In case there was any doubt that the issue of whether subsidies can be "extinguished" through privatizations or other sales of a company, the three members of the Appellate Body Division in EC - Aircraft set out three separate opinions on the issue:
726. Although the Members of this Division discussed at length the issue of extinction of subsidies in the context of partial privatizations and private-to-private sales, no common view emerged. Without prejudice to the further considerations and findings set out below, each Member of the Division wishes to set out separate views on this issue:
(a) Noting that the Appellate Body has previously ruled in privatization cases that a full privatization, conducted at arm's length and for fair market value involving a complete or substantial transfer of ownership and control, "extinguishes" prior subsidies, one Member is of the view that this rule does not apply to partial privatizations or to private-to-private sales.
(b) One Member noted that, as discussed above, the Appellate Body ruled in US – Countervailing Measures on Certain EC Products that, in the context of Part V of the SCM Agreement, full privatization at arm's length and for fair market value may result in extinguishing the benefit received from the non-recurring financial contribution bestowed upon a state-owned firm. In response to an argument made by the United States in that case, the Appellate Body observed that privatization at arm's length and for fair market value does not remove the equipment that a state-owned enterprise may have acquired with the financial contribution and that, consequently, the same firm may continue to make the same products with the same equipment. The Appellate Body agreed with the United States that the utility value of equipment acquired as a result of the financial contribution is not extinguished as a result of a privatization at arm's length and for fair market value. However, as the Appellate Body explained, the utility value of such equipment to the newly privatized firm is legally irrelevant for purposes of determining the continued existence of a "benefit" under the SCM Agreement. The Appellate Body recalled that it had found in Canada – Aircraft that the value of the benefit under the SCM Agreement is to be assessed using the marketplace as the basis for comparison. It follows, therefore, that once a fair market price is paid for the equipment, or more broadly the assets of a company, their market value is redeemed, regardless of the utility value a firm may derive therefrom. In response to the argument by the United States that nothing about the company changes as a result of the privatization, the Appellate Body agreed with the panel in US – Countervailing Measures on Certain EC Products that the new private owners are "profit-maximizers" who will seek to "recoup{} through the privatized company … a market return on the full amount of their investment." Therefore, the new private owners may no longer benefit from any subsidies received by the company before its privatization. This Member considers the rationaleunderlying the Appellate Body's case law on full privatization in the context of Part V of the SCM Agreement equally to apply in situations of partial privatization and private-to-private transactions and in the context of Part III of the SCM Agreement. However, this Member also notes that, as the Appellate Body emphasized in US – Countervailing Measures on Certain EC Products, there is "no inflexible rule" that a "benefit" derived from pre-privatization financial contributions expires following privatization at arm's length and for fair-market value. Rather, as the Appellate Body stated, "{i}t depends on the facts of each case." An important question in this context is to what extent the partial privatization or private-to-private transactions resulted in a transfer of control to new owners who paid fair market value for shares in the company
(c) One Member of the Division, though affirming the general test that an extinction of benefit is to be determined upon a consideration of all relevant facts, entertains no small measure of doubt that an acquisition of shares, concluded at arm's length and for fair market value, constitutes relevant circumstances warranting the conclusion that an extinction of benefit has taken place. A subsidy granted to a recipient company contributes to the net asset value of that company. The value of that asset permits the recipient to enjoy an enhanced stream of future earnings over the life of the asset. The asset is the property of the recipient. The recipient's shareholders enjoy the right to the dividends that may be declared by the recipient and to any capital gains that arise from the enhanced earnings attributable to the recipient. When shares change hands on an arm's-length basis and for fair market value, the buyer pays a price that, in the estimation of the buyer, places a proper value on the future earnings of the recipient. Those earnings derive from all the assets of the recipient, including the benefit of any subsidy paid to the recipient. One shareholder may not accurately value or properly manage the assets of the recipient. Precisely for this reason, sales of shares take place: the buyer believes that the assets, properly managed, will be worth more over time than the price paid, and the seller believes the opposite. Time will tell who is correct. The central point is that a sale of shares, whether or not it conveys control, transfers rights in the shares to a new owner. The assets of the company, to which the shares attach, do not change at all. Nor could it be otherwise, because the buyer would then not acquire the full benefit of the bargain: the buyer would pay for an asset (the subsidy) that had in the very sales transaction been "extinguished". Shares in listed companies are traded on stock exchanges with great frequency and without any fear that sales on the market diminish the underlying value of the assets owned by these companies. The changing price of listed securities reflects the different valuations that buyers and sellers place upon companies and their underlying assets. However, nothing about these trades extracts the value of any asset, including the benefit of any subsidy granted. That subsidy continues to benefit the recipient, even if the ownership of the recipient's shares changes from one day to another. Given that the Appellate Body in this case does not need to come to any final view on the issue of extinction in the context of a partial privatization or private-to-private sales, these matters do not require more definitive determination.
As I read it, Member 1 wants to keep this whole doctrine narrowed to privatizations; Member 2 buys into the general idea that the benefit of a subsidy can be extinguished through changes of ownership under certain conditions; and Member 3 thinks the benefit continues on regardless of any change in ownership.
Unlike many issues, I don't have strong feelings about this one. I can see the arguments made by both sides. Any readers with strong feelings, feel free to offer them in the comments!
