Band of gold

International firms are fighting to make friends with China’s red circle elite in the hope of cracking Hong Kong’s lucrative IPO market

Sue Zheng
Sue Zheng

Over the past year, the Hong Kong IPO market has become a honey pot for a growing number of international firms, with a significant number of US outfits in particular launching multimillion-dollar expansion bids during 2011.

One capital markets partner in a white shoe firm’s Hong Kong office estimates that the lead international firm drafting an average Hong Kong IPO prospectus (with a Rule 144a/ Regulation S placement to global ­investors) should typically pocket ­between $1.5m (£950,00) and $2m (£1.26m).

In certain cases, the main international legal advisers can earn even more than the lead managers. In the recently completed IPO of Chinese company Tianrui Cement, a company backed by private equity firm Kohlberg Kravis Roberts, the issuer raised $124m. It is understood that the legal fees paid to lead counsel Morrison & Foerster (MoFo) reached $2m, while each of the four lead ­managers took $1m.

It is fair to say that in today’s ­economic climate and increasingly competitive market, some firms will give an extremely low quote to win new mandates.

Indeed, the current average price is relatively lower than those stated above.

Nevertheless, Hong Kong remains a promising market with a stronger pipeline of ­future issuances than most other bourses.


Friends in high places

International firms wanting to gain a larger share of the market or maintain their leading positions are putting in significant efforts to recruit and retain experienced, high-calibre lawyers.

But there is another way of staying competitive. Increasingly leading ­international firms are looking to strengthen their relationships with a group of equally elite PRC law firms, which have direct and personal ­access to the vast pool of potential clients based in mainland China. 

“Because the businesses and asset  owners are based in China, PRC firms have first access to these clients and have established relationships with the issuers earlier,” says Kirkland & Ellis partner Dominic Tsun, who has advised on a significant number of Hong Kong IPOs since 1994. “They bring more business opportunities to us than we do to them, and we’re counting on them more than they’re counting on us.”

Beijing-headquartered Jun He sits within the inner circle of Chinese firms that have extensive experience in the listings of Chinese companies in Hong Kong. The firm’s Shanghai-based capital markets partner Shao Chunyang has noticed small but significant signs indicating the changing relationship between different market participants.

“In the past, we [Chinese lawyers] were the ones sending ‘Happy New Year’ text messages to international investment bankers during the ­Chinese spring festival,” notes Shao. “But we’ve started receiving more messages from them this year.”

For those who have not done business in China before, text messages are a more popular and responsive means of business communication than emails, and sending text message greetings for Chinese New Year has become an important and popular business etiquette in China, and lawyers usually send text message greetings to their clients and business partners as relationship-building ­opportunities.


Move closer

In a quieter IPO market, competitive pressure has driven some of the investment banks to establish closer contacts with Chinese lawyers in seeking business opportunities.

Having grown up with their domestic clients over the past two decades, Chinese firms have established longstanding, trusting relationships, especially with privately owned enterprises. When these companies reach the maturity to go public and need to raise funds for future growth, their first port of call is the Chinese lawyers they have known for a long time.

Fujian-based company Changfeng Axle is a case in point. The company listed on the Hong Kong Stock ­Exchange (HKSE) in September 2010 following its $110m IPO. For this transaction, the company first turned to its long-term legal adviser Jun He, asking the firm to recommend all other advisers.

Shao was the lead partner in the deal. He helped his client assemble a strong team of advisers, including ­Sidley Austin, offshore firm Conyers Dill & Pearman and even the sole global coordinator and bookrunner Morgan Stanley Asia.

Shao stresses that a situation such as this, where Chinese legal counsel have helped a client appoint other advisers for its Hong Kong IPO, does not happen often. But the number of cases has increased in recent years.

“Ultimately, the choice of legal ­advisers is up to each client,” he says. “Some of our clients have a ­well-established legal department and good knowledge of the international legal service market. They’ll select their lawyers according to established procedures. Sometimes the investment banks will arrange international legal advisers for the issuers.

“When our clients, particularly privately owned companies and provincial-level state-owned companies, aren’t so familiar with the international capital markets and key international legal providers, they’ll ask us for recommendations. If they’re our very good clients, they’ll generally accept our recommendations.”


