U.S. - Latin American Legal Reporter Snell & Wilmer L.L.P.

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Key Concepts in Preparing a
Distribution Agreement with Latin American Distributors

Certain key provisions should be included in any distribution agreement between a U.S.company
("U.S. Company") and a Latin American distributor ("Latin American Distributor").

1. Exclusivity of Appointment
One of the initial threshold questions is whether the Latin American Distributor will be given
exclusive rights to the U.S. product. The Latin American Distributor will typically desire an
exclusive right to the products to ensure that the work and effort in marketing the products will
not wind up benefiting others. The U.S. Company on the other hand, is concerned about giving
exclusive rights to a foreign entity which has not adequately proven its capabilities.
The two common ways of solving the exclusivity dilemma are limiting the territory in which the
exclusivity would apply and establishing minimum quotas that must be met in order to maintain
the exclusive nature of the Agreement. Under the latter arrangement, the Latin American
Distributor would have to meet certain minimum sales objectives in order to maintain the
exclusive arrangement. If minimum quotas are not met, the contract will become non-exclusive,
and the U.S. Company will be free to seek assistance from other parties.

2. Product Issues
A myriad of product issues needs to be addressed, including patent or trademark issues, labeling
requirements for products prior to their entrance into the Latin American country, labeling
requirements after a product is received in that country and special approvals and certifications
that must take place prior to marketing certain products.
Normally, it is much easier for the Latin American Distributor to obtain the approvals and
certifications in the Latin American country. These responsibilities must be clearly set forth in the
Agreement.

3. Obligations of Latin American Distributor
The Agreement should set forth the parties' understandings regarding the type of marketing that
will be done in the Latin American country. The Latin American Distributor should agree to use
its best efforts and abilities to effectively promote, market and distribute the products and to refer
to the U.S. Company or its designee, any referrals that it receives which are outside of the defined
territory. In addition, the Agreement should establish whether the Latin American Distributor is
to maintain a sales organization to promote the products and/or a service organization to provide
technical advice and assistance to customers within the territory. The Agreement should also
clarify which party will be responsible for the costs associated with such organizations.
For quality control purposes, a provision should be added requiring the Latin American
Distributor to follow and abide by the standard sales and marketing policies of the U.S. Company
and cooperate with the U.S. Company in establishing and maintaining the standards and
reputation of the products.

4. Obligations of the U.S. Company
The Agreement should clearly define the responsibilities and duties of the U.S. Company. If the
U.S. Company is a manufacturer, it should agree to use its best efforts to manufacture and deliver
the specified products and to fulfill the sales orders received from the Latin American Distributor.
It is also typical that the U.S. Company will provide the Latin American Partner with advice and
other assistance on matters relating to marketing and technical questions. The responsibilities of
costs for sending personnel either from the U.S. to Latin America or from Latin America to the
U.S. for training purposes should also be clearly set forth.

5. Pricing
In determining the pricing of products, the initial question that must be answered is whether the
Latin American Distributor will be purchasing products from the U.S. directly, holding products
on consignment, or merely receiving commission on products sold. If the Latin American
representative is purchasing products from the U.S. Company, the price of the products should be
tied to the U.S. Company's current price list with appropriate discounts based on the volume of
products ordered. The U.S. Company should retain the right to revise the price list at its sole
discretion upon an appropriate period of notification.
If the products are to be held on consignment in the Latin American country, appropriate
protection such as bonding or a third-party guarantor need to be established to protect the U.S.
Company's rights to the products. Rights the Latin American representatives have with respect to
the consigned products should also be clearly established.
If revenues distributed to the Latin American Distributor are based on commission sales, the
commission needs to be clearly established and any limitations to the commission rate need to be
specifically set forth within the Agreement. (It is not uncommon to have varying commission
rates depending on the type of products being sold and the territory in which they are sold.) The
Agreement should also clearly identify the currency in which payments will be made.

