Local heroes

At the end of March, self-made businessman Leung Chun-ying was voted in as Hong Kong’s new chief executive following a turbulent campaign. Although it has won the tough election, the special administrative region’s new government faces remarkable challenges, including maintaining Hong Kong’s economic prosperity and ­status as an international financial centre in a new era of slower growth in China.

Many international law firms in Hong Kong, particularly those that expanded significantly in 2011, may also find this year challenging, given Europe’s escalating debt crisis and a slow market for IPOs and listings in Hong Kong. However, the general sentiment in the market remains upbeat, with most lawyers agreeing that Hong Kong has been through many ups and downs over the past 15 years, and its economy is fundamentally strong and resilient.

The expansion of international firms into Hong Kong is continuing, albeit at a smaller scale, indicating their confidence in the city state’s growth potential as a key regional hub for high-end legal services. In addition to US law firms, a number of UK and European firms are also trying to make inroads into Hong Kong.

Watson Farley & Williams is the ­latest UK firm to have entered Hong Kong. It launched its third Asian ­office there in March, with the appointment of corporate finance partner Loretta Lau from Goodwin Procter. The new office is in association with Lau Leong & Co and is led by Lau and two partners who relocated from Singapore,Madeline Leong and Nicholas Hanna.

Watson Farley managing partner Michael Greville notes that as the economic activity in Asia has increased, the requirement for a complementary presence in Hong Kong and direct access to mainland China has emerged.

Fellow City firm RPC appointed four legacy Barlow Lyde & Gilbert (BLG) partners from Clyde & Co in a bid to launch in Hong Kong. The four partners joining RPC are Hong Kong senior partner David Smyth, marine insurance partner Andrew Horton, insurance partner Antony Sassi and disputes partner Gary Yin.

Taylor Wessing is also seeking a base in Hong Kong. The firm has two offices in mainland China and has been in the Greater China market since 1996.

“At the moment, Hong Kong is all about China: a route into China and China’s gateway to the rest of the world. We’ve done a huge amount of work advising Continental European business into China and now we’ve seen a high level of activity coming out of China. We’re looking closely at the market in Hong Kong,” says Robert Fenner, a London-based partner atTaylor Wessing and chair of the firm’s China group.

Among a growing volume of Chinese mandates, the firm has helped all four Chinese banks to establish and develop operations in the UK.

“Our model for expansion is to have local expertise and knowledge. We’ll look for established local teams to join the group and lead our Hong Kong initiatives,” he says. “Hong Kong’s economy is more cyclical than London and New York. Establishing in Hong Kong’s market is a long-term project and people shouldn’t just look at a year or two.”

Local knowledge
In today’s market, the ­capability to advise clients on Hong Kong law is critical. Firms are addressing this issue either with the recruitment of Hong Kong-qualified partners, by ­entering into association with a local Hong Kong firm or encouraging their overseas-qualified lawyers to sit the Hong Kong bar exam.

Akin Gump Strauss Hauer & Feld and Gibson Dunn & Crutcher are two US firms that have launched Hong Kong practices recently. Akin Gump recruited partners Gregory Puff and Andrew Abernethy, from Shearman & Sterling and Norton Rose respectively, for its new office. To offer clients Hong Kong legal ­advice, the firm has filed an application with the Hong Kong Law Society to operate in association with Gregory D Puff & Co, a domestic firm set up by Puff and Abernethy for this purpose.

Gibson Dunn, which opened its Hong Kong office in 2010, has launched a Hong Kong practice with the hire of veteran lawyer Graham Winter from Reed Smith Richards Butler. Winter founded GW & Associates, a firm of Hong Kong solicitors, to practise in association with Gibson Dunn.

Getting qualified

Hong Kong’s regulations require a foreign firm to practise in association with a Hong Kong firm to advise clients on domestic law until it has been in Hong Kong for at least three years. There is no minimum threshold for the number of partners and lawyers at the Hong Kong firm, but at least half of the lawyers in the ­association need to be Hong Kong-qualified. This requirement has triggered a surge in the number of foreign lawyers sitting the local bar exam over the past few years.

According to the Hong Kong Law Society, 257 foreign lawyers became Hong Kong-qualified in 2011 after passing the Overseas Qualified Lawyers’ Examination (OQLE), compared with only 69 in 2006. It is ­understood that more than 20 of Davis Polk & Wardwell’s lawyers took and passed the OQLE last year.

“The trend is likely to continue, ­assuming Asia’s economies keep growing,” predicts Winter. “Many of the firms that have international platforms and aspirations are already here, as we’ve seen the big curve of new entrants over the past year. Going ahead, there’ll be a steady stream of new additions, while firms that are already here will try to grow their practice and increase their ­market shares.”

He adds that Gibson Dunn is also planning to open in Beijing and has submitted an application to the ­Chinese Ministry of Justice.

Independent thinking
In an increasingly competitive and international legal services market, many local Hong Kong firms have ­responded by becoming part of an ­international firm or joiningforces with large Chinese law firms. However, a handful of local independent firms in Hong Kong still find themselves in a strong position.

Mayer Brown’s 2007 merger with century-old Hong Kong firm Johnson Stokes & Master (JSM) has so far been the most significant combination between a Hong Kong firm and an international firm. The merger gave the US firm a meaningful presence in Asia and provided JSM access to a global platform to service its clients’ international ventures.

“Through the merger, our clients now have access to local knowledge and expertise in the US, UK and ­Europe. If we were still JSM with ­offices only in China and Asia, we wouldn’t have won many large, cross-border mandates,” admits Elaine Lo, senior partner of the legacy JSM, who now serves as the chair of Mayer Brown JSM’s Asia board.