Chinese expertise

On the Hong Kong IPOs of Chinese companies, the PRC counsel’s roles are generally at the front end of transactions, such as restructuring, due diligence and issuing PRC legal and regulatory opinions. Hong Kong and international legal advisers will deal with local Hong Kong law and global offering issues, drafting the main legal documents, such as the pros-pectus, and coordinating with the stock exchange.

Until recently, the role of Chinese firms was often overlooked and underrated. Since then, they have come a long way.

King & Wood’s Beijing-based partner Su Zheng, who has been involved in numerous Hong Kong IPOs including some of the world’s largest, attributes this to both the growing competence of Chinese lawyers and the more competitive investment banking environment in Hong Kong.

“Several years ago, it was the norm to have a sole lead manager and ­underwriter in an IPO. The lead ­manager, usually an international bank, had considerable decision-making power and was usually in charge of appointing all the legal ­advisers,” Su recalls. “In more recent years, it’s common to see four or five co-lead managers in one transaction. Against that background, Chinese legal counsel seem to have stronger ties with the issuer compared with investment banks.

“At the same time, some Chinese law firms have become very experienced and well-respected in this area. On many occasions, our clients have turned to us for a second opinion on the advice and recommendations the investment banks have given them. We feel that we now have more say in a transaction.”

This growing importance of Chinese firms has been recognised by their international counterparts.

“Chinese law firms are getting a lot more sophisticated in understanding the process of overseas IPOs, and they play critical roles in Chinese companies’ IPOs in Hong Kong,” says MoFo Hong Kong partner John Moore. “More often now the HKSE looks to PRC counsel in giving Chinese companies the sign-offs for public flotation, making sure there’s no legal and regulatory problems ­before allowing the listing. A lot of ­responsibility is put on PRC counsel who work very closely with us.

“The evolutionary change is that PRC firms have become more international in their approach, which makes for an easier and better working experience for clients and international investment banks.”

It started with a list…

The track record of the leading group of Chinese firms stretches back decades, of course. To be precise, they have been working closely with their international counterparts on Hong Kong IPOs since July 1993, when Tsingtao Brewery became the first mainland Chinese company to be listed on the HKSE. Beijing-based Haiwen & Partners worked alongside Baker & McKenzie and Sullivan & Cromwell, advising the Chinese issuer on a £115m groundbreaking IPO.

Lead partner of the Haiwen team He Fei has become one of China’s pre-eminent capital markets lawyers. While Tsingtao has since instructed many different firms on its offshore legal matters, it has retained Haiwen as its Chinese legal adviser.

Since 1993, there have been almost 600 mainland businesses listed in Hong Kong, almost half of the total number of Hong Kong-listed companies. Given the short list of active Chinese firms in Hong Kong’s IPO market, it is natural that international firms come across them frequently in the transactions.

Take Freshfields Bruckhaus Deringer. The magic circle firm has worked with the top four Chinese firms on a frequent basis. According to Thomson Reuters data on Hong Kong IPOs between 2007 and 2011, Freshfields co-counselled with Chinese firms Commerce & Finance and King & Wood in eight transactions each. It also worked with Jingtian & Gongcheng and Jun He on the same side in seven transactions each.

“We’ve worked with a number of Chinese law firms and we have a good relationship with all of them,” states Freshfields China chairman Teresa Ko, one of the most pre-­eminent lawyers for complex global offerings. “The market is big and there are a large number of companies listing here each year. It doesn’t make sense to form an exclusive ­relationship with any one firm.”

Sidley Austin is another leading ­international player in the market. The US firm has been involved in 53 IPOs in Hong Kong from 2007 to 2011. It also works closely with the top four Chinese firms. During those five years it co-counselled with King & Wood on 10 transactions, Jingtian on nine, Commerce & Finance on eight and Jun He on four.

Hong Kong partner Timothy Li is  co-head of Sidley’s international ­corporate finance practice in Asia.

Li, like many other international lawyers, shares the same view as Ko in terms of being friendly with many Chinese firms.

“We do get recommended by ­Chinese law firms every now and then,” he says. “If you have a special relationship with one firm, you’ll be alienated from others.”

It is a sensible approach. In a world of opportunity, who wants to be tied to a single partner?


Mixing business with pleasure

The central idea in Chinese society of Guanxi (literally ‘relationships’) plays a big part in law firms’ business and is at the core of the collaboration between firms, good relationships ­between individual partners and the referrals that fly around the market.