6. Shipping
The shipping terms and who is to bear the risk of loss should clearly be set forth in the
Agreement. The products can either be sold F.O.B. at the U.S. Company's place of business or
another original point of shipment, in which case the Latin American Partner will bear the risk of
loss after delivery to the point of shipment. As an alternative, the products can be shipped F.O.B.
destination with the U.S. Company bearing the risk of loss until the products arrive at the foreign
destination. In a pure joint venture, both parties may share the risk of loss. The Agreement
should also define who will be responsible for the payment of duties, insurance, freight and other
costs of transportation. The Latin American Distributor should be required to take whatever
steps necessary to satisfy the appropriate custom laws and filing of any required forms to facilitate
the products clearing customs.

7. Non-Competition
It must be determined whether the Latin American Distributor will be allowed to sell competing
products. This would heavily depend on the facts and circumstances of each situation and the size
and extent of the resources of the Latin American Distributor.

8. Independent Contractor Issues
It is very important to clearly set forth the relationship of the parties. If independence is desired,
it must be made very clear that the Latin American Distributor is not acting as the U.S.
Company's "agent" in the Latin American country. If the Agreement is with an individual, care
must be taken to ensure that, under local law, such individual is not deemed to be an "employee"
of the U.S. Company.

9. Arbitration
Because of the differences in legal systems between the two countries and the difficulties in the
enforcement of judgments that are likely to exist or arise, a binding arbitration clause would be an
appropriate means of working out disputes between the parties. (In the case of Mexico, NAFTA
contains special provisions governing international binding arbitration of disputes which offers
further strength to this type of provision.)

10. Governing Language and Governing Law
The Agreement should be translated from English to Spanish and/or Portuguese, or vice versa,
and a clause should be included indicating which language will be the governing language of the
Agreement. No matter how good the translation, there will be differences in interpretation
between the two versions. Therefore it is important to establish which language will control the
Agreement. Typically the U.S. Company will want U.S. law to apply to the Agreement; however,
at times it is advisable to have the law of the Latin American country apply, particularly in
situations where quick action may be required to enforce the agreement.

11. Miscellaneous
The Agreement should contain standard language establishing various miscellaneous items such as
the assignability of the Agreement, severability, the term and termination provisions of the
Agreement, non-disclosure issues and guidelines for keeping books and records.

The Right to Work and the Protection of the Right to Organize in the U.S. and Mexico -- A
Comparison

A. Employees' Basic Right to Associate--the Mexican Constitution and the National Labor
Relations Act

In the 1993 North American Agreement on Labor Cooperation (NAALC), Canada, the United
States and Mexico committed to promote the workers' freedom of association and to protect their
right to organize. This guiding principle is stated in Annex I to the NAALC as follows: "The
right of workers exercised freely and without impediment to establish and join organizations of
their own choosing to further and defend their interests." While the laws of the U.S. and Mexico
protect the workers' right to organize, there are significant differences in the legal structures
established and in the procedures followed in the two countries.
In Mexico, the Constitution itself (Article 123), expressly recognizes the right of workers to
associate. Titles VII and VIII of the Federal Labor Law (FLL) regulate said constitutional right.
In the United States, workers do not have a constitutional right to associate. The National Labor
Relations Act, 29 U.S.C. Section 151 et seq. (NLRA or the Act), is the statute that provides the
legal framework through which the right of employees to associate and organize is protected.1
Indeed, the most basic policy under the NLRA is the employees' free choice to unionize
(associate) or reject unionization, without fear of reprisal or economic penalty.

