The next phase of China’s economic growth will require many Chinese companies to go global and seek international investments by acquiring companies and assets around the world. The rapid accumulation of capital through continued growth in China means fewer and more expensive investment opportunities domestically, creating a pressure that needs to be released by expanding its investment boundaries.
The next phase of investment by Chinese companies overseas is a matter that concerns not only China but the entire world. The consequences of China’s overseas expansion, and particularly its success, will have longterm effects on the global economy as a whole.
Latin America has become a key focus for Chinese overseas investments. When the Spaniards and Portuguese conquered what came to be known as Latin America they came looking for great treasures and stayed, having found them. Centuries on, most of Latin America’s treasures remain underdeveloped, and are now a primary target of Chinese companies. In 200 years of interacting with the rest of the world, little has been achieved by Latin Americans to consistently transform their natural resources into longterm, sustained economic growth and welfare. The reason for this has not been lack of foreign investment, but rather the failing of Latam countries to adjust their economic, social and political structures to the needs of sustainable, longterm development.
But now, a virtuous synergy brings China and Latin America together. On one side is China, with its substantial capital and highly developed technological resources, as well as its thirst for natural resources and investment opportunities. On the other is Latin America, with its vast but underdeveloped natural resources, and with its need for capital and technological expertise. The success of their cooperation further requires China to provide Latin America its proven experience transforming foreign investment into longterm, sustainable growth and local technological innovation. This should be an essential factor in the thinking of Latam governments as they build the institutional framework for Chinese investments in Latin America with the Chinese government.
But the success of Chinese investments in Latin America depends not only on government action. It is a process that also requires Chinese and Latin American businessmen interacting in an efficient manner.
Latam countries share common features that distinguish them from most other jurisdictions in the world. They share a strong influence of European immigration. Most countries have Spanish as their mother tongue, the main exception being Portuguese-speaking Brazil. Almost all Latam countries are influenced by the French civil code and have centuries of written constitutions and codes regulating administrative, contract, labour and corporate law, as well as other major aspects of business law.
This introductory contribution to the process of Chinese investments in Latin America centres on three key issues when facilitating Chinese companies landing across the Latin American region.
The first issue is the need for a regional legal overview. Latin America (including the Caribbean) has 46 national economies interacting in roughly seven regional markets, i.e. customs unions, trade agreements, common markets, etc. Before making any decision to invest, Chinese companies need a comparative analysis of regional trade agreements, local taxation, requisites for incorporation of investment vehicles, and other enquiries across Latin America. A basic example of the challenge this can present is when a Chinese investor purchases or establishes a company with subsidiaries or businesses in multiple Latam countries. Today, very few law firms offer a single regional platform that may identify antitrust merger procedures required in each relevant Latam jurisdiction.
The second issue is standardization of transaction documents. The use of, for example, preanalysed templates of letters of intent, confidentiality and exclusivity agreements, due diligence request lists, due diligence reports and acquisition contracts will allow Chinese clients to design and implement contractual packages that may be used in multiple transactions within the region, subject to adjustments that may be required by applicable law. This allows the investor to avoid reinventing the wheel or having to repeatedly renegotiate general issues such as payment terms, escrows, remedies for post-closing liabilities, indemnifications provisions, survival terms, thresholds, baskets and dispute resolution clauses, and other terms and conditions of the transactions documents. Likewise, it provides comfort that all transactions are designed and implemented following preapproved standards and that any variances must be explained and justified. Standardization facilitates accountability and monitoring of transactions, allowing for continued improvement and avoidance of legal risks.
A third issue is the dispute resolution mechanism most suitable for doing business in Latin America. The first consideration is investment arbitration, which addresses disputes with governmental authorities. Latin America has a history of opportunistic shortterm governmental policies which makes political risk an important issue when evaluating investment risk. Investment protection treaties can be useful to mitigate this risk by providing for a suitable international arbitration forum when investment disputes arise. Effective planning results in a reduction of arbitrary use of powers by host governments and, ultimately, makes them more likely to negotiate reasonable investment settlement.
The second consideration is commercial arbitration, which addresses disputes with business partners. Typically foreign investors succeed in agreeing to an arbitration venue outside the host country, and this increases the chances of a balanced dispute resolution outcome. However, investors usually must still agree on an arbitration venue within Latin America. The careful selection of this venue is critical to the Chinese investor. Latam countries differ in their approaches to and structures for international arbitration. Likewise, it makes sense for Chinese investors to generally choose a common arbitration venue in Latin America which, over time, will increase predictability and reduce risks and costs.
A thoughtful shape of China’s overseas expansion into Latin America, both at governmental and private business levels, is fundamental for achieving the enormous mutual benefits that this partnership may produce to both regions.
Pablo Rueda is a partner in the Buenos Aires office of Perez Alati, Grondona, Benites, Arntsen & Martinez De Hoz (h) (PAGBAM). He can be contacted on +54 11 4114 3047 or by e-mail at firstname.lastname@example.org