Korea: gateway to Asia
With Korean companies competing ever more aggressively on the world stage, and multinationals increasingly targeting the country’s affluent consumer market, law firms continue to prioritise Korea.
It speaks volumes that, amid the long-running chaos and inertia of Brexit, a preliminary agreement has been put in place with South Korea to allow free trade should the UK actually exit the EU on 31 October.
Given trade between the UK and South Korea was worth $18.29bn in 2018 and had more than doubled since the EU signed a free trade agreement (FTA) with Korea in 2011, the preliminary deal has come as a relief to all concerned and particularly those UK law firms with Seoul offices facing major disruption (see box: Brexit chaos resolved).
By contrast, the revised South Korea–US FTA, which came into effect in January this year, offered few fundamental changes to the previous agreement negotiated under US President Obama in 2012. This was despite President Trump describing the original pact as a ‘horrible deal’.
‘The FTA with the US hasn’t really boosted or impeded US law firms in Korea,’ says Sang Hyuk Park, a senior foreign attorney at Kim & Chang. ‘They came to Korea for the steady growth. For example, major conglomerates such as Samsung and Hyundai have attracted some of the international firms.’
The ‘chaebol fighter’
South Korean conglomerates – or chaebols – such as Samsung and Hyundai have long dominated Asia’s fourth-largest economy and dictated its fortunes. However, ever since playing a key role in the impeachment of former President Park Geun-hye in 2017, they have been facing unprecedented public discontent and growing shareholder activism.
For example, in March, just one month before his death, Korean Air Chairman and CEO Cho Yang-ho became the first founding family member of any chaebol (Hanjin Group) to be forced off his board by shareholders following repeated allegations of corruption and abusive behaviour.
Living up to his nickname as the ‘chaebol fighter’, Park’s successor, President Moon Jae-in, has sought to restructure the Korean economy away from its reliance on the chaebols. This has included using various regulatory means to encourage them to delink some of their cross-holdings – such as Kim & Chang’s work last September for Samsung Fire & Marine Insurance (SFM) and Samsung Electro-Mechanics on their disposal of a stake in Samsung C&T for $786m.
Although there have been some successes, progress on corporate reform has been slow, with the chaebols under no legal obligation to restructure, while new legislation such as Korea’s Commercial Code has been blocked at the National Assembly level.
Brexit chaos resolved
Months of uncertainty for UK law firms came to an end in June when the governments of Britain and South Korea agreed to a preliminary free trade deal ensuring continuity in their trading relationship after Brexit, even in a no-deal scenario. The Seoul office of Herbert Smith Freehills (HSF) houses 12 fee-earners, making it the second-largest international law firm in Korea after US firm Cleary Gottlieb. Ever since opening in 2013 as a branch of the firm’s UK partnership under the terms of the EU–Korea free trade agreement (FTA), the office has been assisting Korean clients with their outbound legal work in areas such as corporate, energy, oil and gas, investment funds and international arbitration.
‘We have more of a long-term vision and strategy instead of focusing on short-term gain,’ says Dongho Lee, Head of South Korea at HSF. ‘We’ve made a long-term commitment to the country of Korea and its businesses. Short-term gain is important but Korea has important clients in key sectors in which we operate, such as energy, technology, media and telecommunications and financial services.’
Compared to other UK firms, HSF has a sizeable on-the-ground execution team in Seoul, which made the prospect of having to shut down the operation, even temporarily, undesirable to say the least. However, this is what faced each of HSF, Allen & Overy, Clifford Chance, Linklaters and Stephenson Harwood in the run-up to 29 March this year, two years after Britain began the process of leaving the EU by invoking Article 50 of its Lisbon Treaty.
Fortunately for HSF, the legacy of its 2012 merger between the UK’s Herbert Smith and Australia’s Freehills enabled it to re-register the office in March as a branch of its Australian partnership under the Australia-Korea FTA. HSF’s Asia Exceutive Partner Justin D’Agostino said at the time: ‘Our team is particularly grateful to the South Korean Ministry of Justice and the Korean Bar Association for their quick consideration of our application, and to the British and Australian embassies for their support since this issue first arose.’