“Personal relationship is important for doing business in China,” ­explains Tom Chau, a Herbert Smith partner based in Beijing. “The ­fundamental thing is respect and friendship. Because we have a good relationship with the partners of ­different Chinese firms, from time to time we get referrals from them and we’ll refer work to them. I’ve worked with some of the partners since the 1990s.”

For example, Chau’s relationship with Haiwen partner Hei Fei can be traced back to 1996, when the two worked together on the IPO of ­Nanjing Panda Electronics in Hong Kong. He also worked with Jingtian partner Zhang Xusheng and with Commerce & Finance partner Liu Gang in some of the earlier IPOs of Chinese companies in Hong Kong.

“In addition to referrals, we also help each other out when we have questions and issues regarding each other’s jurisdictions. I often call them for initial advice when I have questions about PRC issues,” Chau says.

Jun He’s Shao also attaches great importance to personal relationships and an individual partner’s credentials when he makes recommendations to his clients.

“When there are two international firms with comparable price and quality, we prefer to work with the firm whose partners we know very well,” confirms Shao.

He notes that partners change quite frequently in international firms’ Hong Kong offices, so he pays a lot of attention to which partner will lead the transaction team when he makes the recommendation.

“I’ll make sure the lead partner is ­someone we know very well and has the experience and expertise for our client’s transaction. So when we work together, we’ll know exactly what the key issues are and how to solve them because we’ve worked on similar deals before. It will make the working process much more efficient, therefore delivering more value to our client,” Shao says.

Sidley Austin’s Li echoes Shao’s views and adds that it is much easier to deal with familiar partners if they face new issues.

“It’s very helpful to work with a good friend rather than partners who are unfamiliar to me,” he says, “because I know them and can deal with them on a personal level if we need to confront some difficult issues. It’s much easier to make the calls and ­discuss with them.”

This approach may work in favour of the US firms that have recruited high-profile capital markets partners over the past few years.

“The high level of partner lateral moves in Hong Kong caused disruption to some of our ongoing IPO projects,” says King & Wood’s Su. “It’s quite upsetting to the clients because when the lead partner of the international advisory team [leaves], we need to spend a lot of time and effort on the changeover process with the ­­new partner. However, we’ve worked with some partners in many transactions and have built strong relationships with them. When they move to another reputable international firm, we’re willing to keep the relationship going.”

Antony Dapiran, who left Freshfields to join Davis Polk & Wardwell in 2010, and Celia Lam, who left Linklaters to join­0 Simpson Thacher & Bartlett in 2011, are among several partners with whom Su would like to maintain friendships.


Keeping busy

In 2011, the largest offerings tended to be the listings of international issuers such as Glencore and Prada. This trend is set to continue into 2012 thanks to a series of other developments that should create new opportunities to both international and PRC lawyers.

“Given all the growth in China, more international companies will be drawn to Hong Kong for listings and to gain access to China’s strong economy. We’ll see more IPOs in the retail and consumer sector as well as energy and resources,” predicts MoFo’s Moore.

Two recently announced deals back up Moore’s prediction. British diamond jeweller Graff Diamonds will soon go public through a $1bn IPO in Hong Kong, while Canadian natural resources company Sunshine Oilsands recently completed its IPO, raising $580m.

The Sunshine Oilsands deal is the first listing in Hong Kong by a company incorporated in a Canadian ­jurisdiction where all assets and ­operations are based in Canada. Freshfields, fielding Ko and Ken ­Martin, was lead counsel to the issuer, while a team from Kirkland led by Dominic Tsun and Li-Chien Wong acted as lead counsel to the ­underwriters.

It is reported that cornerstone ­investors in the IPO include two Chinese companies, China Investment Corp and China Petrochemical Corp (Sinopec Group).

“In terms of the IPOs of Chinese companies, we expect to see more ­privately owned enterprises, given that the pipeline for large state-owned enterprises [SOEs] has become smaller. As a result, there won’t be as many multibillion deals as in previous years,” says Moore.

Although the pool of new SOEs to list in Hong Kong is smaller, Freshfields’ Ko expects that more work will arise from the large SOEs that have already listed there.

