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Latin America Focus: Fall 2023

Latin America Focus: Fall 2023

New horizons


Latin America Group Leader and Editor of Latin America Focus

As we embark on our third year of Latin America Focus, the ever-evolving landscape in the region brings fresh opportunities and challenges for local, regional and international businesses.

After an extremely positive post-Covid growth spurt in 2022, so far 2023 has been a bit more challenging for the region with GDP growth slowing and political uncertainty increasing. Nevertheless, we see plenty of bright spots on the horizon and opportunities for those who know where to find them.

In our third compendium of market insight from the Latin America team at White & Case, we look at what those opportunities are and where challenges might arise for investors.

On the opportunity front, we examine the mining & metals industry in detail. Interest in the region's lithium reserves has soared with the continued growing demand for the mineral for the battery manufacturing process. The "lithium triangle" has turned into a "lithium quad" with Brazil joining Chile, Argentina and Bolivia as a significant supplier of lithium. However, the countries' differing approaches to regulation of the industry means that those looking to source lithium in the region will have to understand the market in each country to determine where, when and how to make significant investments.

The lithium market could potentially be the beneficiary of another Latin American trend: Nearshoring. In a world of escalating geopolitical volatility, there is a shift away from broader globalization towards a more localized approach to manufacturing and trade. Several countries in Latin America have implemented investment and tax treaties, which, along with the ongoing geopolitical shift, make the establishment of industrial plants in the region easier and more enticing than ever before.

In this issue, we also take a look at environmental, social and governance (ESG) considerations; compared to their counterparts in North America or Europe, Latin American companies have arguably been slower to respond to the trend to disclose their approach to ESG. However, within the region this varies widely depending on the industry, as our recent survey of private issuers has shown.

As ever in our volatile world, the threat of market shocks and their impact on businesses and industries remains constant. Three major Latin American airlines and a variety of other businesses recently went through lengthy and difficult insolvency procedures following the Covid crisis. The good news is that most of these businesses are now back on track and performing very well, thanks in part to the creative and unprecedented use of Chapter 11 of the US Bankruptcy Code as well as local insolvency regimes to restructure the debt and the capital structures of the effected companies.

Another bright spot for investors in Latin America in recent years is that international arbitration in the region continues to develop in remarkable fashion, providing foreign investors with recourse to fair and impartial justice when investment disputes arise.

We at White & Case continue to believe that the Latin American market holds long-term promise for the savvy investor. We hope that you find this issue of Latin America Focus, which contains articles from our top experts on the subjects referenced above, interesting and useful as you embark on additional business in the region.


Sustainability disclosures gain momentum among Latin American issuers

solar farm

Unlocking opportunities: Nearshoring in Latin America for US investors

sand and water

Behold the Lithium Quad? Latin America’s race for lithium market share


Navigating turbulence: Latin American airlines in chapter 11

airplane flying

From crisis to resolution: The evolving landscape of ESG arbitration in Latin America


From crisis to resolution: The evolving landscape of ESG arbitration in Latin America

Explore the growing influence of ESG in the Latin American arbitration landscape, how it is disrupting the nature of international disputes and highlight the delicate balance between long-term investment goals and three key areas: environmental protection; social responsibility; and governance.

12 min read


FDI in Latin America rose by more than 50 percent from 2021 to 2022

Latin America is at a pivotal moment. While the COVID-19 pandemic caused diverse impacts on investment and long-term concessions in Latin America, the region rebounded successfully with overall investment rising by 50 percent in 2022. Foreign investment is critical to economic development in Latin America, including through investments related to long-term state contracts or concessions in sectors such as energy, infrastructure, public utilities and transportation. At the same time, Latin America is also facing new challenges, related to these critical investments, at the heart of which are environmental, social and governance (ESG) concerns.

While ESG concerns are increasingly driving societal expectations as to sustainable and responsible investment practices, reshaping the global regulatory and investment environment, they are also an emerging battleground for international disputes.

Stakeholders in Latin America must navigate a delicate balance between the promotion of investment and the environmental and social impact that such investments may have


Latin American countries signed more than 700 investment treaties with foreign states

Balancing macroeconomic development with environmental and social impact

Since the end of the Cold War, the Washington Consensus served as a guiding principle for development and investment in Latin America in response to the macroeconomic crises in the region of the early to mid-1980s.

Over decades, Latin American states sought to induce investment in their economies across key sectors through diverse means, including by developing robust legal frameworks designed to attract and protect foreign investments. In this context, Latin American states signed more than 700 investment treaties with foreign states promising to provide varying standards of protection to foreign investors. These typically include fair and equitable treatment, non-discrimination and legal expropriation. Investment treaties also provide that, if the host state fails to afford the committed protection, investors can bring investment arbitration claims against the state to seek reparation.