Lee says that the re-registering took time, mainly with the Ministry of Justice, but that it had minimal impact on the firm’s operations. ‘Through the Foreign Law Firm Association we had regular meetings with the likes of the Ministry of Justice and the Ministry of Foreign Trade. And I would take calls from other UK firm managing partners asking about the re-registering process. But this was more of a contingency measure and, unlike the other UK firms, we had that option.’
As the 29 March Brexit deadline came and went, Allen & Overy, Clifford Chance, Linklaters and Stephenson Harwood continued to fret over their Seoul offices. With the law only allowing foreign firms to register under a jurisdiction where they make the ‘highest decisions’, there appeared to be little wriggle-room over the quartet’s respective ‘principal office’.
However, against the backdrop of a new Brexit deadline of 31 October, more than three years of uncertainty finally ceased in early June, when UK Secretary of State for International Trade Liam Fox signed a joint statement in Seoul with South Korean Minister for Trade Yoo Myung-hee agreeing to continue trading on preferential terms.
The FTA, which remains subject to final checks before being formally signed, will be the UK’s first major trade deal in Asia since the June 2016 Brexit vote. ‘Since Korea and the UK have been fine-tuning a trade agreement in the case of a no-deal scenario, people are not too concerned with Brexit at the moment,’ says Lee.
‘The Korean government has been trying to deal with the negative aspects of the chaebols dominating the Korean economy,’ says Seoul-based Ji Hoon Hong, a partner at White & Case, ‘but they will continue to drive Korea’s economic growth and they are reaching out beyond Korea’s borders even more so than before.’
The Moon administration has also attempted to boost consumption and employment by raising taxes and the minimum wage as well as capping working hours. It has also tried to help non-chaebol sectors by increasing subsidies and tax incentives for startups and small businesses.
However, by actively pursuing a growth strategy that departs from the traditional approach of nurturing the country’s large conglomerates, it was perhaps inevitable that the Moon administration would come under pressure if the economy faltered.
First-quarter GDP fell 0.4 per cent compared to the previous quarter, which represents the biggest decline since the financial crisis of 2008. This can be partly explained by a slowing Chinese economy and a drop in demand for semiconductors, which accounts for a fifth of Korea’s exports. Economists now predict Korea’s economy will grow at its slowest rate since 2012.
Despite this, Korea’s economy is growing at more than three per cent, which is a rate Western economies can only dream of. ‘The economy is slowing down a little but Korean funds and financial buyers have accumulated lots of cash and need to deploy that globally,’ says Seoul-based Dongho Lee, Head of South Korea at Herbert Smith Freehills (HSF).
Some Korean businesses, such as the country’s life science companies in the US, are seeking market access overseas and many financial buyers typically seeking a solid return on investment over a five-year period are pursuing opportunities offshore. This is because they believe the domestic M&A market now has different investment criteria (with some players focusing more on immediate dividend payments) and has become somewhat saturated as a result.
One recent example was Lotte Group’s acquisition last year of Techcom Finance, a subsidiary of Vietnamese top-five bank Techcom Bank. Bae, Kim & Lee (BKL) advised Lotte Group on its Vietnamese venture and has also guided many multinational corporations (MNCs) on their investments in Korea, such as China’s Qingdao Doublestar on its purchase last year of Kumho Tire.
Sky Yang is a partner at BKL, Co-Chair of the IBA Asia Pacific Regional Forum and member of its Organising Committee for the IBA Annual Conference in Seoul in September.
‘Through our overseas offices and locally qualified attorneys, BKL is able to better serve not only our Korean clients in their overseas business activities but also provide legal services to foreign clients located in these jurisdictions,’ says Yang. ‘We are also bolstering our cross-border practice beyond traditional practice areas such as M&A and capital markets through investments in our crisis management and cross-border compliance practices.’
