Yale School of Management:
Emerging Market Finance (MGT 647)
Legal Considerations with
Respect to Emerging Market
Finance and Investment:
An Overview
Brian W. Tang*
Senior Associate
Sullivan & Cromwell LLP
November 20, 2003
*Views expressed are personal and not those of Sullivan & Cromwell LLP
Emerging Market Finance - Legal Considerations
Ever-improving opportunities for emerging
markets finance and investment . . .

EQUITY
1-Year Returns*
Eastern Europe
Emerging Asia
Latin America
U.S.

54.37%
36.24%
59.26%
17.95%
DEBT

the number of recent completed emerging markets (EM)
quasi-sovereign and sovereign bond issuances indicate
growing market confidence in those economies and new
benchmarks for future corporate bond issuances from those
countries . . .
* As of Oct. 28, 2003
Data: MSCI and Business Week
Emerging Market Finance - Legal Considerations
1
. . . such as Mexico’s Pemex and Venezuela
issuing €500M and $700M of bonds
respectively in August and September . . .
2
. . . and United Mexican States and China
each issuing $1B of bonds in October . . .
Emerging Market Finance - Legal Considerations
3
. . . yet substantial risks remain for investors
in emerging markets:
See e.g., headings in the “Investment
Considerations” disclosure in Bolivarian
Republic of Venezuela September 16, 2003
offering circular:
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Recent Political Developments
2002 Economic Results
New Exchange Control Regime
2003 Year-to-Date Results
The Financial System
Oil Dependency
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Dependence on Major Trading Partner
Emerging Markets
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Limited Trading Market for the Notes
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Emerging Market Finance - Legal Considerations
4
Main roles of the lawyer in emerging markets
finance and investment transactions

Navigate multi-jurisdictional regulatory hurdles,
complicated by different levels of development and
national priorities
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Advise on structuring and negotiating cross-border
transactions to capture opportunity and maximize profit
Risk management and re-allocation
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Four main components from a foreign investor’s perspective:
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Market entry
Obtain bargain
Retain benefit of bargain
Exit strategy (profit and proceeds)
Emerging Market Finance - Legal Considerations
5
Outline
1. Categories and participants of emerging market
finance and investment
2. Main risk considerations
3. Risk management and re-allocation techniques
4. Other strategic considerations
5. Recent developments
Emerging Market Finance - Legal Considerations
6
(a) Foreign direct investment
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Five main categories
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Traditional foreign direct investment (FDI)
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Greenfield physical asset development (e.g., set up factory)
In past – countries often required local partner
Query – degree of foreign investor control
Project financing
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Greenfield or brownfield (esp. resources (mining and O&G)
and infrastructure)
Considerations include:
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Equity - Joint ventures, consortia
Debt – private and public financiers; commercial banks and
capital markets
Government - concessions/build-operate-transfer (BOT), buildown-operate-transfer (BOOT) and production sharing
contracts/licenses
Emerging Market Finance - Legal Considerations
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(a) Foreign direct investment
continued
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Five main categories
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Mergers and acquisitions (M&A), privatizations
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Private equity (financial buyers; later stage financing)
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Strategic purchase of existing companies and/or assets
Query – level of corporate law development
Query – level of permitted foreign control and ownership
Query - exit strategy: IPO or trade sale
Venture capital (seed/early stage financing)
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Query - exit strategy: IPO or trade sale
Emerging Market Finance - Legal Considerations
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(b) Foreign indirect investment
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Direct investment in local stock market
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Query — quality of listing standards (corporate governance;
accounting standards)
Dual/cross-listings via e.g., American Depositary
Receipts (ADRs) — sponsored or unsponsored
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Subject to host country listing and securities requirements
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ADRs often sell at premium to home market
(esp. Taiwan and India (e.g. Infosys on NASDAQ often trades at a
30% premium to Mumbai SE))
NYSE’s “global shares”
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since DaimlerChrysler in 1998, only issued by Deutsche Bank,
UBS and Celanese
Emerging Market Finance - Legal Considerations
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(b) Foreign indirect investment
continued
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Portfolio investment
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Broad product range – equity, debt, convertibles
Emerging markets sovereign and corporate bonds
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Mainly institutional investors
Holders have less leverage compared to bank lenders
Emerging Market Finance - Legal Considerations
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(c) Main EM participants include:
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Equity investor — opportunity/profit maximization and
risk management = long-term (trader = may be shortterm) and bundle of rights and obligations
EM investee — capital-raising; market liquidity
EM host country (central and provincial) — foreign
capital inflow for economic development
Home country government
Debt financings
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e.g., syndicate banks; underwriters; financial advisors