In recent years, however, the dynamics of globalization evolved significantly. In the context of a broad debate against globalization, Latin American governments have increasingly adopted laws and regulation to protect the environment and combat climate change. For example, in 1991, Colombia approved a new constitution, which enshrined the right to a healthy environment and confirmed the state's duty to "guarantee" sustainable development and "prevent and control" environmental degradation. Similarly, in 2008, Ecuador adopted a new constitution that, among other things, included various environmental protections, including becoming the world's first constitution to enshrine a legally enforceable right to nature.

ESG as emerging battleground for international disputes

Environmental: Latin America is host to nearly half of the planet's biodiversity, as well as a wealth of natural resources. Latin American economies historically have relied on extractive industries, and meanwhile remain the second most vulnerable region to climate consequences in the world. Governments and investors in the region now face a tension between the need to protect the region's ecosystem and attract new investments (while maintain existing ones), which is expected to intensify as environmental concerns gain momentum.

Social: Investment in Latin America often flows to big infrastructure and to extractive industry projects. These sectors, in particular, often have significant impacts on the community and environment of the area in which they are located. Moreover, Latin America's heritage, including indigenous cultures, colonial legacy and struggles for independence, adds context that may affect business operations in the region. Tensions have arisen between the protection of local/indigenous communities' rights and the protection of the rights of investors who have invested in projects located in areas where such communities are present. These tensions are expected to increase as policies and legal mechanisms are developed to protect minority rights.

Governance: Over recent years, Latin American countries have been at the center of a series of complex governance scandals that impacted the established political order and assumptions and triggered a regional crisis. The region's endemic challenge of corruption and related threats to democracy and the rule of law were magnified by the COVID-19 pandemic and a wave of political polarization and resistance to globalization, putting the region at the forefront of political governance risks. To ensure long-term stability, investors must carefully consider and manage corruption risks in assessing their investment opportunities

Navigating complexity

Environmental issues can be fraught with controversy. Even where there is a consensus as to the importance of environmental protection, disagreements arise as to the appropriateness of environmental protection measures, how the regulatory framework is or is not applied, or how risks are allocated among different actors. Stakeholders in Latin America must navigate a delicate balance between the promotion of investment and the environmental and social impact that such investments may have.

Various tools have emerged to reduce uncertainty. For example, by granting legal stability guarantees, states undertake to maintain the existing legal and regulatory regime applicable to a particular investment or compensate investors for the economic consequences of future changes to that framework. Investors and local communities can also agree to a social license, whereby they establish conditions to undertake a project sustainably.

Mitigating the risks of future disruption can facilitate investment and create a framework for resolving disagreements. On the other hand, such efforts can also create complexities and disagreements as to the scope of stakeholder obligations. For states, limitations on regulatory powers may be unwelcome, and tensions can arise when a government disagrees with the policies of its predecessors or communities. For investors, this can mean extra layers of political risk.

International disputes

Where differences arise that cannot be resolved amicably, international investors potentially have access to different investment protections that may be set forth in applicable laws, contracts and investment treaties. Many Latin American states established such frameworks to attract foreign investment, and these can be instrumental in establishing the scope of an investor's rights as well as providing a mechanism for resolving investment disputes.

As regards investment treaties, for example, investors may sometimes be able to bring international claims against a state that they consider to have breached its undertaking to treat their investment fairly and equitably, non- discriminatorily and to refrain from illegal expropriations, among other standards. Claims also can be brought for the acts of local officials that can be attributed to the state. Thus, investment arbitration can be a potent dispute resolution mechanism with international arbitrators capable of adjudicating whether states are liable to investors in connection with environmental measures.

Some investment treaties specifically contemplate the possibility of disputes arising in connection with environmental measures, and some have included general provisions addressing the limits of the state's liability. While the scope and drafting of these provisions differ across treaties, tribunals have found they are not intended to provide states with carte blanche to renege on their other obligations under said treaty, including the investment protections granted to foreign investors.

States involved in investment arbitrations also have used environmental protection arguments to justify particular policies and measures against investor claims. For example, states have argued that measures were necessary to safeguard its essential interests against a grave or imminent peril, among other defenses. Investors in such cases may make arguments about the reasonableness of the state's conduct and whether it was pretextual, overbroad or discriminatory, which the tribunal will have to consider.

On the other hand, some states have sought to take advantage of disputes under investment treaties to bring counterclaims alleging violations of environmental obligations by the investor; indeed, this has been attempted even in cases that did not initially appear to relate to environmental issues. For example, in one case arising from an investment in the hydrocarbon sector, the state counterclaimed that the investor had caused significant environmental harm, among other things, in breach of domestic environmental law, for which the tribunal ultimately found the investor liable. Whether arbitral tribunals have jurisdiction over such counterclaims remains controversial, with tribunals reaching conflicting decisions.

The balance between long-term contract continuity and institutional control

Governance and lack of business integrity have posed a major challenge to investors, especially in developing markets such as Latin America. As international observers note, the challenges associated with corruption— including, among others, democratic decline, increased investment risk, lack of legal certainty and protection, and an unpredictable regulatory environment—impact investment decisions, business operations, and long-term stability and growth. They also exacerbate political polarization and popular distrust of the government, providing a breeding ground for extreme leaders to turn the situation to their advantage, often at the expense of the rule of law and democratic institutions.