B. The Unions' Representational Rights--U.S. Section 9 of the NLRA

In the United States, labor unions need not be "registered" with or authorized by the federal or
state governments to legally require employers to recognize them as the exclusive bargaining
representative of the employer's employees. Rather, a union that seeks to require an employer to
recognize and bargain with it as the "exclusive" bargaining representative of a group or unit of
employees, must obtain certification as the bargaining representative of said unit from the
National Labor Relations Board (NLRB), a federal agency established pursuant to Section 3(a) of
the NLRA.
In order to obtain such certification from the NLRB, a union must file a petition for a secret ballot
election among the employees in the group or unit (NLRA Section 9) and obtain a simple majority
of the employees' votes in the election. Generally, in order for the NLRB to process an election
petition, it must be supported by at least 30% of the group which the union seeks to represent.
Normally, such showing of support is submitted by unions to the NLRB in the form of individual
authorization cards.
Once certified, after receiving a majority of the votes in an election conducted by the NLRB, the
union has the right to demand that the employer engage in good faith collective bargaining. An
employer's failure to recognize and bargain with a union that has been certified by the NLRB as
the bargaining representative of the employer's employees, constitutes an unfair labor practice.
Upon a duly-filed charge alleging such violation, the General Counsel of the NLRB must
investigate and prosecute such alleged violation.
C. The Unions' Representational Rights; Mexico--Article 387 of the Federal
Labor Law

The employer who hires workers who belong to a union shall be required, at the request of the
union, to conclude a collective bargaining agreement with such union. If the employer refuses to
sign the agreement, the workers may exercise the right to strike provided for in Article 450.

In Mexico, therefore, the legislative emphasis is not, as in the U.S., on the election of the union by
a majority of the employees as its bargaining representative, but rather on the legal existence of
the bargaining agent itself. The requirements for such legal existence are, therefore, paramount.
For a union to have the legal personality to request an employer "to conclude a collective
bargaining agreement," it must be "registered" with the Ministry of Labor, (national unions) or
with the appropriate conciliation and arbitration board (local unions). The requirements for
"registration" imposed by Mexico's Federal Labor Law are:
1. the union must be "an association of workers . . .";
2. it must be constituted "for the study, advancement, and defense" of their interests;
3. it "shall be formed by not less than 20 workers in active employment . . . "; and
4. the following documents should be filed with the Labor and Social Welfare, Secretariat of
the Ministry of Labor if its competence is throughout the federal territory, or with a conciliation
and arbitration board if it has only local competence:
(a) a certified copy of the minutes of the organizational assembly;
(b) a list of its members, their names and addresses and the names and addresses of the
employer enterprises or establishments in which they are employed;
(c) a certified copy of its by-laws, and
(d) certified copies of the minutes of the meeting at which its managing board was
elected.
(Articles 366, 364, 365 and 356 of the Federal Labor Law.)
In sum, in the U.S., labor unions do not require government authorization or "registration" as a
prerequisite to file an election petition and, thereafter, if elected by a simple majority of the
employees in an appropriate group or unit, to demand recognition and bargaining from employers.
By contrast, in Mexico, the union must first show that it has received "registration" from the
Ministry of Labor, in order to require an employer "to conclude a collective bargaining
agreement" and exercise the right to strike.

D. The Right to Work
In Mexico, the law permits collective agreements providing that only union members will be hired.
While Article 358 of the FLL states that no one may be forced to join or not join a union, Article
395 permits the inclusion of so called "exclusion clauses" (closed shops) in collective bargaining
agreements. (Workers who were employed prior to the signing of a CBA with an exclusive or
closed shop clause, may not be required to join the union as a condition of continued
employment.)
In the U.S., state law controls. Thus, Section 8(a)(3) of the NLRA permits, under certain
circumstances, agreements which require union membership as a condition of employment, but
only in states or territories which do not prohibit such agreements. NLRA Section 14(b). Twenty
of the 50 States have statutes or constitutional provisions which prohibit, in varying degrees,
requiring employees to become or remain union members in order to obtain or retain employment.

1/The declaration of policy in the NLRA states:
"It is hereby declared to be the policy of the United States to eliminate the causes of
certain substantial obstructions to the free-flow of commerce and to mitigate and eliminate these
obstructions when they have occurred by encouraging the practice and procedure of collective
bargaining and by protecting the exercise by workers of full freedom of association, self-
organization, and designation of representatives of their own choosing, for the purpose of
negotiating the terms and conditions of their employment or other mutual aid or protections."