Meanwhile, Yulchon advised France’s L’Oréal Group on its 2018 acquisition of Korean cosmetics and fashion company Nanda. L’Oréal was particularly keen to add Nanda’s ‘3CE’ cosmetics brand and ‘Stylenanda’ fashion brand to its portfolio given their popularity among millennials in Korea and right across Asia. Sai Ree Yun is Honorary Managing Partner at Yulchon, Korea’s fastest-growing firm last year and a member of the IBA’s Korea Advisory Board and Host Committee for the IBA Annual Conference. ‘Korean cultural waves are spreading throughout Asia, so MNCs are using Korea as a test point,’ he says.
Asian rivals: Korea, China and Japan
As Asia’s three major economies develop in differing ways, international law firms have been forced to adapt their models accordingly.
In many respects, the story of Samsung over the last 20 years is the story of the South Korean economy. In that time, the conglomerate has evolved from being a high-volume, low-quality manufacturer without any real brand recognition outside of Korea into the world’s largest electronics company by revenue and an instantly recognisable global brand.
It reached parity with, and then surpassed, its great Japanese rival Sony on quality, design and price by investing heavily on research and development just as Sony slipped on innovation and relevance.
‘Korean entrepreneurs are generally hungrier and more aggressive,’ says Dongho Lee of Herbert Smith Freehills (HSF). ‘On M&A auctions involving bidders from China, Japan and Korea, some Korean bidders can be more flexible and move quicker.’
Japanese and Korean clients like to see their lawyers based permanently near them, but it is proving increasingly difficult for international firms to charge the necessary rates to be profitable in Tokyo and Seoul. ‘There’s been a wave of smaller office openings by international firms but, when the tide goes out, many will reconsider their presence here,’ says one lawyer at a Japanese firm commenting on the situation in both markets.
While international law firms once held the hands of their multinational clients as they ventured into China, Japan and Korea, they now focus on outbound mandates as the inbound work has migrated across to increasingly sophisticated domestic firms. The loss of this work in China cannot be explained by differing price points, unlike in Japan and Korea, with billings at most top-tier Chinese firms now similar to those at international firms.
While Chinese companies, like their Korean counterparts, are known for aggression, they do not share the same inclination to pay full fees, says Yong Guk Lee of Cleary Gottlieb. ‘As Korean clients become more sophisticated, they’re willing to pay premium rates. But sometimes we also have to compete based on price as even sophisticated work becomes routine. On some deals we can generate efficiencies because we know the client so well, but this doesn’t affect our profitability so it’s win-win.’
In Japan and Korea, international firm rates are substantially higher than those at local firms, leading to much speculation as to whether any Tokyo or Seoul offices actually generate profits. ‘The higher fees charged by international firms would mean it is harder for them to compete for work and they have to be more leanly staffed both in terms of overall headcount but also on transactions,’ says Sky Yang of Bae, Kim & Lee.
‘We understand that international firms have various degrees of flexibility in their ability to adjust their normal hourly rates for the Korean market,’ he adds. ‘Those who can be flexible seem to be having an easier time in Korea, whereas those with limited flexibility find this could result in their departure or exit from the Korean market altogether due to the immense profitability pressure from their head offices.’
International law firms with offices in Seoul targeted steady growth in Korea as they nurtured relationships with the country’s chaebols, with many planning on taking these relationships to the next level at some point, providing a Korean law capability. But the Korean government’s decision in 2016 not to permit full market liberalisation by imposing restrictive prerequisites on law firm joint ventures left many international firms in a state of flux.
‘The Korean domestic market is limited and because of current legal restrictions we can only focus on certain matters,’ says Dongho Lee. ‘International firms therefore focus on large M&A deals, project finance and international arbitration, but there are only so many of these.’
