of political imperative. In view of this political imperative, and because the purchase price had been fixed in 1992, no analysis was done to determine the value of de Havilland in 1997. Canada therefore stated that it did not know the total value of de Havilland's equity at the time of sale. At the second substantive meeting on 12 December 1998, however, Canada asserted that the value of OAC's 49 percent equity share in de Havilland decreased between 1992 and 1997. According to Canada, de Havilland had a negative equity value in January 1997. In support, Canada provided the Panel with a letter from the Vice President, Legal Services, of Bombardier, who stated that "[t]he book value of de Havilland in 1997 was irrelevant to the price paid at the time. The 1992 agreement set the price ($49 million) for the Government of Ontario's share of de Havilland. According to the audited statements of de Havilland, the net equity value of de Havilland when Ontario exercised its put in January, 1997 was negative …"
   
7. 
   Brazil made two comments on the negative value of de Havilland's equity in January 1997. First, Brazil stated that "even if de Havilland's net equity value was negative at the time of its sale in 1997, it does not change the fact that it would have been even more negative if government contributions, the present value of which constitute $875 million, had not been made to de Havilland between 1992 and 1997. These contributions increased the value of Ontario's equity beyond the price set in 1992, but Ontario was given no share in this increase."⁵⁸⁷
   
8. 
   Second, Brazil states that "a negative equity value does not give the complete picture of the value of a shareholder's equity. It does not mean that de Havilland was worth nothing - or less than nothing - to Ontario and Bombardier when purchased in 1997. De Havilland's book of orders at the time of sale, for example, although not factored into net equity value, represented value which an equity investor selling its shares could reasonably expect to be captured in the selling price of its shares." ⁵⁸⁸
   
9. 
   With regard to Brazil's first comment, Canada responds that "[w]hether de Havilland's net equity value would have been more negative without the contributions is immaterial: Ontario's sale price was still well in excess of what the equity was worth. Hence, there is no benefit conferred by the sale." We agree with Canada's response.
   
10. 
    Canada makes three observations with regard to Brazil's comment on the value of de Havilland's order book. First, Canada notes that "Brazil has adduced no evidence as to what the value of the de Havilland order book was on the date of sale, let alone demonstrated that the value would have been sufficient to compensate the purchaser for the negative net equity value of de Havilland at the time. Thus, Brazil has not demonstrated that a benefit was conferred by the sale. Second, any such valuation would have to reflect the possibility that orders may not result in actual sales … Third, an order book does not indicate the viability of an aircraft manufacturer: Fokker’s order book just prior to its bankruptcy in early 1996 contained firm orders for 81 aircraft (… source: Lundkvist)." We concur with these observations.
    
11. 
    In light of the information concerning the value of de Havilland's equity at the time of sale in January 1997, we asked Canada to "provide the audited statements of de Havilland that form the basis of this statement, along with all accompanying notes and any other relevant documentation." Canada replied:
    

Canada further notes that Brazil has adduced no evidence whatever in support of its assertions about the increase in de Havilland’s value as a result of alleged subsidies between 1992 and 1997. As well, Canada has shown, in respect of Brazil’s unfounded and incorrect allegations about the alleged forgiveness of the $49 million promissory note, that Brazil’s assertions about de Havilland suffer from a fundamental lack of credibility. Brazil’s allegations about the rise in value of de Havilland should be viewed, in Canada’s respectful submission, in that light.

Finally, Canada notes that it has not put in a defence regarding whether these contributions are subsidies within the meaning of Article 1 of the SCM Agreement. Canada notes that Brazil is in agreement with Canada regarding the relevance of the principle of judicial economy to the issues to be determined in this case.

Canada does not consider it appropriate to adduce evidence in response to baseless and false allegations and a case that has not been established, and in support of a defence Canada has not made.

12. 
    In comments on Canada's response, Brazil stated:
    

It is Canada, and not Brazil, that “suffer[s] from [the] fundamental lack of credibility” noted in Canada’s reply. First, Canada has failed to supply the background documents supporting the statements in the letter from Mr. Desjardins submitted as evidence in support of its defense. Second, Canada has failed effectively to rebut evidence submitted by Brazil from the Public Accounts of Ontario detailing contributions, the present value of which constitute $875 million, made by the Canadian federal and Ontario governments to de Havilland between 1992, when the $49 million purchase price for Ontario’s share in de Havilland was set, and 1997, when Bombardier completed the purchase of Ontario’s share. Canada’s argument that this massive injection of capital did not effect the value of Ontario’s equity is the only claim lacking credibility.

1. 
   We are surprised that Ontario was not furnished with a copy of de Havilland’s financial statements at the time of the 1997 sale. We also regret that Canada chose not to provide us with copies of the audited statements on which Canada's statement concerning the January 1997 value of de Havilland was based. However, in the absence of any evidence to the contrary, we have no basis for rejecting Canada's assertion, based on a signed statement from a de Havilland executive, that de Havilland had a negative equity value at the time of the January 1997 sale.
   
2. 
   We note that, according to Brazil, "Canada has failed effectively to rebut evidence submitted by Brazil from the Public Accounts of Ontario detailing contributions, the present value of which constitute $875 million, made by the Canadian federal and Ontario governments to de Havilland between 1992, when the $49 million purchase price for Ontario’s share in de Havilland was set, and 1997, when Bombardier completed the purchase of Ontario’s share." We recall, however, that "Brazil does not consider that [such contributions] were themselves subsidies contingent upon export performance."⁵⁸⁹ Accordingly, Canada's alleged failure to effectively rebut evidence adduced by Brazil with regard to such contributions is not relevant to Brazil's claim.
   
3. 
   We recall that Brazil's claim was premised on an increase in the value of de Havilland's equity between 1992 and 1997. In light of the unrebutted evidence of a decrease in the value of OAC's 49 percent equity share in de Havilland between 1992 and 1997, we consider that there is no factual basis to Brazil's claim of subsidization in the context of the sale of OAC's 49 percent share in de Havilland to Bombardier in 1997. Indeed, as a matter of logic, we cannot accept that an Article 1.1 "benefit" is conferred when a purchaser is required to pay $49 million for an equity share valued in the negative. It makes no difference to this analysis that the amount of the deficit is less than it might have been absent alleged government contributions. For these reasons, we find that there is no prima facie case that the sale by the OAC of its 49 percent share in de Havilland to Bombardier in 1997 constitutes an export subsidy contrary to Article 3.1(a) and 3.2 of the SCM Agreement, and we reject Brazil's claim accordingly.
   
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