Despite A&O’s failed gambit with Allen & Gledhill, foreign firms can now take shares in Singapore outfits and the polite clamour of tie-up talks can be heard, says Yun Kriegler
In a move that was expected to provoke Singaporean firms into a period of introspection over their international strategies, in November 2011 Allen & Gledhill (A&G) announced that it was holding exploratory talks with Allen & Overy (A&O) about an alliance or combination.
Four months later they surprised the industry again by calling off the talks after failing to agree terms (TheLawyer.com, 26 March). At the time, A&G announced the end of its decade-long joint law venture (JLV) with Linklaters.
It was widely believed that the A&O-A&G tie-up would be a done deal after Singapore’s government passed amendments to its Legal Profession Act on 14 February, meaning foreign firms can take a profit and equity share in a Singapore firm of up to 33 per cent, with the changes due to take effect by the end of June.
Soon after, however, TheLawyer.com (1 March) reported that partners at A&O and A&G were uneasy about the effects of a closer tie-up.
A partner from one revealed that, on 17 February, around 130 partners from both outfits held a closed-door meeting to discuss the issues.
While partners from A&O were mainly concerned about the dilution of profit if the firm took on more than 100 new partners, their A&G counterparts were fearful of retrenchment, questioning whether they could get on A&O’s partnership ladder or if less profitable practices would be cut.
“The differences between the business models of international firms and Singaporean firms are too big,” says the partner. “Even if the law permits a full merger, it’s extremely difficult to reconcile the two very different business models.”
Among many differences, one disparity is that large Singapore firms usually have a steep partnership ladder, meaning only a few top-earning partners are comparable to their counterparts at international firms, while the earnings of the rest of the partners can vary greatly.
Apart from the differing models, industry observers suspect several of A&G’s large Singaporean clients did not support the plan. Another take is that Asia’s rising economies have generated enough opportunities for top Singapore firms to thrive in the region and did not need their hands holding by international firms.
As A&G managing partner Lucien Wong put it in his statement at the time: “Our strategy of maintaining our market-leading position in Singapore and being a leading law firm in South East Asia hasn’t changed, and we’re confident of pursuing this strategy without being in an alliance with, or being part of, an international law firm.”
To the local legal community, A&G’s breakup with its 11-year JLV partner Linklaters was somewhat surprising. However, lawyers familiar with the JLV structure are aware that they would have experienced some of the problems common with JLVs, leading to discontent in the relationship.
The fundamental issue with the original JLV structure, which was introduced in 2000, was lack of economic integration. The JLV simply served as an umbrella under which foreign and domestic firms could work together, with each keeping their own books of business. The JLV terms are non-exclusive, so firms can work with other firms or separately.
The model has caused a range of conflict issues, such as the big gap between remuneration, the lack of motivation to develop clients together (sometimes resulting in firms competing for the same work) and foreign firms’ unwillingness to share standard form documents and other sensitive work products because the Singapore lawyers had their own firms and separate clients.
In some of the major M&A transactions A&G completed in 2010, for example, A&G was the lead adviser to the acquirers and Linklaters played no role. The deals include Malaysian sovereign wealth fund Khazanah Nasional’s $2.6bn (£1.6bn) acquisition of Parkway Health, Glencore International’s $233m acquisition of a stake in Chemoil and Prudential’s $300m acquisition of United Overseas Bank’s life insurance business.
“If profit-sharing isn’t allowed, why would any firm want to enter into a relationship with one international firm that potentially results in losing referrals from all other international firms?” asks one partner at a large Singaporean outfit that used to be in a JLV with a magic circle firm.
It is understood that Linklaters’ strategy and practice focus differ from A&G’s, which also contributed to the JLV’s ’amicable’ termination.
“Linklaters’ strategy is to focus on core practice areas rather than a broader range,” says a former lawyer at Linklaters’ Singapore office. “It doesn’t see the upside of taking on the extra cost and overheads of A&G and has no interest in Singapore’s domestic market and services.”
Although the A&O-A&G proposal ended unexpectedly, many other international and local firms are still seeking tie-ups, particularly given the amended law. One partner at a large Singaporean firm describes the ambiance in the city-state’s legal market as a “speed-dating” scene.
“Many international firms’ managing partners are flying in to visit their local counterparts and local firms are busy entertaining their international suitors,” says the partner. “The general consensus is that people are worried about being left behind. But people are still cautious it will crash and burn if they move too quickly – just like what happened with the JLVs.”
The amendments have addressed the main issues of previous tie-ups. The industry acknowledges that the new provision is a step change in the government’s decade-long process to open up its legal market.
“The effect of the amendments is significant,” says Andrew Ong, a partner at Rajah & Tann, one of Singapore’s largest firms. “Now domestic firms have the choice of pursuing growth plans. Allowing profit-sharing and concurrent partnerships between foreign firms and local partner firms will ensure their economic interests are aligned. That’s vital for a stable and long-term partnership.”
From international firms’ perspective, the new provision is far from a full liberalisation, but it has provided an additional and more attractive avenue for expanding in Singapore.
“As a global law firm, being able to practise local law is the core of our structure,” says Martin David, a partner at DLA Piper’s Singapore office. “We’ve yet to acquire the Singapore capability.”
The firm’s bid for a qualifying foreign law practice (QFLP) licence in 2008 was unsuccessful and DLA Piper has decided to remain single.
“The key opportunity provided by the new scheme is that, for the first time, foreign firms can have direct ownership of local Singaporean practices,” adds David. “If we can find the most suitable local partner with which we can participate in the new structure, that will be the way forward. We’re certainly looking at this option closely.”
Nevertheless, there are still firms that see the upside of staying single.
“We have no immediate plans to tie up with any other firm,” states Gary Pryke, a director at Drew & Napier, Freshfields Bruckhaus Deringer’s JLV partner from 2000 to 2007. “While we can understand why some firms are looking at tie-ups, we’ve found there’s a huge advantage to remaining available to work with the many international firms that have no formal relationships in Singapore.”
Regardless of its effectiveness, Singapore’s latest attempt to become a key regional centre for the provision of legal services has received the stamp of approval from general counsel based in the city.
“It’s good news, as this gives us access to a larger pool of lawyers from all over the world,” says Deborah Foo, Singapore-based general counsel at New York-listed China Yuchai International. “And with greater diversity comes improvement in the quality and range of legal services.”
Timeline of market liberalisation
Introduced joint law venture (JLV) and formal law alliance (FLA) schemes.
Nine foreign firms took the plunge when the schemes were launched and formed JLVs,
albeit six have since ended their relationships with the local firms.
Introduced an enhanced JLV scheme and the qualified foreign legal practice (QFLP) scheme to resolve problems that arose from the previous schemes.
Twenty international firms applied for QFLP licences, but only six got them: Allen & Overy, Clifford Chance, Herbert Smith, Latham & Watkins, Norton Rose and White & Case.
The enhanced JLV produced new alliances, notably Duane Morris & Selvam, Pinsent Masons MPillay and Watson Farley & Williams Asia Practice.
Passed amendments to the Legal Profession Act that will provide increased flexibility and scope for collaboration between foreign and domestic firms.
Important changes include allowing equity and profit-sharing of up to 33 per cent in the event of a tie-up (including an enhanced FLA scheme); allowing QFLPs to enter into JLVs and FLAs; and making it easier for QCs to appear in Singapore’s courts.
LEGAL MARKET AT A GLANCE
registered foreign lawyers