For additional information, please contact Jerry Morales at 800-322-0430, 602-382-6362
or Lexis Counsel Connect, jmorales @ counsel.com

Key Concepts in Preparing a
Distribution Agreement with Latin American Distributors

Certain key provisions should be included in any distribution agreement between a U.S. company
("U.S. Company") and a Latin American distributor ("Latin American Distributor").

The Agreement should set forth the parties' understandings regarding the type of marketing that
will be done in the Latin American country. The Latin American Distributor should agree to use
its best efforts and abilities to effectively promote, market and distribute the products and to refer
to the U.S. Company or its designee, any referrals that it receives which are outside of the defined
territory. In addition, the Agreement should establish whether the Latin American Distributor is
to maintain a sales organization to promote the products and/or a service organization to provide
technical advice and assistance to customers within the territory. The Agreement should also
clarify which party will be responsible for the costs associated with such organizations.
For quality control purposes, a provision should be added requiring the Latin American
Distributor to follow and abide by the standard sales and marketing policies of the U.S. Company
and cooperate with the U.S. Company in establishing and maintaining the standards and
reputation of the products.

For additional information, please contact David Armstrong at 800-322-0430 or 801-237-1981.
The Right to Work and the Protection of the Right to Organize in the U.S. and Mexico -- A
Comparison

A.Employees' Basic Right to Associate--the Mexican Constitution and the National Labor
Relations Act

B. The Unions' Representational Rights--U.S. Section 9 of the NLRA

The process by which labor unions obtain representative status and the legal rights which such
status provides in the United States are in sharp contrast with their counterparts in Mexico.
In Mexico, Article 387 of the Federal Labor Law provides:
The employer who hires workers who belong to a union shall be required, at the request of the
union, to conclude a collective bargaining agreement with such union. If the employer refuses to
sign the agreement, the workers may exercise the right to strike provided for in Article 450.
In Mexico, therefore, the legislative emphasis is not, as in the U.S., on the election of the union by
a majority of the employees as its bargaining representative, but rather on the legal existence of
the bargaining agent itself. The requirements for such legal existence are, therefore, paramount.
For a union to have the legal personality to request an employer "to conclude a collective
bargaining agreement," it must be "registered" with the Ministry of Labor, (national unions) or
with the appropriate conciliation and arbitration board (local unions). The requirements for
"registration" imposed by Mexico's Federal Labor Law are:
1. the union must be "an association of workers . . .";
2. it must be constituted "for the study, advancement, and defense" of their interests;
3. it "shall be formed by not less than 20 workers in active employment . . . "; and
4. the following documents should be filed with the Labor and Social Welfare, Secretariat of
the Ministry of Labor if its competence is throughout the federal territory, or with a conciliation
and arbitration board if it has only local competence:
(a) a certified copy of the minutes of the organizational assembly;
(b) a list of its members, their names and addresses and the names and addresses of the
employer enterprises or establishments in which they are employed;
(c) a certified copy of its by-laws, and
(d) certified copies of the minutes of the meeting at which its managing board was
elected.
(Articles 366, 364, 365 and 356 of the Federal Labor Law.)
In sum, in the U.S., labor unions do not require government authorization or "registration" as a
prerequisite to file an election petition and, thereafter, if elected by a simple majority of the
employees in an appropriate group or unit, to demand recognition and bargaining from employers.
By contrast, in Mexico, the union must first show that it has received "registration" from the
Ministry of Labor, in order to require an employer "to conclude a collective bargaining
agreement" and exercise the right to strike.

