Hong Kong heats up

Two years on from the start of the Asian financial crisis, Hong Kong is still in recession. However, the first stirrings of optimism in the legal market indicate that the worst might be over.

The magnitude of the crash has overshadowed any apprehensions about how the former British colony would fare after the handover to China and how the 'one country, two systems' principle would work in practice.

A decision last month by the Chinese government to overrule Hong Kong's Court of Final Appeal sent tremors through the legal community, which was concerned the move could undermine the rule of law.

But most lawyers see the volatility of the Far East markets, rather than political change, as the driving force in the legal market.

The aftermath of the crash forced law firms to rethink their traditional sources of work. Local firms, many of which relied heavily on conveyancing, were severely hit by the property collapse. For the big international firms, securities, capital markets and project finance work slumped while debt and corporate restructuring, insolvency and default work boomed.

Some firms 'retooled' staff to work in different areas; others recalled partners to London or did not replace those going home. A number took advantage of the slump in recruitment to pick up the best talent.

But the signs of improvement in Hong Kong's economy have prompted firms to talk again of expansion. Last month, Cameron McKenna lured away Denton Hall's head of Asian operations, Christopher Clarke, and partner Janine Canham from its corporate and commercial department. Denton Hall admits its office has suffered from the recession but says it is now planning to expand.

For Patrick Moss, secretary general of the Law Society of Hong Kong, there are a “few straws in the wind” that the economy is picking up – slowly.

“Hong Kong has a lot of very small practices and sole practitioners who are more vulnerable to the economic crisis than the large international firms,” observes Moss. “But we have seen the worst of the redundancies. Firms are starting to advertise again for staff in our weekly circular and the numbers of legal staff have increased in the last few months.”

Julia Charlton, who has practised in Hong Kong for 11 years and is sole partner at Charltons with eight other lawyers, formed an association with Dibb Lupton Alsop six months ago after the collapse of a two-year venture with Arthur Andersen Legal.

She says: “The corporate finance sector is extremely busy. There was a period from October 1997 to last month when there was very little new equity fund raising. But in the last couple of weeks there is a perception that the market is getting stronger.”

Richard Weisman, international partner in Baker & McKenzie's Hong Kong office, identifies very substantial changes in Hong Kong's legal market over the past two years. He says:”The very busy areas are litigation, insolvency, mergers and acquisitions and debt restructuring. Conveyancing and general finance work has been very quiet, while project work remains slow. But capital markets work is definitely heating up. Because the market is up, we anticipate a significant increase in new listings.”

The firm hopes the Chinese government will relax the rule restricting overseas firms to one branch office so they can expand in China.

Weisman says US lawyers are playing an increasing role in Hong Kong, in part because US investment banks are making very substantial inroads there. “But there are still lots of documentation being done under UK law,” he adds.

Clifford Chance's Hong Kong office, its second largest outside London, has been relatively static after a period of substantial growth. John East, regional managing partner for Asia, says: “Our overall numbers have fallen by a few since 1997. But we were more fortunate than some of our competitors because we were less dependent on securities business. Our finance and projects practice was able to tide us over the worst times.

“Part of our strategy for coping was changing the mix of lawyers – if someone is a banking lawyer, they ought to be able to do restructuring for a company.”

The niche construction practice Shadbolt & Co raised a few eyebrows when it decided to open a Hong Kong office last year. But managing partner Colin Dodd says both he and partner Mark Fell have worked for many years in Hong Kong: “We were not new kids on the block. We were also able to take advantage of the lower office and residential costs.”

He adds: “We are fairly bullish at the moment. We are about to move to bigger premises and take on another three UK lawyers as well as recruiting some local Chinese lawyers. The construction industry is fairly buoyant, with the next big project being the rail company KCRC's new line to China. We are also being kept busy with arbitration work involving some very big claims.”

For Andrew Carmichael, head of Linklaters' capital markets practice in Hong Kong, the territory is “still patently in recession with contracting GDP and static or falling prices”. He adds: “However, the Hang Seng index is up and the corporate finance market has rebounded very strongly in the last two months, after only a handful of deals in 1998. We are involved in four public security offerings involving Hong Kong-listed companies, two of which are China-controlled.

“On the banking side, there is a reasonable amount of new money-raising, restructuring and rolling over of debts, while crisis insolvency and bankruptcy work remain the same – it's a case of intensive care as opposed to rigor mortis.”