As Latin America continues to attract foreign investment, investors considering opportunities in the region should carefully assess investment risk associated with corruption in these markets, and whether they may be entitled to the investment protection framework afforded by investment treaties.

Endemic challenges

Latin America has been a region historically marked by cycles of nationalization and privatization. With the return of many Latin American countries to nationalist economies, threats to assets acquired by foreign investors loom in the horizon. Political transitions may also lead to "witch-hunts" against good faith investors that have acquired the business of predecessor companies under investigation. In the context of a political transition, an investor can protect its investment with a prudent contingency plan (including structuring foreign investment protections for any potential treaty dispute) while maintaining operational and commercial progress.

To maximize the long-term success of the investment across political transitions, and to manage near-term challenges, investors should seek investments with solid fundamentals in the country such as those anchored in long-standing legal and economic frameworks. Some long-term assets present lower risks because they are backed by strong economic and regulatory frameworks.

Governance risks can be managed preventively at the outset of an investment, and as part of the legal strategy to protect the investment in an arbitration and after an award. A proactive approach to addressing governance issues, considering the strategic observations mentioned below, is central to avoiding disputes related to corruption allegations.

Investors who put the right level of emphasis on these risk factors from the outset of a transaction usually achieve the best outcomes, both in the transaction itself and in protecting long-term assets during its operation. Arbitration is deeply entrenched in the private and public sectors and is a key mechanism for international disputes arising out of unfolding transitions in the region, including in the face of corruption scandals.

Preventative strategy

Implementing an anti-bribery and corruption compliance framework, including through thorough due diligence, regular trainings and controls, is crucial to managing "governance" investment risks. These risks could exist both in the original investment of the predecessor company or arise during the operation of a new or preexisting investment.

There are several steps companies can take when structuring their investment to ensure its international protection. Legal due diligence at the outset of the investment may play a critical role in the investment's future operation to evaluate the risk profile of the investment target, identify "black spots" and mitigate liabilities, and help bring assets to a higher level of governance to ensure stability over the long term. Purchasers of existing investments may include contractual protections in deal documents to limit their liability for pre-acquisition risks.
Investors may also secure the protection afforded by international investment treaties (such as bilateral treaties and regional treaties signed by the country hosting the investment), which may grant foreign investors a series of rights aimed at protecting their investments and afford them access to international arbitration to resolve disputes against host states. Some investment treaties contain provisions that condition the protection afforded in the treaty to the investment's compliance "with the host state's laws" or "in accordance with the laws and regulations" of
the host state. While there is no unanimous approach, these provisions have been understood to limit the scope of application of the investment treaty and the state parties' consent to arbitration to "legal investments," thereby excluding "illegally acquired assets that are not considered to be an investment."

Due diligence and a compliance framework may not eliminate corruption-related risks. But applying international corporate best practices and retaining specialized external advisors, including local counsel, can prove critical to deter unfounded corruption challenges, or otherwise structure a strong defense, as they help establish the investor's diligence and reasonable expectations at the time of making the investment.

International disputes

Recent international disputes have been enlightening for democracies in Latin America. Issues of illegality and corruption are attracting increased attention in the landscape of Latin American arbitration, with greater regularity today than ever before. The delicate relationship between foreign investment, corruption risks and international arbitration has come under more scrutiny over past years, as there is a surge of new international disputes— encompassing both commercial and investor-state arbitration scenarios—where allegations of corruption constitute a key element into which arbitrators need to delve.

Allegations of corruption can impact international arbitration disputes at two main stages: by prompting a determination from the arbitrators on corruption allegations, thus requiring them to investigate possible acts of corruption; or after the arbitration proceeding has concluded and an award has been rendered, and the corruption allegations are raised in order to seek to avoid recognition and enforcement of an award.

The increasing importance of corruption in the context of international disputes raises key questions, including as to whether an arbitral tribunal should investigate suspicions of corruption that may affect the parties' claims in the absence of a request of a party to do so; the level of evidence required to demonstrate corruption in international arbitration; and the effect of a finding of corruption on a contractual or investment arbitration claim.

While corruption may be easy to allege in international arbitration—as well as in other settings—it remains difficult to prove, as there will hardly ever be direct evidence. Various "red flag" lists with indicators of illicit conduct deployed by business organizations, international bodies, non-governmental organizations, and academia have been tailored and adapted in the context of international arbitration proceedings. If fundamental or multiple red flags are present that raise a suspicion of corruption, arbitrators increasingly take a closer look to establish whether corruption was present.

Preventive actions, including legal due diligence with a focus on corruptions risks, can help an investor defend its investment against allegations of corruption, including as a response by a state or state entity faced with international claims. Depending on the stage and circumstances of the case, a finding of corruption by the arbitral tribunal could result in the tribunal lacking jurisdiction, the claims being found inadmissible or denied on the merits, or an award being set aside.

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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

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