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A steely resolve

A steely resolve

New Zealand is most associated with the All Black's, its beautiful scenery as depicted in Lord of the Rings and more recently, the devastation and response to the earthquake in Christchurch.…

New Zealand is most associated with the All Black's, its beautiful scenery as depicted in Lord of the Rings and more recently, the devastation and response to the earthquake in Christchurch. Darise Bennington reports that its people and its law firms remain optimistic about the future

Looking back, 2011 will be a year marked by two momentous occasions for New Zealand: the Rugby World Cup 2011 (RWC2011) and the devastatingly tragic earthquake that struck Christchurch at 12.51pm on 22 February.

LOOKING GLASS: The challenges that tragedy

presented NZ lawyers with has revealed their

strength and optimism for future opportunities

As I write, we are in the throes of RWC2011 fever. Like 200,000 others, I crammed into Auckland's waterfront on opening night to be part of the action, and while things got decidedly messy as the night wore on, it was something I would not have missed. Watching the Tongans perform their sipi tau, followed by the All Blacks haka, on a building towering over a street teeming with thousands of excited rugby fans from all over the world, I felt proud of a country that only months before had watched with horror as one of its most beautiful cities crumbled and fell.

The impact of the Canterbury earthquakes

For New Zealand's legal profession, the tragedy that hit Christchurch had an enormous effect. With most of the Canterbury legal profession based within the decimated central business district (CBD), as well as its courts, the rest of New Zealand wondered how their businesses would survive it. Not surprisingly, some of those based in Christchurch, especially those who had spent harrowing hours stuck in buildings waiting to be rescued, also wondered the same.

But what New Zealand quickly came to realise was that Canterbury is our most resilient of provinces. Within days (and in some cases, hours) of the quake, Canterbury's law firms had set up offices and were ready to provide whatever assistance they could to their clients. It is something that has come up time and time again in the nominations for the 2011 New Zealand Law Awards, which I also oversee. Having lost their offices, their infrastructure, access to their clients' files, and sometimes even their homes, the lawyers of Canterbury, almost without fail, have put the needs of their clients and their staff first.

The Canterbury earthquake of 22 February also illustrated the true collegiality of New Zealand's legal profession, with firms all over the country - large and small - offering assistance to those whose practices had been badly affected by not only the quake itself, but by the cordon - a red zone that has more or less shut businesses out of their offices for the past seven months.

In August, the Christchurch City Council released its draft Central City Plan, in which the Mayor of Christchurch, Bob Parker, said, "Out of adversity comes an unprecedented opportunity. We are embarking together on one of the most exciting projects ever presented to a community in New Zealand, perhaps the world." That opportunity is the rebuilding of a city from the ground up.

"There's a lot of capital sitting on the sidelines waiting to be re-invested"

Jack Porus, joint managing partner, Glaister Ennor

With that opportunity will come even more opportunity for New Zealand's legal profession. Andrew Logan, a partner with Christchurch firm Mortlock McCormack, a mid-sized city firm, admitted that initially, straight after the earthquake, there were great fears about whether law firms would survive. However, when I spoke with him recently, he told me he was excited about the future and about the opportunities that Christchurch was now offering. "Christchurch is currently a demolition site, and eventually it will become a building site, but it won't become a building site until insurance issues have been resolved," he said. "Everything is linked to everything else."

For the first time in a long time, therefore, law firms are actively seeking property and commercial lawyers, as they prepare for the influx of work that will come as Canterbury deals with issues relating to leasing, construction, resource management, and most definitely, insurance. Nor are these opportunities restricted to those who practice in New Zealand's South Island. As one Auckland law firm partner pointed out, resources will be absorbed by Christchurch, which creates a fight for resources in other parts of the country.

Already, the Christchurch-related insurance cases, which are expected to dominate the litigation landscape in the foreseeable future, are providing work for firms all over New Zealand - not just those based in Christchurch.

