Bob Bragar (The Netherlands)
Director - Strategies for Impact Investors
Legal Risk Management for Impact Investors: Should We Be Using Local Law and Local Lawyers?
It's time to take a fresh look at how MIVs and other impact investors handle legal risks. The microfinance industry is turning a corner, and investors need to keep up. Our risks are increasing. In an age of negative news about MFI over-funding, client over-indebtedness, and increasing failure rates among some well-known microfinance organizations, this is the moment to look carefully at whether our legal rights are adequately secured. Until now, the standard practice for many loan contracts has been to use New York or UK law. Why? For good reasons: New York and UK law are well-developed for international commercial transactions. They give predictable results on a wide variety of legal issues. They also let MIVs use their familiar lawyers, avoiding the muss and fuss of dealing with various lawyers in the target countries. But is this wise? Will this work in a foreclosure? Have investors, in fact, been generating legal documents of little use in a crisis? How can we collect when negotiations fail? Already, in workout situations we are seeing that lenders with inadequate documents are receiving short shrift. In some cases, unsecured lenders are not even being invited to the negotiation. Investors or donors want reasonable protections. This is a reputational issue for MIVs, as well as a potential financial and legal problem. Would using local law and local lawyers open options or shape them differently? Who should care about this? Investors, donors, and the business people who manage risk. Isn't this just a technical issue for lawyers? No. Choice-of-law decisions are not just legal issues. They can involve new strategy, budget, staff training and structure for developing legal documentation.