Nick Rees, head of Linklaters' Hong Kong office, says the crucial factor in surviving the financial crash had been shifting skills to the right area. Partner numbers have remained about the same but there has been some movement between Hong Kong and London to get the right balance. “It has also been important to be flexible geographically, says Rees. “Corporate finance lawyers have been more willing to do M&A work outside Hong Kong than two years ago when there was enough work to keep them busy here.”

Most corporate and commercial lawyers have taken a pragmatic view of the Chinese government's decision to overrule the Court of Final Appeal, despite it being described by some legal experts as sounding the death knell for the common law in Hong Kong. The Court decided that, under the Basic Law, Hong Kong's mini-constitution, children born in China to a parent living in Hong Kong had the right of abode in the former colony. But China reinterpreted the law to restrict the number of children who qualify.

Weisman says: “Some clients have inquired about the issue but I would not go as far as saying it had undermined confidence in the legal system.” East agrees: “Will it affect people's views of Hong Kong? I think it is seen more as a political issue.”

Hong Kong remains an attractive posting for UK lawyers. Salaries are roughly double, income tax is low and the property crash has meant lower rents. However, they now have to qualify along with every other foreign lawyer to practise there and there is increasing demand for Chinese speakers.

Katy Lang, principal of legal recruitment firm Hughes-Castell's Hong Kong office, says US law firms are the major recruiters. The other growth area is for in-house lawyers, where local and regional expertise and language skills are proving more attractive than UK experience.

Hughes-Castell's managing director John Lingard says: “Lawyers used to go to Hong Kong for a two or three-year jolly, but now the market is so much more sophisticated, firms want people who are committed to the area.”

Accountants reveal their legal ambitions in Hong Kong

According to senior lawyers, it is inevitable that the Big Five accountancy firms will get in to the legal market in Hong Kong. But how quickly they will achieve their ambitions is another matter.

Arthur Andersen Legal's decision last year to drop its Hong Kong firm Ede Charlton only two years after setting up the practice and its jilting of Wilde Sapte have made lawyers think carefully about teaming up with an accountancy firm, however global its reach.

In an article in Asian Lawyer last week, Allan Aw, who heads Andersens' Asia-Pacific operations, admitted its aborted attempts in Hong Kong had damaged many lawyers' confidence in the Andersens vision. “I get the feeling that Andersen is not yet taken seriously in the Hong Kong legal market,” he said. “Of course, there was the 'blunder' last year and I'm sure many lawyers were saying 'I told you so'.”

Andersens went on to bring 67-lawyer Singapore firm Rajah & Tann and Malaysian firm Zaid Ibrahim & Co, with 60 lawyers, into its network of associated law firms. However, it continues to work on setting up a new association in Hong Kong.

For the Big Five, the crucial question is how the legal profession tackles the issue of multidisciplinary partnerships (MDPs), given predictions that they will eventually be approved in the US and the UK. MDPs are not allowed in Hong Kong. Patrick Moss, secretary general of the Law Society of Hong Kong, says: “We will not be taking a lead, that's for sure.”

Paul Downing, head of corporate development for PricewaterhouseCooper's associated legal firms, says he has “absolutely no doubt” that there will be mergers between law firms and the Big Five in Hong Kong in the near future.

“Any firms that want to be serious players in the global market must have a major operation in Hong Kong and an equal position in mainland China,” he says. “For a law firm to be truly part of a global network, then association with one of the big Five is a serious option. It is much easier to graft something on to an existing infrastructure.”

Jason Felton, Ernst & Young tax partner in Hong Kong, says it is looking at developing an association with a law firm. Clients like the idea of one-stop shopping. “I think accounting firms feel it is the way to go and it now appears some of the larger law firms feel the same. I guess you will start seeing associations between the two within the next three to five years,” says Felton.

Nick Rees, head of Linklaters' Hong Kong office, says linking up with an accountancy firm “is certainly not for us”.

Richard Weisman, international partner at Baker & McKenzie in Hong Kong, agrees a link-up is not part of its strategy. He adds: “It is inevitable the accountancy firms will move into legal services. The question is how quickly they move, how successfully they do it and what part of the market they will be able to penetrate.”

John East, Clifford Chance's regional managing partner in Hong Kong, says MDPs are not on its agenda but adds that it is not complacent about the accountants' legal threat. He says: “The impact of things like Wilde Sapte and Ede Charlton have not been helpful for their ability to attract top rate people or business. But they will have such huge bases of referrals from their own business, it ought to be a reasonably successful formula – which is why it is surprising it hasn't been successful so far.

“There is a very long way to go before they are really capable of challenging for the top end of legal work.”