Behind the BRICs - Chris Crowe

Big global deals emanating from BRIC nations are presenting challenges for international law firms.

The much-hyped shift in economic power from West to East has not bypassed the attentions of a ravenous global legal profession. London and New York have long stood as the dual-beating hearts of the legal market for decades, but business is increasingly evading these two financial centres. Deals are being struck on an intra-regional basis with little or no nexus with the US or Europe and often these transactions involve jurisdictions where foreign law firms are prohibited entirely or are only granted fettered access. As the global business climate gradually adjusts to this new economic phenomenon, the legal profession has much to contend with.

Just as predictions of an imminent financial crisis were virtually non-existent, few could have foreseen the complete impact of China’s emergence as an economic superpower. The rise of China and the other BRIC nations has set off a fascinating chain of events. For example, the Australian legal market has become a subject of intense intrigue, most notably following Allen & Overy’s rather revelatory decision to establish a presence in this exceptionally mature and competitive market. This striking swoop not only resulted in the firm securing a distinguished team from Clayton Utz, but it was also impeccably timed just as an era of trade between Australia and China has gathered intensity.

China’s notorious wealth is being cleverly tilted in the direction of natural resources and other foreign assets; Australia has a plentiful supply of vital commodities. Indeed, PetroChina and Royal Dutch Shell recently launched a joint bid for Australia’s Arrow Energy.

Sam Farrands, a Hong Kong-based Infrastructure and Projects Partner at Australian firm Minter Ellison, now spends a week every month in Beijing where China’s acquisitive state-owned enterprises are plotting their next moves. Having been stationed in Asia for 14 years after launching the firm’s presence in Hong Kong in 1996, he says he has never been filled with such self-belief. ‘Nearly all of what we are doing at the moment is talking to Chinese clients about investing in Australia, particularly in the energy and resources and agribusiness sectors. China is about to become the trading partner with Australia.’ Farrands also thinks this will revitalise the Australian legal community. ‘I’ve never seen such a situation where Australian firms have a natural competitive advantage. It is very exciting,’ he says.

For decades, the mature Australian legal market has consisted largely of domestic firms, many of which have sought to expand into Asia. Minter Ellison, Mallesons Stephen Jacques and Allens Arthur Robinson have had Asian offices for years and are soon to be joined in Hong Kong by Clayton Utz itself. But now with Allen & Overy’s antipodean venture and Norton Rose’s merger with Australia’s Deacons in January, the Australian domestic and Asia Pacific regional picture has altered considerably. Even US firm Dorsey & Whitney established a presence in Sydney back in 2008 to service Asia, most notably the Indian IPO market.



‘The flow of capital is no longer always into the US. There's now a huge flow of capital being redirected into the emerging markets. The tide of capital is really changing.’
Michael Fitzgerald
Milbank Tweed Hadley & McCloy


China’s insatiable quest

Suddenly, the growth in trade initiated by BRIC nations has captured the attention of the legal profession. Much of the trade that emanates from these states now bypasses the giant economies of Europe and the US altogether. Michael Fitzgerald, New York-based Chairman of the Global Securities Group at Milbank Tweed Hadley & McCloy has his sights on Brazil with the firm announcing the launch of a São Paulo office in April. ‘I think emerging markets will be the drivers of world economic development over the coming years,’ he says. ‘China has this insatiable quest for national resources and Brazil has every commodity you can imagine in great abundance.’ Fitzgerald is adamant that this macroeconomic phenomenon is going to have a profound effect on law firms: ‘The flow of capital is no longer always into the US. There’s now a huge flow of capital being redirected into the emerging markets. The tide of capital is really changing.’

A survey published by Norton Rose in January, which looks at the global financial recovery, indicated that 68 per cent of respondents expect there to be a permanent shift in economic power from West to East. Although this doesn’t necessarily take into account the rise of Brazil, which is the only BRIC nation to be outside of Asia and the geographic East, this survey backs up Norton Rose’s decision to establish a large presence in Australia and invest more resources into Asia. Jeffery Barratt, a Senior Banking Partner
and Head of the Global Projects Group at Norton Rose, says that international firms have traditionally treated their foreign offices as outposts that service their multinational clients. He now sees a paradigm shift in approach: ‘Going back a few years, we used to employ joint projects teams between London and our Singapore office, but now these projects are solely run by the people in Singapore with the critical mass that we have there. There’s not a huge amount of work in South-East Asia that we do from London these days.’

