Despite initial fears to the contrary, the economic emergence of China since 1997 – the year Great Britain ceded sovereignty of Hong Kong back to China – has not diminished Hong Kong’s importance as a hub for Asian capital markets and M&A transactions.
In fact, since 1997, Hong Kong has emerged as a vital pawn in the global law firm chess game that seems to be changing the Australian and Asian legal market.
In 2012, no law firm could sell itself as being “global” without a Hong Kong office that has a top-shelf capital markets and banking and finance practice.
“A strong and robust Hong Kong office is very important to our status as a leading international firm, albeit one that started in the UK,” says Allen & Overy partner Gary McLean, the Hong Kong-based head of the firm’s Asia-Pacific corporate department.
A&O has been in Hong Kong for over 20 years, and now has 26 partners and 113 lawyers there; making it the firm’s largest Asian office, just ahead of Sydney.
However, its Hong Kong strategy is vastly different to its highly targeted approach as a new entrant in Australia, where the focus of A&O has been to target high-end M&A, banking and finance and energy and resources work.
“Our Hong Kong office is slightly more broadly based than that,” says McLean. “The Australian operation has been set up to be quite definitively more selective.
In Hong Kong, you have corporates who want you to do a wide range of commercial deals, and that is what you end up doing.”
In addition to having a broad-based corporate practice, A&O targets the lucrative capital markets and finance work that lured the large UK and American firms to Hong Kong in the first place.
“When you look at finance-related matters, many of the most significant players in the market, such as the investment banks, are based here or in Singapore,” says Andrew Harrow, the head of A&O’s Asia-Pacific capital markets group.
“Most of the global law firms base their regional capital markets teams in Hong Kong, but we often do a lot of work in India on both the debt capital markets and equity capital markets side, and also service the Philippines and Korea from here as well.”
Firms like A&O and its magic circle rivals in Hong Kong are also looking abroad for
work in addition to treating their Hong Kong offices as regional hubs.
Economic forecasts in February painted a damp picture for the Hong Kong economy in 2012. UBS predicts that Hong Kong’s economy would only expand by around 1.6 per cent this year, on the back of a slumping property market.
Throw global economic and market volatility into the mix, and the prospect of large scale initial public offerings (IPOs) the size of the record breaking $US22.1 billion Agricultural Bank of China IPO in August 2010 – on which A&O acted as the US counsel to the international underwriters – coming to the market in the present environment are slim, unless political imperatives push them through.
“The market is still pretty nervous, and I don’t think there would be many companies that would push through a large IPO at the moment, unless there was a policy reason for doing so,” says Harrow.
“That is always the big over-rider: even when the market appears to be shut, there will always be certain issuers that will come to the market.
“Typically, the Chinese will say that, in a sense; ‘We don’t really care about pricing.
This is going to happen’, and they will get support from the Chinese investment banks to underwrite it.”
Choose your battles wisely
With all the major US and UK global law firms in Hong Kong, many other international firms with an office on the ground target niche areas.
That is certainly the case for Minter Ellison. The full-service top-tier commercial law firm targets mid-level capital markets work, construction, dispute resolution, infrastructure projects and project finance.
“We have a different strategy in Asia, and we don’t seek to be a full-service firm in those jurisdictions,” says Mark Green, the Melbourne-based head of the firm’s international practice.
“We haven’t expanded into other areas where we would not be in that top tier, and that is deliberate, because it trades off the strength that we are seeking to exploit in the region, which is around energy and resources, corporate work, M&A, and capital placements.”
While Minters doesn’t release headcount figures,its Hong Kong office is the largest of its five international offices, but is no where near the headcount of leading magic circle firms or Mallesons Stephen Jaques, which is the largest Australian law firm in Hong Kong.
The scale of Minters’ practice in Hong Kong, and the type of work it targets, means it is able to receive referral work from the large global firms.
“Look at Linklaters [in Hong Kong]. They focus on the billion dollar-plus floats. The stuff that is below that, they refer to us,” says Green. “We had a large public takeover a few years ago we that couldn’t do, so we sent it off to Clifford Chance.
There is not too much jockeying for position in Hong Kong. There is an acceptance and perception of where firms are.”
In a similar vein to Minters, Allens Arthur Robinson treats its Asian practice as one large group.
“It’s part of a regional offering, covering 14 cities throughout Asia and Australia,” says Paul Quinn, the firm’s executive partner for North Asia.