Global trading group Li & Fung, for example, is a major client for JSM. It has been acquisitive, buying businesses in the UK, US and Europe. Since the merger, Mayer Brown JSM has advised Li & Fung on all aspects of its M&A transactions without ­having to bring other firms on board.

Another important client of the firm, Beijing Automotive, has also been active in acquisitions of European targets. In the past few years, the firm has advised the Chinese ­automaker on its bid to acquire a 51 per cent stake in General Motors’ ­European Opel Unit and on its acquisition of IP rights, technology and equipment from Saab.

“When you work with local counsel on a transaction, the services aren’t always seamless and clients will doubt the duplication and efficiency of the work,” says Lo. “Now we’re able to handle all aspects of a complex, cross-border deal and manage the entire project under one roof.”

The merger was also transformational for JSM in the sense of moving up the value chain.

“Since we became part of an international firm, we have a different cost base, focus and strategy for our South-East Asia offices,” says Lo. “We now mainly target clients who have the need for international lawyers and pay international rates for international counsel to lead projects in the region.”

The merger between JSM and Mayer Brown may have posed new competition for some global players, but it has also meant less rivalry for others. Deacons, Hong Kong’s largest independent law firm and once JSM’s closest rival, is pursuing a very different strategy and remains independent after 160 years in ­existence.

“Following the merger between JSM and Mayer Brown, it has left us in a comfortable position as the largest remaining independent firm in Hong Kong, with comparable size and standing to JSM. This strengthened position re-ensures our partners’ desire to remain independent,” says Deacons executive partner ­Jeremy Lam.

Over the past few years, the 190-lawyer full-service Hong Kong firm with three offices in mainland China has attracted numerous international suitors. However, it does not believe there would be any added value in an international merger.

“While independent firms are ­facing many challenges, we believe the benefits outweigh the downsides. Being independent makes us the master of our own destiny and we work with autonomy. It also enables a strong flow of referrals from many other firms with or without an office in Hong Kong,” says Lam. “There are a large number of firms willing to ­cooperate with us because we don’t have offices overseas and don’t ­compete in their home market. Even some of the international firms in Hong Kong still refer work to us ­because their Hong Kong offices aren’t full-service yet.”

The legal environment in Hong Kong has changed more rapidly than ever before in recent years. Deacons is watching all the market developments closely, seeking to evolve while remaining independent.

“If the cost of independence is that we can’t grow larger in size, we’re ­prepared to pay that price,” says Lam.

Going it alone

The establishment of new independent firm Howse Williams Bowers (HWB) is further testament to the ­opportunities some see in independence, as well as demonstrating that joining an international outfit is not for everyone.

On 1 January, a group of 50 staff led by Chris Howse, the senior partner of Reed Smith Richard Butler’s Hong Kong office, left the firm to set up a new practice focusing on four key areas: corporate and commercial, ­dispute resolution, employment and insurance.

Howse has practised in Hong Kong since 1983, when he relocated from Richards Butler in London to build the firm’s Hong Kong office. At its height, the office employed 250 ­people. In 2008, Richards Butler Hong Kong joined Reed Smith as part of the two firms’ transatlantic merger.

Howse says the move to an independent was very difficult, having to leave behind colleagues the team had practised with for 20 years, but he ­believes it was necessary.

“We want to be a substantial independent Hong Kong firm, modelled on Richards Butler Hong Kong prior to its merger with Reed Smith,” says Howse. The new firm has been in business for only three months and has already received significant ­referrals from London and Europe. Its staff headcount has also grown to 65, including six partners.

“We’re in a good position for ­referrals from firms based overseas, as they won’t want to use the Hong Kong office of one of their competitors in their home jurisdiction,” ­explains Howse. “In addition, we only have a single office in Hong Kong, so we can run a very lean and efficient law firm that charges significantly lower rates than big international firms. It’s very much the model that made Richards Butler Hong Kong a highly profitable firm.”

The hourly charge-out rate of a partner at HWB is estimated to be at least one-third cheaper than partners at international firms.

Conflict of interest is another major issue facing large international firms. During Howse’s time at Reed Smith Richards Butler, four out of five prospective clients were conflicted. The problem is ­particularly acute in insurance work.

“Big international merger suits some firms and doesn’t suit others, depending on the nature of their practices.

“Reed Smith is a perfectly good ­international firm but it just wasn’t suitable for the practices we’re ­running,” says Howse. “As more law firms go international and look
to ­undertake multi-jurisdictional high-value transactions, the mid-range market in Hong Kong will see less firms competing and the market for strong independent firms is very empty. Our goal is to become an ­alternative to Deacons.”

HWB and Deacons are both clear ­alternatives to the internationals and, for the moment, are breathing more easily in Hong Kong’s competitive legal services market.

—

Independents’ day

Hong Kong has positioned itself as a gateway to the opportunities in China and in recent years international firms have piled in. But can the few independent law firms left in the special administrative region survive against the onslaught of the bigger outfits?

—

Key figures

GDP (2010)
$224.5bn

Annual inflation (March 2012)
4.9%

Population (2011)
7.1m

Life expectancy at birth
83

Unemployment rate (March 2012)
3.4%

Source: World Bank, Hong Kong Census and Statistics Department

—

Hong Kong facts

8,100 HK lawyers
788 HK law firms
1400 Foreign lawyers
70 Foreign law firms

—

Hong Kong Directory

Gall
Howse Williams Bowers (HWB)
Robertsons
Tanner De Witt