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Print articleM&As: Lawyers Without Borders Why the US remains the top choice, even for deals across Latin American borders.
April, 2015 - STEFANO D’ANIELLO
There are two reasons why Latin American clients keep coming to US law firms to handle their cross-border M&A deals. The first reason is our execution capabilities: US law firms have been advising on cross-border M&As for more than 100 years. The second reason is the predictability of a tried and tested legal system: US law remains the preeminent choice for large cross-border M&A deals because of the certainties and guarantees it offers to everyone involved.
Why a US Firm? Quality and Experience.
US firms are best positioned to handle complex cross-border M&A deals in Latin America. This is due to a virtuous cycle that has fed on itself since American investment started in the region in the beginning of the 20th century, fueled by investor demand, history, and geopolitics.
American investors, such as corporations and private equity funds, have always demanded New York or other US law as the governing law for their Latin American deals. The reason for this is twofold. First, when American foreign investment started in the region, political strife, corruption, and instability were prevalent. This made US law a much better choice, since at least it mitigated some of the risks associated with Latin American investments. Then, there is bargaining power: those making the investment and risking capital have the upper hand when it comes to choice of law and forum. For US investors, this meant their home jurisdiction laws and court systems.
In addition, capital and financial markets for the Latin American region have traditionally revolved around New York, which also happens to be the capital for media, advertising, finance, investment management, and, most recently, a hotbed for technology. Then, we have the more recent positioning of Miami as the “official capital” of Latin America, both for business and leisure. Add Texas and California, with their close ties to Mexico, and you get the picture. In short: The sheer number of deals that rely on US law has always been enormous, which means US lawyers focusing on the region have had ample opportunity (again, dating back over100 years) to hone their skills and learn the ins and outs of deal making.
With this vast experience to back them up, US firms do more than ensure each party identifies and achieves its strategic objectives. A high-caliber M&A team will identify, mitigate, and allocate all the relevant risks. No matter what industry (be it banking, telecom, or fisheries), an American firm will always have an expert in the area working on the deal.
Why US Law? One word: predictability
Having chosen a US firm for an M&A deal, it logically follows that New York, Delaware, Florida, or other US law would be the governing law for the deal and, more often than not, a US forum to litigate.
1. The virtuous cycle also applies to judges, litigators, and arbitrators. Yes, that virtuous cycle of quality and experience that I mentioned earlier also applies to whomever has to litigate or decide a contractual dispute. While a judge in, say, Ecuador (my home country), will seldom hear cases involving a cross-border M&A dispute, a judge in the Southern District of New York will likely have a docket full of them. The same is increasingly true of South Florida, where the Southern District of Florida hears a great array of cases involving Latin American corporate transactions.
2. US law provides the predictability that parties need to get the deal done. Among the many benefits that US law provides, one is predictability. In general, a well-drafted contract governed by some US law will be enforceable as per its terms, with very few surprises. This provides parties the certainty that “a deal is a deal is a deal.” This is good for everyone involved and an easy thing to obtain, just by contractually agreeing to it. For example, under New York law, two parties to a transaction can choose New York law to govern their contract if the contract is worth at least $250,000 (i.e. virtually every M&A deal out there). This is true even if the transaction has no connection with New York.
How About We Go Outside to Settle This?
A well-drafted arbitration or forum selection provision provides parties the peace of mind that a neutral third party, outside of their spheres of influence, will decide their dispute. For the non-legally inclined, a forum selection clause is a contractual provision through which the parties agree to resolve their disputes in a certain court system (New York, Florida or Federal courts, for example) or, in the case of an arbitration provision, through a certain arbitration body (such as the International Centre for Dispute Resolution), often at a specific location, such as Miami or Panama City. To decide the case, the judge or arbitrator will then apply the agreed-upon substantive law (to resolve issues of contractual interpretation and quantify damages, for example) and its own procedural rules to conduct the proceeding.
Forum selection and arbitration clauses are generally enforceable in the United States. So, for example, when a plaintiff buyer sues the defendant seller to enforce a contractual indemnity in a US jurisdiction other than the one that was specified in the forum selection clause, a US court will generally grant the defendant’s motion to either dismiss the suit or, if possible, transfer the case to the jurisdiction specified in the contract. Moreover, a well-drafted forum selection clause will include waivers of the parties’ right to challenge the forum selected in the contract, which provides even further certainties to everyone involved.
But, of course, for a cross-border deal between two Latin American countries, the issue is not whether a US court will enforce a forum selection or arbitration clause, but whether the courts in a Latin American jurisdiction will do so. For example, let’s say a Colombian buyer of a Peruvian company has a Delaware law contract with an agreement to settle their disputes through binding arbitration in Miami – an established center for Latin American arbitrations due to its geographic location, strong ties to the region, fully bilingual demographic, and acceptable costs. If the buyer sued the seller in a local court in Colombia, hoping to get a more favorable decision or less expensive or more convenient way to enforce the contract, would a Colombian court dismiss the suit and honor the contractual provision? Although the answer will depend on the particular jurisdiction, fortunately, the answer has generally been “yes,” at least in recent memory. This is especially true of arbitration provisions, which are almost invariably enforced thanks to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
In this increasingly globalized economy, with foreign investment and acquisitions coming from within the region, as well as from Asia, the Middle East and Europe, the United States has ceased to be the only source of investment capital for Latin America. This is good news for the region, as it achieves a more mature stage and lowers its dependence on a single country. When it comes down to the acumen and the choice of legal system and laws, however, the United States has never been more relevant. In a way, for cross-border M&A in Latin America, we can proudly say we wrote the handbook.