“Several large SOEs have been listed in Hong Kong for many years and they’ll start thinking of spinning off some of their subsidiaries through an IPO,” she predicts. “It’s a natural development. The quality and complexity of these transactions will be comparable to the IPOs of their parent companies.”

The future growth plan of China Petroleum & Chemical Corp (Sino-pec) is indicative of what is to come. The state-owned oil and gas company, listed in Hong Kong, New York and London following a $3.4bn H-share IPO in 2000, is reportedly planning to consolidate eight of its engineering and construction subsidiaries in preparation for a Hong Kong IPO in the coming years.

It will be interesting to see whether the same advisory team that assisted Sinopec in its IPO in 2000 will be ­instructed for the planned spin-off IPO. The issuer’s team comprised Herbert Smith, Skadden Arps Slate Meagher & Flom and Haiwen, and the underwriter’s line-up included Simmons & Simmons, Davis Polk and Commerce & Finance.

In addition to more issuers from a wider range of jurisdictions, the market is also expecting to see more IPOs of Chinese companies backed by ­private equity firms.

“Rather than more traditional companies, such as state-owned or privately owned, there’ll be more IPOs of companies whose owners are a group of private equity firms. This development reflects the maturity of the market,” says Kirkland’s Tsun. “There’ll be a lot of new things and the market will change rapidly. Those who can readjust and refocus will prosper in a new reality.”

That is a fair observation. Since the well-being of the Hong Kong ­capital markets is so intertwined with the mainland, re-evaluating and strengthening the relationships with their mainland counterparts should be added to international firms’ checklists for strategic planning.


Hong Kong’s one-stop legal shops

On a standard IPO in Hong Kong, it used to be that US law was an important add-on, as the issuers needed to offer shares internationally and to global investors. On those deals, historically a US firm would usually work with an English firm with a strong Hong Kong law offering. But that is changing.

“Increasingly clients and other advisers prefer working with an integrated team that can offer both US and Hong Kong law advice,” says Dominic Tsun, who joined Kirkland & Ellis from Skadden Arps Slate Meagher & Flom with fellow partners Li-Chien Wong and Nick Norris in August 2011. “From their erspective, why answer similar questions three times from a set of UK, US and Hong Kong firms if you can work with one firm that can solve all the US and Hong Kong law problems?”

US firms are not the only ones that are building up their Hong Kong law offerings. A number of leading Chinese firms have also set their sights on local Hong Kong law capability.

King & Wood, Jun He and Zhong Lun have already achieved this by acquiring smaller local outlets. Fangda is in the process of setting up an office in Hong Kong and hiring Hong Kong-qualified lawyers to offer both PRC and Hong Kong legal advice.

Grandall opened a Hong Kong office in 2008, but it remains a registered foreign law office that can only practise PRC law. However, the firm’s partners are planning some changes.

“We’re currently seeking an appropriate local firm with whom we can localise in Hong Kong,” says Liu Wei, an executive partner of Grandall in Shanghai. “It’s our goal and we’re getting close to realising it. As more of our clients become listed in Hong Kong and more are wanting to list there, it’s necessary for us to be able to offer both PRC and Hong Kong legal advice. Our clients are calling for that integrated services.”

Top PRC firms


Commerce & Finance

Head office: Beijing

Main partners: Liu Gang, Wu Gang

Hong Kong office: No

Jingtian & Gongcheng

Head office: Beijing

Main partners: Zhang Xuesheng, Cui Jianxin, Fu Siqi

Hong Kong office: No

King & Wood

Head office: Beijing

Main partners: Yang Xiaolei, Su Zheng

Hong Kong office: Yes

Jun He

Head office: Beijing

Main partners: Shao Chunyang, Shi Tiejun

Hong Kong office: Yes

Zhong Lun

Head office: Beijing

Main partners: Yang Yuhong, Zhang Xuebin

Hong Kong office: Yes

Haiwen Partners

Head office: Beijing

Main partners: He Fei, Jiang Weibo, Liu Su

Hong Kong office: No


Head office: Shanghai

Main partners: Liu Wei, Charles Guan

Hong Kong office: Yes


Head office: Shanghai

Main partners: Jonathan Zhou

Hong Kong office: Opening soon

Tian Yuan

Head office: Beijing

Main partners: Liu Yan, Wu Guanxiong

Hong Kong office: No

(Click diagram to view larger version)