Allens primarily concentrates on energy and resources work in Asia, with many of its Hong Kong based partners having expertise in that area and travelling between Hong Kong, Mongolia and China.
Clayton Utz offers an even more specialised offering in Hong Kong. The firm opened an office there in 2010 under the tutelage of Colin Dodd, a partner with the firm since 2002.
Local regulations dictate that a foreign law firm can’t practice local law under the name it trades
under in its home jurisdiction until after a period of three years.
Therefore, former Deacons partner Glenn Haley was brought in by Dodd, and the practice is currently described as Clayton Utz in association with Haley & Co.
Clayton Utz targets the construction sector in Hong Kong, with Dodd and the firm deciding to
start a practice after Dodd finished working on a project in Taiwan.
“When that project finished, we sat down and thought; ‘Is there any point in me returning to Australia
or should I remain in Asia?’” says Dodd.
“I stayed here and the work is here.”
The work Dodd refers to involves casino and resort developments in Macau, as well as major construction and infrastructure projects in Hong Kong.
The firm’s client base in this area involves acting for various contractors and consultants on some of those projects, from both China and abroad.
With M&A and finance work in Hong Kong sewn up by the large global firms that have been in Hong Kong for decades, Dodd says Clayton Utz doesn’t intend to expand its offering in Hong Kong to try and get a slice of this more high-end work.
“We think we are doing what we are good at, and construction and major projects are easily exportable from Australia,” he says.
Mallesons is the one Australian firm that challenges the big global firms in Hong Kong on their home turf of banking and finance and capital markets.
According to A&O, it is the only Australian firm with any frequency on the other side of the deal table.
“On the debt capital markets side, we do see a bit of Mallesons,” says A&O’s Harrow. “They have a significant Hong Kong law offering, and while they have probably more frequently gone in for volume transactions, they also appear occasionally on the bigger public debt capital markets transactions.”
Mallesons is one of the oldest foreign law firms in Hong Kong, having been on the ground for more than 20 years and having 99 lawyers permanently based there.
Following the imminent merger with Chinese firm King & Wood in March, the newly branded King & Wood Mallesons will have 36 partners, 168 lawyers and 353 total staff, making it the fourth largest law firm in Hong Kong.
“The merger will completely change our strategy in Hong Kong and China,” says Mallesons banking and finance partner Richard Mazzochi.
“ We are already competing with the magic circle firms, but what King &Wood gives us is the ability to work with mainland clientspractising international law together with Chinese law. No other firm in the world is able to do that.”
The other law firms in Hong Kong are certainly watching, but with a skeptical eye.
While there is no doubt that King & Wood is a leading mainland Chinese firm, its Hong Kong offering is relatively modest. It only has 69 lawyers, with Mallesons the larger partner in Hong Kong with 99 lawyers.
“Lots of people in the market have been speculating about the merger, and I don’t have any particular insight as to whether that will change the nature of the competition,” says A&O’s McLean.
“Mallesons has a decent office here, and King & Wood a pretty small one, so putting them together doesn’t necessarily transform their prospects in Hong Kong.”
Keeping a stiff upper lip
While the Asia-Pacific has fared better than Europe and North America with regard to recent global economic shocks, it hasn’t emerged unscathed.
When releasing the M&A league tables for 2011 in January, Bloomberg noted a 42 per cent drop in deal activity in the Asia-Pacific Q4 2011 compared to Q4 2010.
Hong Kong has not been immune to this drop in activity, but its lawyers remain decidedl optimistic about its ability to weather this current financial storm relatively unscathed when comparedto GFC Mark One in 2008.
“The market has fallen out at the upper end – at the major half a billion to billion-dollar end – but we focus on the mid-cap market, and we have found that to be reasonably robust,” says Minters’ Mark Green.
“We are quite bullish, still, that the market will come back.”
While that analysis might be pleasing to Minters, what about firms like A&O which target the top end?
“I don’t think we did see a noticeable decline in activity,” says McLean.
“The stats obviously don’t lie, but by the same token, it didn’t feel as though there was a significant drop off in activity. I think what we felt was that a number of deals were taking longer, or some of them were failing, so we were still busy, but maybe those deals wouldn’t necessarily get to the finishing post.”
In a city like Hong Kong, where many residents, locals and expats love nothing more than a day at the races, it seems that rather than hurtling down the main straight towards the finishing post, the current global ructions – economic and legal – in the Hong Kong marker have only just broken the barrier.
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