e.g., multilateral agencies (MLAs) such as World Bank, IFC
e.g., export credit agencies (ECAs) such as US EXIM, JBIC
Emerging Market Finance - Legal Considerations
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Outline
1. Categories and participants of emerging
market finance and investment
2. Main risk considerations
3. Risk management and re-allocation techniques
4. Other strategic considerations
5. Recent developments
Emerging Market Finance - Legal Considerations
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Five levels of analysis for framework
of project debt rating analysis (2002)
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Project-level risk
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Contractual foundation benchmarks
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Technology, construction and operations benchmarks
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SPE bankruptcy remoteness, financing jurisdiction, collateral
Counterparty benchmarks
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Industry fundamentals, supply, demand, competitive advantage
Legal risk benchmarks
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Preconstruction –v- postconstruction
Competitive market risk benchmarks
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Commercial and collateral contracts
Sponsors, EPC contractors, suppliers and offtakers
Financial risk benchmarks
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Debt-service coverage ratios, amortizing –v- bullet payments
Emerging Market Finance - Legal Considerations
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Five levels of analysis for framework
of project debt rating analysis (2002)
continued
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Sovereign risk (“sovereign ceiling”)
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Business and legal institutional development
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Legal system, enforcement culture, transparency
Force majeure risk
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Foreign currency rating, exchange controls, expropriation
Floods, earthquakes, civil disturbances, strikes, law change
Credit enhancements
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Political risk insurance (PRI), sponsor support, monoline
insurance wrappers
Analysis assists with conclusions regarding
bankability of non/limited recourse
projects
Emerging Market Finance - Legal Considerations
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Outline
1. Categories and participants of emerging
market finance and investment
2. Main risk considerations
3. Risk management and re-allocation techniques
4. Other strategic considerations
5. Recent developments
Emerging Market Finance - Legal Considerations
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(a) Foreign investment or
concession agreement framework
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Concessions/BOT, BOOT and production sharing
contracts/licenses
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Statutory/constitutional basis
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Government guarantees and foreign investment
contracts
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Contractually stabilized legal and tax regime
Emerging Market Finance - Legal Considerations
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(a) Foreign investment or
concession agreement framework
continued
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Chile
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widely recognized for successfully
attracting FDI
between 1974-2001, attracted FDI totaling
$57.9 billion
DL 600 is one of oldest foreign investment
statutes in Latin America
Peru
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protection mainly constitutional and
statutory, but augmented by execution of
legal stability agreements with each investor
between 1993-2001, entered into 336 legal
stability agreements
Emerging Market Finance - Legal Considerations
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(a) Foreign investment or
concession agreement framework
continued
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Main features (e.g. Chile and Peru)
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Type of regime – constitutional; statutory; contractual
Restrictions to investment in certain sectors
(e.g. media, “strategic areas”)
Non-discrimination principle
Right to repatriate capital
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Right to remit profits
Availability and convertibility of foreign currency
(e.g. Peru requires registration with Comision Nacional
de Inversiones y Technologieas Extranjeras (CONITE))
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Off-shore account maintenance and payments
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Emerging Market Finance - Legal Considerations
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(a) Foreign investment or
concession agreement framework
continued
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Main features (e.g. Chile and Peru) (con’t)
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Legal and fiscal stability (regime matters whether
constitutional, statutory or contractual)
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Freeze at time of execution of agreement (Peru)
Stability with respect to e.g., tax, environmental protection,
labor, export promotion systems
One time waiver of tax stability
Emerging Market Finance - Legal Considerations
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(b) Treaties
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Bilateral and regional tax and investment treaties
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Bilateral investment treaties — e.g., MFN and
non-discrimination clauses
Regional conventions — e.g., NAFTA
Multilateral investment treaties
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Bilateral tax treaties — e.g., double taxation and
tax-non-discrimination clauses
Dispute resolution — e.g., 1965 International Center for
Settlement of Investment Disputes (ICSID) Convention
Cross-jurisdictional recognition and enforcement — e.g.,
New York Convention on Recognition and Enforcement of
Foreign Arbitral Awards
Breach gives rise to inter-governmental claim
Emerging Market Finance - Legal Considerations
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(c) Some tools for risk allocation in
