South Korea: Seoul train
30 September 2013 | By Yun Kriegler
17 June 2013
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28 May 2013
The past year has seen an influx of international firms setting up offices in Seoul, but have they started reaping the benefits of being on the ground?
This summer, South Korea saw one of this year’s largest M&A transactions take place. In a deal valued at €1.24bn (£1.04bn), ING sold its wholly owned Korean life insurance business ING Life Korea to major Korean private equity firm MBK Partners.
Allen & Overy, although yet to establish a presence in Korea, was instructed again by long-standing client ING to act on its latest major step in its divestment of Asian insurance and investment management units. US firm Cleary Gottlieb Steen & Hamilton, which opened a Seoul office last October, acted for MBK Partners alongside South Korea’s largest firm Kim & Chang.
Cleary has a long-established Korean practice with around 30 Korean-speaking lawyers across its global network. Since the opening in Seoul, half of the firm’s 15-member Korean team based in Hong Kong have moved to the country’s capital, a process led by partner Yong Guk Lee. However, in the ING-MBK deal most of the work was undertaken by a team in Hong Kong led by partner Sang Jin Han.
“The firm has had a Korean practice for 20 years and the Korea practice group based outside of Seoul continues working for existing
Korean clients on transactions as we’ve always done it,” explains Lee. “A key role of the Seoul office lies in developing new clients that may not be familiar with international firms.”
According to Lee, some of Cleary’s new clients developed in Seoul include Daegu Bank, SK Innovation, Hyundai Rotem and Doosan Group. In the case of Daegu Bank, Cleary’s Seoul office gained the client by advising the joint lead managers in its $300m debt issuance in April 2013.
“For firms without an on-the-ground presence and ties with Korean clients, it’s going to be increasingly difficult to attract new clients and work from the country,” Lee adds.
Linklaters’ Seoul managing partner Hyung Ahn adds that just having a shop window is not enough to attract serious mandates.
“When we did our due diligence on opening an office in Seoul we spoke to many clients in Korea. The main message was that clients would not be interested in a representative office without senior people who can actually execute matters,” says Ahn, who relocated together with project finance partner Stephen Le Vesconte from Hong Kong to spearhead the firm’s new Seoul office in May.
Indeed, the need to secure future mandates from Korea and maintain existing client relationships has driven many firms to pile into the country since the restriction was first lifted last year as a result of the country’s free trade agreements (FTAs) with the US and the EU.
Foreign legal consultant offices
So far, 18 foreign firms have opened a foreign legal consultant office (FLCO) in the country, and talk on the street suggests there are up to 10 more applications in the pipeline. Only registered foreign legal consultants can work in FLCOs and at present there are over 50 registered with the Ministry of Justice.
Paul Hastings is another foreign firm with a large following in Korea. Its Seoul office, launched in November 2012, has eight lawyers. Office chair Jong Han Kim says Seoul has generated fees in its own right as well as executing matters.
Two recent transactions led by Paul Hastings’ Seoul team were the $114m global depositary receipts offering by Korean company Youngone Corporation, in which it advised the sole bookrunner Credit Suisse, and representing Samsung Electronics in its $110m investment into Japan’s Sharp Corporation. Another focus of the office is cross-border dispute resolution for Korean clients. In June, Kim and his team secured a victory for client Lotte Chemical in a complex arbitration over trade secrets in the US.
The steady increase in demand has already resulted in the firm’s first lateral hire for the new office – New York qualified corporate associate Young Hwan Ryu, who moved to Seoul from Latham & Watkins’ New York office.
“As our business continues to grow, we will hire qualified foreign attorneys,” says Kim. But he also points out that some of the FLCOs will remain as liaison offices with one or two lawyers while others typically have only three to four time-keepers.
Herbert Smith Freehills, which opened an office in April, tapped into the Korea trend slightly later than its major international competitor but is looking to boost its capability.
Seoul resident partner Lewis McDonald says the office has two partners and three lawyers, but is looking for an additional Korean-speaking, foreign qualified lawyer.
Although many firms are interested in entering into the market, legal recruitment activity is relatively quiet according to recruiters.
“Foreign firms are still conservative and are not over recruiting lawyers if there is not enough work,” says a recruiter. “There’s interest among foreign legal counsel working in local firms to move to international firms, but a key concern for them is the longevity of these foreign offices. There’s fear that some will be closed due to low levels of business.”
In addition, recruiters are finding it difficult to move elite foreign qualified lawyers from leading local firms, where they can earn over $600,000 or more at partner level, since they consider moving to a small start-up office as risky.
Regulatory requirements also make it difficult for foreign firms to recruit. The regulation requires lawyers employed by FLCOs to have a minimum of three years’ experience with two in the home jurisdiction of the international firm. This significantly limits the pool of local candidates for international firms, particularly in the junior ranks.
While it is widely anticipated that South Korea will fully open its legal services market in 2016 to countries with which it has signed a Free Trade Agreement, there is no detail on what form the final liberalisation will take. But the Korean Bar Association’s recent announcement on an interim measure to allow collaboration between local and international firms has been hotly discussed.
The bar association issued a regulation that set out rules to allow
international firms’ Seoul offices to conduct joint assignments with their local counterparts on individual matters and share revenues and profits from the joint work. Prior to that, FLCOs were barred from forming any kind of business affiliations and sharing profits with Korean firms. However, the new liberalisation measure is yet to generate notable interest in the market.
Foreign lawyers generally hold the view that the regulation does not have enough merits to attract international firms to enter into such arrangements.
“There are not enough incentives for us to partner up with local firms. We already work alongside local counsel instructed separately by clients and we each receive our own respective fees from clients,” says Cleary’s Lee.
The regulation is applicable to firms from the EU but will become effective for US firms next year. So far there have not been any reported joint arrangements.
Some foreign lawyers attribute the lack of interest to the stringent requirements set out by the regulation. Key requirements include formal registration of the joint arrangements with the bar association prior to jointly pitching and advising on matters, collaborations are restricted to a matter-to-matter basis and joint arrangements are subject to strict reporting and disclosure obligations at the end of each year. Breaches of the regulation will lead to heavy punishment, including possible imprisonment.
“It requires the disclosure of some sensitive and confidential information, which could cause both clients and firms discomfort. The severe punishment also means it’s very risky for international firms,” says McDonald.
Linklaters’ Ahn notes that the regulatory requirements are too complicated and “everyone took a quick look at it and decided that there’s no point and nothing to be gained in doing such arrangements”.
DLA Piper’s Korea managing partner Daniel Lee, however, expects there to be an increasing number of joint engagements between international law firms and Korean law firms until the final phase of the legal market opening.
Whether or not the interim measure will be a popular option, a fully opened market is inevitable and a free market means more competition. But leading Korean firms are confident about their market position even beyond 2016.
The major Korean firms have a long history working with leading international firms on cross-border M&A and capital markets transactions. Although many have set up an office in Seoul, it is not a “ground-breaking situation”, says senior
foreign legal counsel Luke Shin of Kim & Chang.
“It’s an exciting time to be in South Korea as it is gaining positive attention from the global firms and becoming a much more dynamic market. The leading Korean firms have been preparing for this for a quite some time and they will remain independent and dominant players even when the market is fully opened,” Shin adds.
Looking back on neighbour
Japan’s experience, it is safe to predict that some smaller South Korean firms will become associated with large international firms but the domestic market will be dominated by several large independent Korean firms, while most foreign firms will have much more focused offerings.
Key figures: South Korea
Annual inflation 1.3%
Population (2012) 50m
Life expectancy at birth 81
Unemployment rate 3%
Source: World Bank, Statistics Korea