Andrew Tortoishell, Herbert Smith’s Managing Partner of Greater China says that the firm is closely following the links between China and Russia especially, with the energy sector being of particular interest. He says: ‘There are real synergies between our Russia practice and China practice. We have several huge ongoing deals in the energy and minerals sector, but we’re beginning to see considerable growth in the interaction between Moscow and China.’ Tortoishell believes that Russian energy company Rusal’s decision to list on the stock exchange of Hong Kong may well lead to a series of further listings on this market by Russian companies. The stock exchange of Hong Kong has also put fervent effort into attracting potential issuers from overseas, just as Shanghai is rivalling it as the primary exchange for Chinese companies looking to go public.

Fifty-two Chinese enterprises listed on the Hong Kong exchange in 2009, despite the dour global economic climate. In mainland China, there were 99 domestic IPOs according to the Zero2IPO Research Center, although 90 of these were on the secondary market SMEB and China’s Nasdaq-equivalent ChiNext, with nine floating on the main board of the Shanghai Stock Exchange. Yet compare this to New York – traditionally regarded as the most liquid capital market in the world – where only 41 flotations occurred in 2009. To put this in context, a massive 600 companies went public on the US stock markets in 1996.



‘It will be interesting to see if Chinese law firms become more sophisticated and move up the food chain and do the work that we do.’
Andrew Tortoishell
Herbert Smith


For Wall Street law firms, this statistic suggests that Asia should be high on their agenda and this is leading to landmark strategic alterations. Shearman & Sterling has been in Hong Kong since 1978 providing purely US law expertise, but in January it established a Hong Kong law practice with the hire of partners Colin Law and Peter Chen from O’Melveny & Myers. For decades it has taken on prime roles on many of Hong Kong’s largest equity offerings, but found that its lack of local law expertise was leaving it short. Shearman’s Asia Head Matthew Bersani says: ‘In 2009 Hong Kong led the world in initial public offerings and that trend is likely to continue as Hong Kong’s importance in China-related deals increases. A few years ago, the large Chinese companies driving the Hong Kong IPO boom might also have considered listings in the United States but such dual listings have become rare. For this reason, Hong Kong has become a vital component of our global securities practice.’ Bersani says that the trend towards ‘one-stop-shop’ firms for Hong Kong and US law ‘has made it tough for fi rms practising only US law.’ Olivia Lee, a Hong Kong Partner at Troutman Sanders, says that equity offerings that would have traditionally had a US or international tranche, are now being focused almost entirely at Asian investors. She comments: ‘There has been so much money in the Hong Kong capital market since the later part of 2009, that issuers involved in Hong Kong IPOs don’t necessarily need to look to the US investors to ensure successful completion of IPOs raising US$100 million or above, even though in the past deals of this size would usually have required US144A offerings to US investors to ensure full subscription of IPO shares.’

Indian assets

Even with this focus on going native in Hong Kong, over in mainland China foreign firms are still unable to practise local law. Indeed, of all the BRIC nations, only Russia has fully liberalised the legal market to allow foreign entrants unhindered access. In Brazil, foreign ownership of law fi rms is prohibited so overseas firms are required to enter a formal association with a local entity. In India, the authorities have denied foreign fi rms access altogether. Ashurst was forced to close its Delhi liaison office in February, following a court judgment which ruled that all foreign law firms were prohibited from practising all law in India.

This has not prevented foreign firms entering non-exclusive referral arrangements with domestic players. But even with these barriers, credibility on the ground in these jurisdictions is becoming increasingly imperative. Giant Indian conglomerate Tata Group is one of Herbert Smith’s premier clients, thanks in part to the fervent efforts of key London-based Partner Nimi Patel, who is well-known among India’s largest corporates. Overseas clients are becoming increasingly crucial to top UK firms, just as the proportion of world trade appears to be lessening in the traditional economic powerhouses of Europe and the US.

