If Alibaba is indeed turning away from Hong Kong to New York for its highly anticipated, multibillion-dollar listing, will Freshfields Bruckhaus Deringer become the biggest loser among all the legal advisers to the Chinese e-commerce giant?
For many years, Freshfields has been a close adviser to Alibaba Group, since the Hangzhou-headquartered enterprise started venturing into the global capital markets. From the $1bn IPO of Alibaba.com in Hong Kong in 2007 to the company’s privatisation and delisting from the Hong Kong Stock Exchange in 2012 (1 March 2012), and from the $7.1bn buyback of a stake in the group from Yahoo! (21 May 2012) to the $7bn financing deal to refinance its debts in June 2013, Freshfields always held the lead international counsel role to Alibaba Group, advising on Hong Kong law.
Teresa Ko, Freshfields’ China chairman and a corporate partner in Hong Kong, is the key relationship keeper for Alibaba. In August 2007, the relationship was further cemented as Freshfields Hong Kong partner Timothy Steinert joined the group as general counsel shortly after its Hong Kong IPO.
Naturally, when the group kickstarted its plan for a $60bn IPO and listing in Hong Kong earlier this year, the magic circle firm was again instructed. However, Freshfields seems to have lost control of the relationship after Alibaba’s listing plan took a U-turn.
At the end of September, talks collapsed between Alibaba and the Hong Kong Stock Exchange over the company’s proposals to control the make-up of its board following its public float. Alibaba expressed its intention to abandon the Hong Kong plans and turn to New York instead for its IPO.
Sources close to the matter recently confirmed that US firm Simpson Thacher & Bartlett, fielding Hong Kong partner Chen Leiming, has secured the lead counsel role for Alibaba’s New York debut. The firm has previously acted on several of the group’s major transactions, such as advising the underwriters in Alibaba.com’s IPO and advising Alibaba itself on its $586m acquisition of a stake in Weibo Corporation from Nasdaq-listed Sina (30 April 2013).
Given that Alibaba’s main businesses and assets are located in China, long-serving Chinese firm Fangda Partners is said to have maintained its role as the issuer’s PRC counsel. But sources are speculating that should Alibaba’s US IPO go ahead, Freshfields, which has primarily provided Hong Kong legal advice to the company, would lose its place on the global offering.
A partner in Freshfields also told The Lawyer that it’s uncertain at the moment about what the firm’s role would be for the client.
“For IPOs in the US, there is no need for Hong Kong and English law advice. Freshfields is likely to be dropped from the main line-up, but there is a possibility that it can still take certain support roles given its involvement in the preparation,” said a capital markets partner of an international firm in Hong Kong. “It might be a big financial pitfall for Freshfields, as the fees for the lead counsel in similar-sized Hong Kong IPOs could go up to £3m if successful.”
Some other partners estimated a much smaller impact.
“Legal advisers are paid according to the amount of work and hours undertaken instead of a percentage of the total proceedings of the IPO. In the current market, the international counsel legal fees for a big-ticket IPO would be around [US] $2m to $3m,” said another Hong Kong capital markets partner. “Clients will generally make milestone payments, so Freshfields will be paid for the work it has done. It may lose a success bonus.”
There may be limited immediate impacts on Freshfields’ fee income. But in the longer term the firm may lose out more on future M&A and corporate matters of the globalising company.
Slaughter and May, which has also been working regularly with Alibaba, could be another affected. In the IPO and privatisation of Alibaba.com, the firm acted as the Hong Kong counsel to the underwriters. It was said to be well-placed to win a role on the underwriters’ side if Alibaba were to list in Hong Kong.
For the US counsel role, competition among the New York firms must have been tough. Previously, Sullivan & Cromwell had provided US advice on many capital markets transactions, such as the Alibaba.com IPO and privatisation.
Alibaba Group’s vice-chairman and founding member Joe Tsai was previously an associate in Sullivan & Cromwell’s New York office. This relationship is said to have played in favour of the firm, which was regarded as a strong contender for the US counsel role in Alibaba’s IPO.
Several market observers jokingly contributed Simpson Thacher’s win to its robust client entertainment programme, such as taking clients to a ski resort in Japan and playing mahjong with clients’ families. Despite how much truth is actually in the claims, business development and client relationship management are undoutedly fundamental to any big global players’ success.
However, the hard truth for leading UK firms such as Freshfields and Slaughters is that they are losing out on deals when clients are turning away from Hong Kong to the US and they are yet to find a way to address the US law capability issue.