For additional information, please contact Jerry Morales at 800-322-0430, 602-382-6362
or Lexis Counsel Connect, jmorales @ counsel.com
The Right to Work and the Protection of the Right to Organize in the U.S. and Mexico -- A
Comparison

A. Employees' Basic Right to Associate--the Mexican Constitution and the National Labor
Relations Act

B. The Unions' Representational Rights--U.S. Section 9 of the NLRA

Tax Reforms Affecting Maquiladoras

Since January 1, 1995, "maquiladora" plants south of the border are paying more taxes to
the Mexican government as a result of new Mexican tax laws. The new laws are part of a trend
to incorporate the maquiladoras, which now employ nearly 626,000 Mexican workers, as full
participants in the Mexican economy.
Maquiladoras are the product assembly factories that sprouted along the U.S.-Mexican border in
the 1970s and 1980s and then spread into the Mexican interior states. Eighty to ninety percent of
the 2,029 maquiladoras operating as of October 1995 are owned by U.S.-based companies.
Maquiladoras, previously prohibited from selling their products domestically, are now permitted
to sell their products in Mexico. The percentage of products that may be sold domestically will
increase from 1993 to 2001.
Maquiladoras have traditionally been operated as "cost centers" by their United States parent
companies. As cost centers, the maquiladoras did not generate income from the sales of their
products, because they did not "sell" products directly to anyone, but rather imported parts and
raw materials duty-free from the United States, assembled the products in Mexico and exported
the finished product back to the parent company for further development, completion or sale.
The maquiladoras received payment only for the value added to the particular product, primarily
labor.
Until now, maquiladoras have not been required by Mexican law to pay income taxes on the
transfer of products to parent companies; however, Mexico's new transfer-pricing law requires
maquiladoras to charge an "arm's length" price for products "sold" to their parent companies,
recognize profits for such sales and pay income taxes in Mexico accordingly. Under "arm's
length" principles, the appropriate price paid for the product transferred between related
companies is the amount that would have been charged or paid if the transaction had occurred
between unrelated companies. Failure to use the correct transfer price could result in sanctions
and penalties. Additional rules issued by Mexican tax authorities in March and July 1995 create
alternatives for compliance.
Some or all of the additional taxes that the U.S. company must now pay to Mexico may be offset
by a tax credit in the United States. However, the rules for determining tax liability are
complicated and many uncertainties still exist. Companies need to obtain advice from
professionals well-versed in Mexican tax law to minimize their overall tax liability, as well as the
risk of noncompliance. While the tax changes specifically affect companies with maquiladoras
organized as wholly -owned subsidiaries, any company doing business in Mexico or exploring
such potential should evaluate their options and liabilities in light of the tax changes.
The accounting, research and documentation necessary to comply with Mexico's new tax
requirements will increase the costs of doing business. But the benefits of reduced labor costs and
direct access to a new market of more than 90 million potential consumers seem to be more than
enough to offset this increase. The new tax requirements should not discourage maquiladoras,
and there is evidence to suggest that they have not. In the first six months of 1995, the Ministry
of Industrial Development in Mexico issued 268 permits for new maquiladoras and another 450
permits for the expansion of existing maquiladoras - triple the number of permits normally issued
during that period of time.
The rules of engagement for doing business in Mexico and the Mexican tax laws will continue to
change; therefore, businesses who want to profit from the changes need to know the rules and
follow them.

Doing Business in Mexico
Some Protocol Do's and Don'ts for Your Success

Despite the globalization of the economy, the business environment in Mexico is quite different
from the U.S. Some basic rules of protocol will improve your chances of successful business
dealings with your Mexican counterparts.

Rule #1 - Understand The Differences.
As a foreign executive doing business in Mexico, the first problem you will face is immersion in a
new language and the frustration of being forced to depend on interpreters. One of the mistakes
to avoid is assuming that a business colleague's or assistant's ability to speak good or workable
Spanish will guarantee or ensure success. The knowledge of the cultural and business
background of your audience will do wonders even without a good working knowledge of the
language. In the absence of language skills, understanding and patience are the keys to success.
Most Mexican nationals are well aware of their history and very nationalistic, just like most
Americans and Canadians. A reading of U.S.-Mexico history is a worthwhile pastime if you will
be doing business in Mexico. A Mexican national will not necessarily be a political activist, but he
or she will be conversant on a variety of political topics.