Jonathan Brayne, Allen & Overy’s India Head, says that for this reason the firm’s referral relationship with Indian firm Trilegal is crucial to the firm’s global ambitions: ‘ India wasn’t a hermit kingdom before, but unlike China it was until recently very much a domestic, standalone economy and not export-led. It was not as active a participant in the world economy as China was and is. The fact that it is now embracing the notion of becoming an active participant internationally means that of all the four BRIC countries, it is the most interesting to watch.’

Yet just as the traditional international firms reach out to snatch a piece of lucrative Indian business, they are in effect being nudged back by a protectionist domestic legal market. As a result, it is local fi rms that are best able to exploit the nation’s emergence on the international stage. Rabindra Jhunjhunwala, a Mumbai Partner at leading Indian firm Khaitan & Co says: ‘While the rest of the world faced the recession, we had our best year in the last financial year. Domestic clients are a very important part of the practice and these clients are also going to go out and make acquisitions around the world.’



‘[O]f all the BRIC nations, only Russia has fully liberalised the legal market to allow foreign entrants unhindered access.



A similar scenario is playing out in China. While there are well over 100 foreign fi rms with offices in the jurisdiction, local firms have shouldered them aside for much of the inbound investment work. Herbert Smith’s Tortoishell says: ‘It will be interesting to see if Chinese law firms become more sophisticated and move up the food chain and do the work that we do.’ He admits that they already do much of the foreign direct investment that international firms fi rst went into China to do. The international elite cannot compete domestically and are severely disadvantaged when trying to tap into the diversified and geographically widespread economy. King & Wood, for instance, has 12 offices throughout mainland China, giving it the capacity and resources that international rivals could never match. It also has branches in Hong Kong, Tokyo, Silicon Valley and New York, making it an international player in its own right.

For international firms, this creates hurdles that might never be overcome. Firms must negotiate the complex maze of the Chinese business environment, something that native Chinese lawyers are clearly better equipped to tackle. And influential native Chinese lawyers are in short supply among foreign international firms, especially since key names such as Zili Shao left Linklaters to join JP Morgan and Jeremy Xiao departed Herbert Smith to go to Credit Suisse; he has since returned to Herbert Smith on a one day a week consultancy basis. For other foreign lawyers trying to identify key decision-makers within major state-owned enterprises and even private businesses, it can be a teeth-clenching task. ‘It’s not like doing a Google search and fi nding the general counsel,’ Minter Ellison’s Sam Farrands says. ‘The key decision-maker is often in a part of a company that you wouldn’t expect. It’s a bit of a labyrinth, especially with people often moving on to new roles very quickly. It’s incredibly interesting and challenging, but often very frustrating.’

Dominant player

China is set to overtake Japan to become the second largest economy in the world in 2010 and there is the very real sense that the international legal profession is being frozen out. Marc Harvey, Linklaters’ Joint Managing Partner of Greater China admits that local Chinese firms have adopted the same technologies and sophistication as those in the UK or US, but still believes that Linklaters will rise to the occasion when cross-border deals of real significance come to fruition. He says: ‘China is now looking out into the wider world. Corporates and banks that are looking outside of China and going into Africa, the United States and Europe; we say we can do that for you.’

In 2007, Linklaters represented Industrial and Commercial Bank of China (ICBC) on its landmark US$5.5 billion acquisition of a stake in South Africa’s Standard Bank. It was one of the fi rst deals to really illustrate the buying power of China, which has well over US$1 trillion in cash reserves, largely in dollar-backed assets. Even with this economic might and healthy prospects, foreign firms such as Linklaters are still prevented from really exploiting the world’s most dynamic economy. Domestic legal advice remains the sole territory of local law fi rms. Harvey admits this is a considerable hindrance to Linklaters’ ambitions: ‘If you look at the US as a major economic superpower, there is a massive domestic M&A market, a massive domestic capital market and a massive domestic litigation scene. If China develops in the same way then it would be terrific to be a dominant player in the local market. Full liberalisation [of the legal market] would be huge, but you can’t plan on that basis.’