project financings
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Completion undertakings/ construction bonds
Take-or-pay or other offtake arrangements
Price support
Political risk insurance
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e.g., Multilateral Investment Guarantee Agency (MIGA)
Convention: PRI covering debt and equity against
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convertibility/transfer risk
expropriation
political violence
arbitrary non-enforcement of breach of contract
Casualty insurance
Legal opinions
Engineering reports
Off-shore accounts
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Reserve accounts in USD
Emerging Market Finance - Legal Considerations
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(d) Some non-legal protections in
project financings
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Composition of lender group
(e.g., MLA/ECA participation)
Local political support publicly expressed
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Local economic stake in outcome of investment
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Emerging Market Finance - Legal Considerations
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Outline
1. Categories and participants of emerging
market finance and investment
2. Main risk considerations
3. Risk management and re-allocation techniques
4. Other strategic considerations
5. Recent developments
Emerging Market Finance - Legal Considerations
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Rule of Law/ Enforceability of contract
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“So what if you have great representations and
warranties?”
Default risk especially in contracts with sovereign
and sovereign debt
Fear lack of impartiality of local judiciary
Choice of law and forum
Litigation, arbitration and restructuring
Enforceability of foreign judgment
Emerging Market Finance - Legal Considerations
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Choice of jurisdiction of
special purpose entity (SPE)
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e.g., according to Conyers Dill & Pearman, Bermuda
companies constitutes more than 50% of approx. 750
HKSE listed companies
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Tax considerations — absence of income, profit or capital
gains taxes; absence of withholding tax
Geographical location — proximity to New York and London
Legal system based on UK, with final appeal to Privy Council
Corporate law flexible and based on UK corporate law
“Light regulation”
Takeover defense tools permitted — e.g., blank check
preferred stock, staggered board, poison pill
Emerging Market Finance - Legal Considerations
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Equity investment
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Choice of investment vehicle — corporate; contractual JV
Corporate governance under corporate law and listing
requirements
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liability of management; minority shareholder protection;
private securities litigation rights; regulatory oversight
Shareholder agreements
Accounting and reporting requirements
Bankruptcy rules
Antitrust/competition regulation
Project operation: environmental laws; labor regulation;
industry-specific regulations; local content requirements;
permits, consents and approvals; penalties, etc.
Emerging Market Finance - Legal Considerations
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Debt investment
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Piercing “sovereign ceiling” set by rating agencies
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Requirements in addition to financial covenants
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Require e.g., strategic importance, U.S. dollar revenues,
irrevocable account structures, export product
(esp. O&G projects)
e.g., environmental and social requirements of MLAs
and ECAs
Creation and perfection of security interests for
collateral
Guarantees (parent or subsidiary) and structural
subordination
Emerging Market Finance - Legal Considerations
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“Exit strategy”
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Capital/currency controls — taking profit and proceeds
out of country
Trade sale — esp. for foreign direct investment and M&A
Initial public offering (IPO) — domestic and/or
international
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Choice of overseas listing market (e.g., NYSE, NASDAQ, LSE,
HKSE) – often for deeper markets and richer valuations
Local regulatory issues (e.g., political acceptability)
Carl E. Walter & Fraser J.T. Howie in
Privatizing China (2003) outline five methods
of corporate restructuring for international
listings of Chinese enterprises:
Emerging Market Finance - Legal Considerations
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1. Basic indirect overseas
listing structure
Holding company
incorporated in
tax-efficient jurisdiction
Issues
Shares
Cash
Public investors
of foreign listed
shares
100%
Offshore China
investment company
>50%
Chinese joint
venture partner
<50%
Onshore Sino-foreign
joint venture
company
Source: Walter & Howie, Privatizing China (2003)
Emerging Market Finance - Legal Considerations
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2. Back door listing
with share offer
Step 1
Step 2
Issues
shares
Publicly listed
company
Acquires
listed company
Unlisted company
Publicly listed
company
Cash
Public
investors
Sells
assets
Parent company
Source: Walter & Howie, Privatizing China (2003)
Emerging Market Finance - Legal Considerations
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3. Typical listed infrastructure
“company”
Provincial
Communications
Bureau
Public
investors
Cash
Issues
Shares
Listed company
Highway
Segment # 1
Highway
Segment # 2
Highway
Segment # 3
Tariff structure
Source: Walter & Howie, Privatizing China (2003)
Emerging Market Finance - Legal Considerations
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4. Red chip listed company
Chinese municipal
government
A
B
C
D
Cash
E
onshore
offshore
Listed
company
Hong Kong
registered company
Issues Shares
Cash
Public
investors
Source: Walter & Howie, Privatizing China (2003)
Emerging Market Finance - Legal Considerations
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5. Whole industry repackaging
Parent companies
Ministry
Holding
Company Co. Ltd.
