Capital city

With workflows booming, lawyers in Hong Kong are celebrating. Joanne Harris reports on how IPOs and energy deals are keeping them busy

Last year was a record one for the Hong Kong stock exchange. It raised HK$445bn (£34.4bn) from IPOs during 2010, up 79 per cent compared with 2009, as 113 companies listed for the first time.

The largest IPO last year was the record listing of the AIA Group in Hong Kong, part of the disposal of the company by parent American International Group. The listing raised $20.5bn (£12.3bn), almost double the amount raised by the next largest IPO in the jurisdiction last year. That was the dual Shanghai-Hong Kong listing of the Agricultural Bank of China, which raised $12bn in Hong Kong and $10bn in Shanghai.

This IPO growth was a bonanza for law firms in the Greater China region and, as 2011 matures, things are staying busy. The recent announcement by commodities ­trader Glencore that it plans to carry out a primary listing in London and a secondary listing in Hong Kong is an indication of that activity.

A wide variety of firms won work on the biggest listings in China and Hong Kong last year, although the names of the UK’s magic circle crop up a lot (see tables, page 26). Herbert Smith, Norton Rose and top-tier US firms also appear, alongside the largest Chinese practices. However, the ­regulatory restrictions still in place in China mean that domestic firms take almost
all the work on the top Chinese IPOs.

The sheer amount of work is causing a few headaches for firms – although headaches many are happy to have.

“The capital markets remain extremely busy, to the extent that most firms are turning down work,” says Herbert Smith Asia head Ashley Alder. “The trick is to ensure your client knows that you can only do a deal if you can properly resource it. We’ve seen things fall apart.”

Teresa Ko, China managing partner at Freshfields Bruckhaus Deringer, agrees that the market is “extremely busy” and many firms are finding that they do not have enough lawyers to staff transactions.

“The first half has been busy and I think the market generally is buoyant,” Ko says.

The amount of activity is testament to the efforts made by Hong Kong’s authorities, which have been working hard to improve the jurisdiction’s regulation and increase its attractiveness to companies and investors worldwide.

“When I started 20 years ago, everything came through Hong Kong – all foreign investment,” says Zhong Lun Law Firm international managing partner Robert Lewis. “In the past 10 years there was more going direct through Beijing and Shanghai. For a lot of reasons Hong Kong has had to reposition itself somewhat and renegotiate its competitive advantage vis-à-vis the ­mainland, and it’s done so very effectively.”

Stock answer

Linklaters’ Asia managing partner Stuart Salt explains that Chinese companies in particular are listing on the Hong Kong stock exchange, or acquiring Hong Kong-listed companies, and using that as a means to access overseas capital.

“It’s also an increasingly important exchange for overseas companies wanting to get a strategic foothold in China,” he adds, suggesting Glencore as an example of this trend.

Indeed, overseas markets has been a key focus for the Hong Kong stock exchange. Of the top 10 IPOs last year, three of the newly listed companies were headquartered outside Greater China. These included Russian aluminium giant Rusal, which raised $2.4bn on its debut in January 2010 and generated work for a host of international and Chinese firms.

“International companies see Hong Kong as a real source of Asian capital and the Hong Kong exchange has sensible regulation and a real appetite to attract business from overseas,” says Salt. “Singapore is making really big efforts and has been successful but it doesn’t really have the flag for large-scale raising that Hong Kong has.”

Lawyers in Hong Kong see their work as being split into two groups: inbound investment into China and outbound investment from China. Salt believes inbound work is now less important than it used to be. However, he says, there is still a considerable amount of work for a variety of companies, particularly in the financial services sector.

“It’s still pretty sophisticated stuff from a legal respective but they’re not the massive frontier deals they used to be,” he notes. “The reason this is continuing is that they’re opening up ­different bits of the financial services sector to overseas investment on a phased basis so that keeps a pipeline of work going.

“The big change in trend from 10 years ago is that Chinese companies, in both the public and private sectors, don’t really need the cash anymore. What they’re really ­looking for is strategic partners who can bring something else to the table. Cash may become more important again as China goes through another cycle.”

High energy

Energy and natural resources, both within and outside China, is a key area picked out by many firms.

“Our clients, particularly in the energy sector but also in financial services, ­telecoms and other industries, are all doing things outside the country,” Alder says. “China is energy deficient and other countries have surpluses.”

This has led to the massive investment in regions such as Africa, where Chinese companies are tendering for energy projects and investing in mines, exploiting the resources of countries before importing the resulting commodities back to China.

Lawyers say many of these transactions end up being governed by Hong Kong law and requiring advice from both domestic Chinese and international law firms.

“Chinese companies are going out with a strong mix of commerciality and a great need for natural resources,” says Salt. “What’s beginning to happen is that other industry sectors are following suit, looking for acquisitions that will benefit Chinese industry.”

Gide Loyrette Nouel Beijing partner ­Warren Hua says the trend is generating work for international firms based on the mainland too. “Definitely, the number of outbound investments initiated by Chinese ­companies has been increasing,” he says. “We’ve seen quite a lot of investment by Chinese ­companies in emerging markets, ­particularly in Africa and Latin America.”

However, Hua says investment in developed markets remains limited, with the highly regulated environments of Europe and the US putting off many Chinese companies.

Naturally, the increased appetite for overseas investment is leading to an increased possibility of litigation when things go wrong. Alder says Herbert Smith’s Asia ­disputes practice is busier now in Hong Kong and China than it has ever been, as Chinese corporations become used to ­disputes as “part of normal commercial life”.

“That sort of formal dispute isn’t their cup of tea culturally but they’ve got to deal with it,” he adds. “China is a much faster learner than Japan in terms of how it adapts to circumstances. Therefore, we’re finding that more disputes are arising. You’ve got to be in Beijing as well to do this.”

Although the Chinese markets have opened up enormously, mainly through Hong Kong, lawyers believe there is still a way to go in many areas. A key one is the ­liberalisation of China’s currency, the ­renminbi (RMB), which has begun the process but has a long way to go. Recent major developments include the issuing of the first RMB-­denominated stock outside China, following the listing of the Hui Xian Real Estate Investment Trust in Hong Kong in late April.

Funds runs

China has allowed a limited number of trade settlements in RMB outside the country since mid-2009.

“That’s a huge development,” says Salt. “It means companies can access RMB funds for use overseas with a soft approach for ­reinvestment in China. Previously, exchange policies meant that people ­couldn’t get access to RMB in that way.”

Hua notes that there must be mechanisms to allow the two-way flow of the currency.

“If you use RMB for international trade then RMB will flow to other countries. At the same time you need to allow an inflow back into China,” he points out.

Hua says Hong Kong is an ideal place for China to use as a laboratory for the liberalisation of its currency, further increasing the jurisdiction’s importance as a regional hub. However, once the currency is fully liberalised, Hong Kong could lose out again and become less significant.

According to Salt, full liberalisation is in sight although still several years off. He thinks the importance of moves made by the Chinese government recently cannot be underestimated.
“We’re seeing the start of the world’s ­second reserve currency,” he says.

Lawyers in all types of firms in Greater China are enthusiastic about the future for the region. Despite continuing restrictions on activity on the mainland, it appears there is more than enough work to go around and nobody sees any sign of things slowing down.

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