Total M&A value in the Asia Pacific region rose by six per cent in 2009 compared to 2008 according to a report by Intralinks and mergermarket, an illustration of a resurgent region following the global economic crisis. Chinese carmaker Zhejiang Geely Holding Group is in the process of acquiring Volvo from Ford for US$1.8 billion, with Freshfields Bruckhaus Deringer representing the Zhejiang Geely and Hogan & Hartson (soon to be merged with Lovells) advising long-term client Ford.

Hong Kong’s wealthiest businessman Li Ka-Shing is reported to be launching a bid for French electricity titan EDF Group’s UK electricity distribution business. This patent transfer of economic clout explains why HSBC recently moved its Chief Executive Michael Geoghegan to Hong Kong from London.

The financial crisis and economic slump had an acute effect on the legal profession in Western markets, with redundancies and pruning of partnerships sweeping through a series of top law firms. Many of these firms grew dramatically during the previous decade and boom climate but have now legislated for much more conservative growth plans in the next ten years.

Yet the space for expansion is almost certainly to the East. ‘The China story is very compelling even for a non-economist like me,’ Linklaters’ Harvey confirms. It’s not hard to be convinced. Morgan Stanley estimates that emerging market economies will increase their gross domestic product by 6.5 per cent in 2010, compared with just two per cent for mature economies. Harvey says: ‘China will be a superpower if it’s not already and a dominant player in the financial markets and in the service industries around it. Should you believe the hype? Yes.’

Harvey believes that China will be the main caveat to the new era of cautious growth: ‘Would I expect Linklaters to be much bigger in ten years? It’s difficult to predict. Do I think the partnership cohort in China will be considerably larger? Yes I do.’

Even so, with domestic law firms in China and India able to achieve unfettered growth in their home jurisdictions as well as overseas, could they follow the sharp incline of national economic development and be the legal superpowers of tomorrow?

Chinese elite takes steps to boost international credentials

Leading Chinese law firms AllBright, jun He and King & Wood have taken further moves to boost their international credentials, each making headline lateral hires. Rupert Li has left Clifford Chance to take up the role of International Managing Partner at King & Wood, while Robert Lewis has departed Lovells (now Hogan Lovells) to take up a similar role at AllBright. Jun He has also hired three IP partners, James Zhu and Zoe Wang from the Shanghai office of Seattle-based Perkins Coie, and Steven Cui
from Jones Day in Beijing.

King & Wood’s founder, Junfeng Wang, told the IBA: ‘We are trying to recruit influential and prominent practitioners in the market. Someone like Rupert Li, who has an international background, brings not only extensive practice expertise, but also the management skills which will facilitate the internationalisation of the firm.’

The significance of the hire has not been lost on the wider market. Christopher Stephens, China Senior Partner at Orrick, Herrington & Sutcliffe said that Li’s arrival was ‘a great illustration of how King & Wood is positioning itself to compete for highend international work’.

The increasing sophistication of domestic Chinese firms has enabled them to grab much of the work that initially drew foreign law firms into the People’s republic of China (PrC), but these fi rms have also invested a considerable amount of time, effort and money into their global operations. King & Wood now has 12 offices across mainland China, as well as branches in Hong Kong, Tokyo, New York and Silicon Valley.

Despite AllBright having just two offices in Beijing and Shanghai, it has much greater aspirations than being a purely domestic player. Robert Lewis, who joined AllBright on 1 May, is convinced that PrC firms have an extremely bright future. He said: ‘The importance of the Chinese law firms will be tied to the continuing growth of the Chinese economy and the increasing influence of Chinese corporates in the global marketplace.’

Recent deals, such as Geely’s acquisition of Volvo from Ford, have alerted the international business and legal community to the power of China, but have principally provided significant legal mandates to foreign law firms, not their PrC counterparts. Even so, Lewis said that PrC firms have gradually eaten into the traditional domain of foreign firms operating in China, most notably foreign direct investment (FDI) work. While at Lovells, Lewis created the Sino-Global Legal Alliance, a broad network of firms that now includes Hogan Lovells as the sole international member and 13 domestic firms including AllBright.
This is an edited version of an article that appears on the IBA’s newly launched website news platform. To read the full version of this article and other coverage of international legal and business stories go to: tinyurl.com/ibawebnews

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Chris Crowe is a freelance journalist. He can be contacted by e-mail at chris@crowemedia.co.uk.


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