New
Company/
ListCo
Source: Walter & Howie, Privatizing China (2003)
Emerging Market Finance - Legal Considerations
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Outline
1. Categories and participants of emerging
market finance and investment
2. Main risk considerations
3. Risk management and re-allocation techniques
4. Other strategic considerations
5. Recent developments
Emerging Market Finance - Legal Considerations
34
EM sovereign debt restructuring
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1.
2.
Debt restructurings that require e.g., change of
payment terms generally require unanimous
bondholders’ approval, leading to holdover risk
Statutory approach embodied in the IMF’s proposal for
a Sovereign Debt Restructuring Mechanism (SDRM)
Market-based contractual approach — collective
action clauses (CACs)
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Majority action to amend and waive key bond terms (including
payment terms, governing law, submission to jurisdiction, waiver
of sovereign immunity)
Appointment of bondholders committee upon Event of Default
Initiation of acceleration by 25% bondholder vote
In 2003, sovereigns that used CACs include Brazil, South Africa,
United Mexican States; Uraquay
Query - use for EM corporate issuers under US law
Emerging Market Finance - Legal Considerations
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Equator Principles
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Launched in June 2003 by certain commercial lenders
(i.e. non-MLAs and ECAs) who agree to manage social
and environmental issues surrounding project financing
based on World Bank and International Financial
Corporation (IFC) policies
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current signatories include18 banks which, according to
Dealogic, arranged $43 billion in project loans in 2002
(74% of the project loan market volume), including
Citibank, ABN Amro, Barclays, WestLB, Mizuho, HSBC
and Dresdner
require environmental assessments and environmental
management plans
principles incorporated onto loan covenants
justified as prudent risk management to address NGO
criticism
Emerging Market Finance - Legal Considerations
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International investment treaty
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Extension of bilateral investment treaties (BITs)
Negotiations to establish a Multilateral Agreement on
Investment (MAI) discontinued by OECD countries in
1998
Multilateral Investment Agreement (MIA) on agenda of
WTO ministerial conference in Cancun in September
2003, but trade talks collapsed
Emerging Market Finance - Legal Considerations
37
International capital markets and
corporate governance developments
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Numerous corporate governance rule changes in light
of Enron, WorldCom and other corporate scandals
worldwide
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Competition for capital
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e.g., US Sarbanes-Oxley Act, UK Combined Code
e.g., EU Prospectus Directive and proposed HK Stock
Exchange listing rules
Harmonization of accounting standards
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e.g., all listed EU and Australian companies to prepare and
publish their financial statements in accordance with
International Accounting Standards (IAS) by 2005

U.S. Financial Accounting Standards Board (FASB) to work with
IASB to remove differences between US GAAP and IAS
Emerging Market Finance - Legal Considerations
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Asian bond market initiative
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Lack of domestic bond markets increasingly blamed as
a cause of the Asian financial crisis
Recent promotion of Asian bond market initiative,
especially by Thailand
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e.g., APEC Regional Bond Market Initiative, ASEAN+3 Asian
Bond Market Initiative
e.g., June 2003 - $1B Asian Bond Fund established to invest
in a basket of dollar denominated bonds issued by Asian
sovereign and quasi-sovereign issuers
Emerging Market Finance - Legal Considerations
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