New Zealand's legal profession

As at 1 September 2011, New Zealand's legal profession numbered 11,271 practising lawyers, the majority of which practise law in small to mid-sized firms [most with between one to 24 partners] spread throughout the country. Only a handful of firms can truly be described as "national", with offices in all the major cities, and, for the most part, these firms have a partnership of less than 100 partners. Of the "big firms", the top three are Russell McVeagh, Bell Gully, and Chapman Tripp, with Simpson Grierson hot on the heels of the top tier, and Minter Ellison Rudd Watts coming in fifth.

"They tell you there's been loosening, but the only time you know there's been loosening is if the deal's done"

David Quigg, partner, Quigg Partners

While all firms were affected by the downturn in the property market that heralded the recession, the top-tier remained relatively insulated from the negative impact [a 40 per cent drop in property transactions led to a similar drop in revenue for those smaller firms, whose 'bread and butter' work has been predominantly private client conveyancing]. Chapman Tripp, in particular, has benefitted from a decision made in 2003-2004 to establish a restructuring / insolvency group, under the leadership of partners Michael Harper, Michael Arthur, and Michael Anderson. At the time, it was a bit countercyclical, said Chapman Tripp corporate and commercial partner Barry Brown. But that move certainly paid off, with the firm acting for a significant number of the receivers of the major finance companies that collapsed prior to and during the recession. On the back of that insolvency work has come a steady stream of transactional work for the firm.

For the big firms, much of the litigation work has centered on regulatory matters, with regulators like the Commerce Commission, the Financial Markets Authority, and the Serious Fraud Office all actively pursuing non-compliant corporates. In addition, firms in the top-tier have been concerned with the proposed criminalisation of cartel behaviour, currently being worked on by the Ministry of Economic Development.

Where's the money?

One of the biggest impacts on the New Zealand legal market in the recession and the months following it has been the perceived lack of capital. As a result of finance company collapses that began in 2007, and restrictive lending practices introduced by banking institutions during the recession, those seeking to embark on major construction projects found themselves unable to do so.

Following the collapse of the finance company sector, the newly established Financial Markets Authority (which replaced the New Zealand Securities Commission in 2011) is currently investigating 16 collapsed finance companies with the estimated losses to investors said to be in the vicinity of NZ$3.45 billion ($2.75 billion). In addition to these losses are the ones caused by the finance companies that are now being investigated by the Serious Fraud Office.

In February 2010, a panel of bankers and economists predicted that the collapse of the finance company sector would be especially problematic for small to medium-sized enterprises. This was generational money that was now lost to the economy forever, they said. It was the money invested by 'ma and pa' investors, and which had been the traditional pot to which troubled family businesses looked to in order to get by in times of economic strife. With that pot depleted irreparably, it was expected that 2010 and 2011 would be marked by downstream insolvencies in the small to medium enterprise market.

However, that did not happen; and, in fact, some within the insolvency industry are now saying that they do not expect any further major collapses in the foreseeable future.

Despite the losses brought about by the finance company collapses, lawyers I have spoken with from Auckland's mid-sized firms, who had previously been through the recession that followed the 1987 crash, have said that the big difference between the two recessions is that there is not a lack of cash this time round. "After the recession in the late 80s, early 90s, New Zealand was bereft of capital," says Jack Porus, the joint managing partner at Glaister Ennor. "There was just no cash anywhere, and we saw an influx of Asian investors buying up properties around Auckland at quite high yields. It was really difficult to move forward because of the lack of capital."

This time, however, Porus believes things are completely different. There's a lot of capital sitting on the sidelines waiting to be re-invested. It's just waiting for the right conditions to occur, and then the money will flow. "Already, I'm aware of clients who are eyeing up opportunities and just waiting for the right moment to take that opportunity to buy another company, buy a struggling competitor out, or to expand their activities in some way."

The M&A market

Although there have been stories abounding that the M&A markets around the world are picking up, the evidence appears patchy. For the firms who have managed to secure the high profile, bespoke work, life at the end of 2010 and the beginning of 2011 has been anything but quiet.

