Latin America offers vast opportunities for Middle East investors looking to expand their presence in the region. As a result, Middle East investors are increasingly looking to Latin America for both yield and diversification. For example, in 2009, Abu Dhabi Investment Authority undertook construction of two towers in Rio de Janeiro and the United Arab Emirates’ Aabar Investments invested $328 million in the initial public offering of Banco Santander of Brazil.
The Middle East has an arid climate forcing the region’s countries to import ninety percent of their food supply. On the other hand Latin America’s regular rainfall and abundance of solar energy provides a year-round growing season. Moreover, Latin America has abundant deposits of natural resources which include but are not limited to iron, copper, agricultural land and food crops.
However, investments in Latin America can be fraught with challenges and investors can face a variety of legal risks in the course of doing business in Latin America. From our experience of working with several investment deals in recent years, here are some of the key issues investors need to factor into their thinking.
What Issues Should An Investor Consider Before Investing In Latin America?
- Local Regulatory Environment. Local regulations may not necessarily square with the expectations investors derive from other formal statutes and regulations. Without doubt, face-to-face meetings with the relevant regulators are essential. Investors that ignore this process may upset the regulator or worse. Understanding what drives government interest is therefore essential. In numerous cases, we have helped clients negotiate with regulators, drawing on our in-depth knowledge of local regulations in Latin America and our understanding of local priorities.
- Investment Treaties. A prudent investor will take steps to gain maximum protection for their investment. Ensuring that the investment is protected under an investment treaty should be the first step to mitigate foreign investment risk. Investor should be aware of any more favorable provision contained in investment treaties. Understanding these different provisions can be complex and even minor errors can sometimes prove costly. For peace of mind, and to ensure that investment is covered by the best protection available under any applicable investment treaty, we recommend that a legal counsel needs to be consulted before finalizing any investment.
- Government Contracts. It is not unusual for foreign investors to contract directly with a government owned entity for the purpose of carrying out an investment. There are a few issues that one should consider in these circumstances. Ideally, the contract should include an express waiver of sovereign immunity by the government or government entity to ensure accountability for breaches of contract by the public entity.
- Political Risk Insurance. A further way of managing investment risk is to obtain political risk insurance. The risks to which this type of insurance responds are government or politically related risks. As with any type of insurance, there is a variety of policies in the market that cover losses occurring from different types of events. It is ultimately up to the investor to decide which policy is most suitable.
- Contractual Safeguards. Many investors are not aware of the extent to which their business in Latin America may expose them to liability. A contract provides an opportunity to manage that exposure by limiting the liability. Negotiating agreements that protect the long-term value of the investment is an absolute necessity. If the other party prepares the first draft of any contract, one should assume that the provisions of that draft are those that favor that party, which is one reason why it is typically best to be the party that prepares the first draft of any contract.
- Dispute Resolution. The enforcement of contractual rights is subject to the dispute resolution procedure prescribed in the contract. Consider very carefully how disputes under the contract will be resolved, e.g., by litigation or by arbitration, and in what forum, and where. Latin American governments will always prefer matters to be litigated in their national courts, but investors clearly will not; a middle way needs to exist. Arbitration remains a popular dispute resolution mechanism across Latin America and there have been some recent positive changes to the way disputes are administered.
- Employment Matters. If an investor hires any worker in Latin America, it will become subject to local labor laws. This is a complicated area for employers and therefore they need to understand the basic rules applicable to such issues as hiring, management, incentives, promotion and discharge of employees. Smaller offices managed by executives sent from overseas may have the highest risk of making mistakes in this area, and the resulting potential liability may be out of proportion to the size of the office.
- Engaging Legal Counsel. Prior to entering into negotiations with Latin America, investors need to engage a legal counsel that is experienced in advising companies in connection with investments. The legal counsel will have responsibility for reviewing and negotiating the terms and conditions of any investment, while seeking to protect the interest of the investors. It is essential to seek legal advice to identify risks that may be lurking and to mitigate those risks before liabilities or problems arise.
The main challenge for Middle East investors will be to adapt their expectations and operational methods to local realities. Investing successfully in Latin America takes careful planning and foresight. Investors should be mindful of the risks, but not be deterred. Having an experienced legal counsel on the ground, with good local connections, is the best way to secure and structure deals, and doing so also enables investors to respond quickly to unexpected problems. With significant experience in investments in Latin America and working with Latin American companies, we know the do’s and don’ts in the region and can provide timely, comprehensive advice wherever you operate in Latin America.