Can UK talent make white shoe firms a good fit in Hong Kong?
4 September 2011
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6 December 2013
It is rare that New York’s white shoe firms undertake a mass shift in strategy.
It is even rarer when that shift is an acknowledgement that, rather than leading the market, they are lagging behind.
So when Cleary Gottlieb Steen & Hamilton, Davis Polk & Wardwell, Simpson Thacher & Bartlett and Sullivan & Cromwell all launched Hong Kong law practices this year after capturing senior-ranking figures from UK rivals, it was probably the biggest communal strategic shift in the past decade. Indeed, the calibre of recruits underscored how seriously the firms are taking their ventures.
Davis Polk took Paul Chow and Antony Dapiran, the Beijing heads of Linklaters and Freshfields Bruckhaus Deringer respectively, plus Bonnie YT Chan, a former director at Morgan Stanley, from HKEx, Hong Kong’s stock exchange.
Cleary added Norton Rose China corporate finance chief Freeman Chan; Simpson Thacher recruited Linklaters China managing partner Celia Lam and Freshfields’ former regional corporate leader Christopher Wong; while SullCrom hired Freshfields Hong Kong head and ex-global co-head of capital markets Kay Ian Ng.
So what sparked this seemingly sudden desire for a top-notch Hong Kong law capability?
The obvious answer is the economy, but that does not tell the whole story. As Peter Charlton, Asia-Pacific managing partner at Clifford Chance, puts it: “Asia’s continued to grow year-on-year and China’s been growing strongly and consistently for the past 30 years, so in that sense it’s nothing new.”
To prove the point, Cleary opened in Hong Kong in 1980, SullCrom in 1992 and both Davis Polk and Simpson Thacher in 1993. The deeper reason behind the local law foray is changing client expectations and the relative sluggishness of firms in adjusting to meet those expectations.
“Having spoken to a number of the US law firms, I was surprised by the relative ignorance of the managing partners here in terms of the need to set up a local law practice and why others were doing it,” claims Robert Sawhney, a Hong Kong-based legal consultant at SRC Associates.
From a practice perspective, the surging HKEx is the focal point for the launches. The bourse attracted HK$789.5bn (£61.67bn) of equity investments in 2010, including 98 IPOs accounting for HK$412.2bn, according to HKEx.
Again, the capital markets boom is nothing new. White shoe firms have long been satisfied with the US law aspects of listings (22 out of the 99 listings in New York in 2010 were by Chinese issuers). The two largest Hong Kong IPOs of 2010, those of AIA Group and Agricultural Bank of China (ABC), gave SullCrom, which represented the underwriters, and Davis Polk, which acted for the issuer, lead US law roles. Local law advice was provided by Linklaters and Herbert Smith respectively.
However, New York firms have found that area of work is narrowing. Big deals provide some US law instructions, but the main role in many IPOs is Hong Kong law, which they could not offer, so more clients were turning to UK or Hong Kong counterparts that could offer one-stop shops.
Simpson Thacher Hong Kong partner Leiming Chen says: “If a law firm wants to handle the IPO, it needs to have a Hong Kong law capability, as without it they’re unable to advise the issuers or the underwriters on Hong Kong law matters.”
This is compounded post-IPO when follow-on corporate and finance advice is required. These also tend to require a Hong Kong law speciality, both for the corporate and the banks.
“US firms were missing out on work by not doing Hong Kong law,” Davis Polk’s Chow observes. “For instance, US law firms tend to write the prospectuses for an IPO and undertake US law work, but would have to hand the Hong Kong law aspect over to a UK or Hong Kong practice. Once the company had listed it would more often turn to the Hong Kong practice for further work, so the relationship would be lost [for the US firm].”
Losing potential clients was one consideration; handing over existing clients to London or US counterparts, such as Latham & Watkins, Shearman & Sterling or Skadden Arps Slate Meagher & Flom, was another.
“We also have a lot of institutional clients, particularly in the private equity sector, so when there was a deal involving Hong Kong law we’d have to refer the matter to a Hong Kong firm,” states Simpson Thacher’s Chen.
Cleary partner Megan Tang says corporates, private equity firms and banks have encouraged their local law push by becoming more active in the region, adding that “all [clients] expect their US legal counsel to expand the range of services they provide”.
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This slowness to adapt to these trends meant laterals were needed to kick-start practices. Rivals point out, though, that these shifting client demands mean the strategy is not so much about winning, but having the talent to also service the existing client base. So while the new partners provided an extra boost to the local presences, they also complemented the New York firms’ existing US law capabilities (and client lists) in Hong Kong.
Ng, for example, worked alongside SullCrom for the underwriters on China Pacific Insurance’s $3bn (£1.83bn) IPO; Dapiran advised on the ABC and Industrial and Commercial Bank of China listings alongside Davis Polk; and China Mobile, a key client of Simpson Thacher, turned to Lam for its $6bn purchase of a holding in Shanghai Pudong Development Bank.
“It’s all very well sending in a star partner from Wall Street or the City, but the market doesn’t have that many lawyers with good experience of headline Hong Kong IPOs, and that’s what you need for immediate market credibility,” observes Ng.
Davis Polk’s Hong Kong office has a strong corporate client base: partner James Lin is a leading figure with clients such as Air China, China Flooring Holding Co and Prada, acting for the latter on its recent landmark listing. But Davis Polk’s hires have particular experience with underwriters.