Rule #2 - Respect Your Counterpart's Background.
In addition to cultural differences between the United States and Mexico, there are differences in
the educational systems as well. Whatever their degree of business or technical specialization,
Mexican professionals usually have a broad cultural background. Mexicans tend to have a
relatively theoretical, world-wide, formalized education; Americans frequently have a more
technical, objective background. Informal discussions regarding family, city, town, national or
international events will gain your listener's confidence and respect and will demonstrate your
genuine interest in your listener as a person.
Your Mexican counterparts have their own ways of doing things. Remember that they are part of
the local "establishment." The best way to "turn off" foreign business associates is to approach a
situation with the phrase: "Well, back home, the way to handle this situation is . . . ." Since
Mexicans are naturally polite, they will probably refrain from telling the speaker to go back to the
United States. Instead, it is more likely that they will say "yes" or "okay" but nothing will happen.
The practice of being blunt, direct, or "up front" is considered rude in Mexico.

Rule #3 - Be Personally Expressive, Understanding, and Patient.
Regarding business meetings in Mexico, be aware that just getting all the parties to a meeting is a
success in itself. Then, once there, conferences rarely "get down to business" right away. A
preliminary period permits the parties to exchange pleasantries, ask about the family's health, or
discuss recent political and economic events. This is also true of conference calls. It is not
unusual to spend the first 5 to 10 minutes "chatting" before you even address the purpose of a
call.
Greeting people is also different in Mexico. At introductions, before dining and before convening
or after concluding a meeting, there will be a full round of handshakes; however, the handshakes
should not be knuckle-crushers. If there is an ongoing, close relationship, a hug is required
between men. The hug is the equivalent of the U.S. or Canadian handshake. It must be a tight
one with a couple of slaps on the back. Enjoy it! The "hug" is not customary for women or
between men and women. In those situations, end meetings with a handshake and, if both parties
are women, with a kiss on the cheek.
Doing business in Mexico can be immensely challenging and enjoyable for those who are able to
participate in a different cultural and business environment, but it can be frustrating for the
businessperson who insists on making comparisons or refuses to adapt to a different business
environment. Commingle, observe, learn, do not compare, smile and enjoy . . . it's a whole new
adventure.

.
Latin American Legal Services

Snell & Wilmer is a full-service law firm with offices in Phoenix and Tucson, Arizona;
Irvine, California and Salt Lake City, Utah. The Latin American Services Group assists U.S. and
international individuals and companies in exploring, establishing, and fostering investment and
business opportunities in this hemisphere.

The attorneys in our Latin American Services Group are bilingual, bicultural, and represent
diverse practice areas. Their professional, cultural and ethnic makeup is particularly well-suited to
represent clients with investments, business activities or other contacts in Latin America.

Services Offered Include:

• The Formation of Wholly-Owned Subsidiaries and Joint Ventures

• The Formulation, Development, and Implementation of Business
Plans

• The Drafting of Outbound and Inbound Sales and Services
Agreement

• Foreign Tax Credit Planning

• Structuring of Domestic and Foreign Operations

OFFICE LOCATIONS
PHOENIX
One Arizona Center
Phoenix, Arizona 85004-0001
Tel.: (602) 382-6000
Fax: (602) 382-6070

IRVINE
1920 Main Street
Suite 1200
P.O. Box 57062
Irvine, California 92619-7062
Tel.: (714) 253-2700
Fax: (714) 955-2507

TUCSON
1500 Norwest Tower
One South Church Avenue
Tucson, Arizona 85701-1612
Tel.: (520) 882-1200
Fax: (520) 884-1294

SALT LAKE CITY
Broadway Centre
111 East Broadway
Suite 900
Salt Lake City, Utah 84111-1004
Tel.: (801) 237-1900
Fax: (801) 237-1950

Reproduced with permission for the InterAm Database

Snell & Wilmer
LAW OFFICES
One Arizona Center
Phoenix, Arizona 85004-0001