David Quigg of Wellington boutique commercial firm Quigg Partners, reported to me that he had noticed a huge difference in the market from that he experienced prior to the recession. "Private equity is not fighting over everything," he says. "If anything, they've reversed sides. They're the seller. And the activity is in someway driven by them as to when they'll sell or if they can sell."

Quigg also described the market as having changed significantly over the past two to three years. In particular, he mentioned the lack of big deals and public M&A deals. Instead of private equity dominating the scene, it's a return to the days of yore when trade dominated. "They're trade, they know the business, so they're not getting into something that they don't know," he said. It's also an uncertain market, with logical acquirers much harder to predict. Quigg also noted a significant increase in outbound deals - also trade-related. "I think that is a sign of confidence," he says. But he warned that there would not be a rush of them, as they require careful planning and "steady hand implementation, because the implementation of any of those things is by far the most critical aspect".

"Terms and conditions are now more buyer friendly"

Cathy Quinn, chair, Minter Ellison Rudd Watts

Another trend in the market this year, noted by Quigg, is the treatment of business units not considered to be at a company's core. If the seller can't find a trade purchaser, or can't do an IPO, then spinning it off may provide better value for the seller, says Quigg. Barry Brown, a partner in Chapman Tripp's corporate and commercial team, has also noticed the trend, with firms reviewing what is and is not their core business. Brown worked on the Shell deal, which resulted in the company divesting its retail operations and downstream operations, choosing instead to focus on its "core" upstream business.

In Quigg's opinion, the market is still quiet. The real issue, he said, is whether private equity will be able to get the finance to do the deals they want to do. When I asked him whether there had been any "loosening" in the gearing ratios offered by banks, he said the jury was still out. "They tell you there's been loosening, but the only time you know there's been loosening is if the deal's done... They certainly seem to indicate that they are more amenable, but the proof of the pudding is in the eating."

Like Quigg, Cathy Quinn, Minter Ellison Rudd Watt's chair and head of the firm's private equity and mergers and acquisitions teams, said that in recent years it had been much harder to get deals completed. "Nothing is done until it's done," she says. However, she was seeing an increase in activity - even if the deals were taking longer. "Terms and conditions are now more buyer friendly. It's taking longer to document, and buyers are more cautious," she says.

What of the future?

It has certainly been a year of ups and downs for the New Zealand legal profession. Just as the market starts to pick up - albeit slowly and cautiously - with high-end, bespoke deals concluding just as the year began, the country was brought to a standstill by a 6.3 earthquake centered under Christchurch's CBD. The effect of the earthquake and the subsequent aftershocks were devastating. Since then, Christchurch has continued to rumble, with the number of recorded earthquakes and aftershocks now totalling over 8,600 (since 4 September 2010); and 182 people have died as buildings in which they worked or were having lunch in failed and collapsed on top of them. In recent months, over 1,000 CBD offices have been scheduled for demolition - many of which still hold within their crumbling walls law firm files that cannot be accessed.

Despite the tragedy of 22 February, and another 6.3 earthquake that hit the city on 13 June, the lawyers of Christchurch have shown amazing tenacity in getting their firms back up and running, so that they could provide full legal services to the people of Christchurch - and around New Zealand. It is expected that the demolition and rebuilding of Canterbury will attract work in the previously sluggish property and commercial markets. However, just as the return of M&A work has been slow and cautious, so is the rebuilding of Canterbury. With insurers debating with the Earthquake Commission and insurers over who should fund the repairs, and whether cover accepted for the very first earthquake on 4 September 2010 will be continuing for the subsequent earthquake events on 22 February and 13 June, any real growth in these markets will be slow and long-term.

But firms are cautiously optimistic. They have determined that the outlook is positive - even if slow - and it is with that in mind that they are now planning for the future. And at the moment, wherever you look, firms are embracing the spirit of the RWC2011, using it as a reason to bring together staff and clients to enjoy the celebrations as 20 different nations exhibit their sporting excellence in New Zealand. Whether this will have a long-term effect on the work that comes the way of the legal profession remains to be seen. However, those who are coming to the country to party are seeing a country energised by the challenges of 2011, and looking forward to the future.

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