Cleary’s main focus has been on issuers, which together with its global spread bodes well as more foreign companies such as Prada, Rusal and Glencore International look to list in Hong Kong. The firm’s underwriter client list is sturdy, with names such as Deutsche Bank, HSBC and Goldman Sachs on its roster; but Cleary’s regional emphasis has arguably been more on South East Asia, in particular Korea, where clients include Korea Development Bank, Samsung Electronics and LG Electronics. Chan can help Cleary dig further for local clients, having worked for China Modern Dairy, Sihuan Pharmaceutical Holdings Group and China Shanshui Cement Group among others, in addition to enhancing its existing capability.
SullCrom has strong banking and corporate clients, but its headcount is significantly smaller than those of its peers, with 15 lawyers listed in August, so it may need to bulk up. It benefits from offices in Tokyo and the key Australian centres of Melbourne and Sydney. Ng concentrates on Chinese issuers, with mandates closed for China Pacific Insurance, AIA and Guangzhou Automobile Group.
Simpson Thacher’s banking and private equity pedigree will assist in referrals from its US hub. Lam will strengthen capital markets: she has acted for local clients China Netcom Group Corporation and Bank of Communications, while Wong has undertaken work for Morgan Stanley, Citigroup, UBS and KKR Capital Markets.
“Strong client relations probably play an element in [the recent] hires,” says Charlton, “but I believe the US firms already have strong relations with their corporate clients, especially the US investment banks. So the hires are more about having quality and experienced local lawyers on the ground to serve those clients and help develop more Chinese clients.”
Practice made perfect
Perhaps the more symbolic gesture, and an indication of how long it has taken to launch a local law practice, is the low-key moves by white shoe firms to requalify their lawyers in Hong Kong over the past two years, which is starting to come to fruition.
“Our strategy goes beyond just a partner hire,” Cleary’s Tang stresses. “We see ourselves as a Hong Kong law firm, not just the Hong Kong office of a US law firm.”
Chow says Davis Polk’s Hong Kong lawyers get the chance to work on US law matters too and vice-versa, which is why so many partners have retrained in Hong Kong law.
“It’s a good selling point to be able to have lawyers who can work on both Hong Kong and US law issues,” stresses Chow.
It is no coincidence that the four firms are the top-rated capital markets practices in the US. They have enough strong and active institutional clients to kick-start any office, let alone an established branch in a healthy market such as Hong Kong’s.
“We’ve already been asked by a number of clients when Celia and Christopher are going to start so they can hire us for deals governed by Hong Kong law,” Chen adds.
Morgan Stanley, for example, is a longstanding client of Davis Polk, but has turned to other firms for US-Hong Kong advice. It instructed Freshfields on Springland International Holdings’ $548m IPO and called upon Paul Hastings for the sell-downs by Warburg Pincus and Enerchina Holdings and the IPOs of Changfeng Axle (China) Co and Longfor Properties Co (alongside Citigroup and UBS).
However, now that Davis Polk offers integrated advice, the firm can compete for such instructions. Indeed, Morgan Stanley recently handed Davis Polk the lead role on the placement of two million new shares by G-Resources Group.
It would be easy to voice concern about the impact on firms such as Freshfields, but as with its New York counterparts, the magic circle firm’s clients are deep-rooted. So despite losing three top partners it still has more than 100 lawyers, including experts such as Teresa Ko and Robert Ashworth, and maintains a strong showing, particularly on cross-border work. Recent work includes acting on the $1.25bn Samsonite IPO, representing Japan’s SBI Holdings on its $167m global offering of Hong Kong Depository Receipts and China Unicom on its alliance with Telefónica.
Tang does not think anyone would write off the magic circle. “Law firms are all adapting different strategies,” she says. “Some focus on quality and others on price. It’s hard to predict where the market will be in five years time as there’s so much going on at the moment.”
A different ethos
The US firms’ ethos on prime instructions from low costs, low overheads and low infrastructure serves as some respite for nervous UK firms.
“In terms of pure lawyer numbers the US firms still have a much smaller presence than the UK firms’, hiring only one or two partners who can practise local law,” SRC’s Sawhney says. “Even if these partners bring their entire books of business with them, the amount of work is still unlikely to have a big impact on the UK firms at present.”
In addition, HKEx estimates that there were 187.2 million equity transactions during 2010, but according to the Law Society of England and Wales there are around 6,500 practising solicitors in Hong Kong. The real challenge, then, is less for clients and more for talent, which is where UK firms still hold the upper hand. Allen & Overy, Clifford Chance, Freshfields and Linklaters have some 500 lawyers in Hong Kong between them; the four New Yorkers have fewer than 100.
“The recent moves by the top New York firms may be a challenge to the UK firms in Hong Kong,” Chen concludes. “Even so, I think there’ll be plenty of deals for strong firms whether they’re UK or US firms.”
Chow believes Hong Kong remains competitive, but stresses that the main difference now is that, rather than the English firms having the monopoly on offering Hong Kong legal advice, “now it’s everyone”.
Competition is sure to increase. The London and US firms offering an integrated service have enjoyed a successful stint, but are now looking over their shoulders as the white shoe firms play catch-up.
In that sense, the Manhattan quartet may be late to the party, but they are certainly bringing plenty of bottle.