Doing business in Latin America: opportunities and pitfalls.

U.S. companies have the benefit of such a large domestic market that many have been relatively late to enter international markets. The fear of doing business abroad also has led American companies to underestimate the opportunities in regions such as Latin America.

This is a lost opportunity, as Latin America has experienced impressive economic growth. In 2004-05, the average growth was over 5% per year. Bilateral U.S. trade with Latin America totaled $426.8 billion in 2004 and is up 14% in 2005, compared with $514.7 billion with Europe, a mere $231 billion with China and $184 billion with Japan. In addition, the United States has Free Trade Agreements (FTAs) with Mexico (NAFTA), Chile and Central America (CAFTA), and is now negotiating FTAs with Andean countries. These agreements make trade with Latin America even more attractive, and companies interested in doing business there should consider the following:

Fewer Restrictions on Foreign Exchange:

Most countries have liberalized their currency controls so that there are few restrictions on currency conversion and capital transfers to and from the region. In March, Brazil largely ended its restrictions on international currency transfers and payments in Reals, the local currency.

Fewer Restrictions on Foreign Investment: Economic nationalism has declined, except in Venezuela under Chavez. In general, foreign investment is permitted in virtually every sector and there is substantial foreign investment from Spain, Europe, Japan and the U.S., in banks (particularly by Spanish or US banks), telecoms (especially Telef?nica of Spain), and even utilities. Restrictions, such as Mexico's restriction on the foreign owner-ship of oil, are rare.

In order to invest in Latin America, to establish a sales or corporate presence, or to source products or services, it is necessary to navigate through issues such as:

Corporate Structure: The options for structuring subsidiaries are similar to those in the United States: limited liability corporations, often called "S.A." (Sociedad An?nima), or partnerships. The vehicle should be chosen based on the foreign company's sales goals and tax considerations. Often at least two shareholders or quota holders are required. Generally setting up a company takes about a month.

Often the second shareholder holds a single or nominal share. However, in Argentina, various foreign companies recently faced reclassification of their subsidiaries as branches of the parent because the regulatory authority deemed the nominal shareholding to be a sham. Companies will have to redistribute equity in the local subsidiary in order to avoid this.

Labor/Employment Latin America's labor laws are very similar to restrictive European laws, except that labor costs are lower than in Europe. Labor laws tend to favor the employee, so your company's growth must be carefully considered. Employees may be more difficult to dismiss than U.S. employees.

Latin American labor laws also provide many express benefits to the employee (vacation pay, extra December pay, statutory pension schemes), so offer letters are less used. in addition, U.S. companies that give stock options to employees may find them treated as salary, which in turn may trigger other add-on benefits. Seniority and other accrued benefits may be due to the terminated employee in many countries.

Contracts: Latin America has moved strongly toward unfettered freedom of contract. However, individual consumers are given added protections in various countries, and clauses considered unconscionable may well be void. For example, in software licenses in Brazil, the technical validity (warranty) period must be stated, or the "warranty" will be indefinite in duration. In Latin America, the standard U.S. warranty disclaimers may not be valid; sometimes, hidden defects cannot be disclaimed. Similarly, liability for death or personal injury generally cannot be limited.

See You in Court: The dark side of doing business in Latin America may be dealing with the archaic, slow and sometimes corrupt judicial system. While not universally problematic (e.g., Chile is better), most countries will now accept arbitration, which often expedites resolution of commercial disputes, and allows parties to choose corruption-free arbitrators and mediators with greater expertise.

Formalities: Latin American countries have a civil law tradition that is more formalistic and bureaucratic than in the U.S. Powers of attorney must be granted to retain an attorney, a customs broker and for many other tasks. The powers must be in perfect form and must be properly notarized and legalized. Notaries public wield great power over many aspects of commercial life in Latin America, and are not used merely for document authentication.

Distribution: Great care must be taken to choose the right partner for your product distribution. Be careful to register your trademark, giving only a limited license to your distributor. Have your contract reviewed, so that you are not forced to pay statutory indemnities upon termination of the distributor.

Intellectual Property Rights: Latin America is also famous for piracy, but careful planning in regard to your copyrights, trademarks and patent rights can help you minimize this danger. Statutory protection tends to be good, but enforcement lags.

Many U.S. companies have had great success operating in Latin America. While all new markets should be entered with eyes wide open, it didn't take Microsoft long before a majority of its revenues came from outside the United States, and Wal-Mart has certainly moved aggressively into foreign markets such as Latin America. There are great opportunities, especially with burgeoning free trade between the U.S. and that region, but don't lose sight of legal and other pitfalls.

Richard E. Neff and Claudio Magliona of Greenberg Glusker regularly counsel U.S. and Canadian companies on doing business in Latin America. Greenberg Glusker also assists Latin American companies doing business in the U.S. Richard and Claudio can be reached at [e-mail] and [e-mail], respectively.