Foreign lawyers place their operations in Seoul in three broad categories. First, those that previously operated in Korea out of their Hong Kong offices before opening in Seoul when first permitted in 2012 (Seoul offices tend to house between six and 16 lawyers). Second, those that were previously less active in Korea, servicing Korean subsidiaries out of their London or New York offices (such firms are trying to expand their practices in Seoul and tend to house three to five lawyers). And third, those with no previous Korean experience but which saw the market opening in 2012 as an opportunity (one or two lawyers).
US firm Cleary Gottlieb is the largest international firm in Korea, with 16 lawyers in Seoul doing all of the execution on Korea-related capital markets and cross-border M&A mandates.
Partner Yong Guk Lee says his firm sits comfortably in the first category, having had this size team for 20 years servicing a stable client base. ‘Our decision to open was based on thinking there was an opportunity to do existing work in a more efficient manner,’ he says. ‘It’s business as usual but much more convenient. It doesn’t change much with the ups and downs of the economy.’
While Lee admits that there was a defensive aspect to opening in Seoul in that clients could be tempted to work with other firms if it did not, he says that the strategy of firms in the second and third categories is that their Seoul office acts more like a marketing outpost. ‘While this can work, it’s hard to compete when the deal is tossed back to London or New York,’ he says.
Five of the 30 or so international firms on the ground are of UK origin and focus mostly on outbound work for the Korean financial sector. The remaining 25 firms are of US origin and, by contrast, are pursuing a variety of business opportunities, such as focusing on niche areas like intellectual property litigation for Samsung or outbound corporate work for Hyundai.
Children try out Samsung’s Galaxy S9 at its store in Seoul, South Korea, 7 January 2019 © REUTERS/Kim Hong-Ji
Yong Seok Ahn is Managing Partner at Lee & Ko and member of the IBA’s Korea Advisory Board and Host Committee for September’s Annual Conference in Seoul. ‘Some US firms are struggling as they didn’t have a good client base in Korea before they opened and they are trying to develop that on the ground, which is really hard,’ he says.
The fortunes of US firms in particular, and international firms in general, were closely scrutinised towards the end of last year when Simpson Thacher & Bartlett, traditionally one of the strongest players in Korea, announced it was closing its Seoul office. The New York firm has since moved most of its Korea operations back to Hong Kong, while local lead partner Youngjin Sohn subsequently joined Kim & Chang.
But just as one shop closed another two opened, with Arnold & Porter Kaye Scholer joining Shearman & Sterling in launching a Seoul office. Yong Guk Lee says that although the latter is targeting project financings and arbitrations, it is hard to generalise on the opportunities for US firms. ‘For a while, arbitrations were seen as the big opportunity but there are now opportunities across various niches and some firms have succeeded in grabbing market share from others.’
White & Case’s former office head and Korea practice leader James Lee is helping Arnold & Porter Kaye Scholer open in Seoul. His successor at White & Case, Ji Hoon Hong, says his firm’s history and strengths in Korea crystalised its strategy where it wanted to have sufficient resources on the ground to execute deals across project development and project finance, cross-border M&As and international arbitrations.
Although the firm has been doing Korea-related work for decades for key clients such as the Export-Import Bank of Korea (Korea Eximbank – KEXIM), it was a relatively late entrant to Seoul, finally opening in August 2015. ‘We took some time to consider carefully what our strategy should be,’ says Hong. ‘Increasingly, we keep getting asked by clients, “Can you handle this from Seoul?” So while marketing outposts could work in the short to medium term, they will be hard to sustain as clients increasingly want meaningful execution capability on the ground.’
While the cause of Simpson Thacher’s retreat is open to speculation, what is clear is that relationships between Korean companies and law firms are not institutionalised in the way in which the New York firm enjoys on a global level with the likes of KKR. Many Korean clients are now very sophisticated and demanding in terms of how they buy and value legal services, and know what they want in terms of fee structure.
For some areas, international firms are needing to offer a capped or fixed fee structure or a risk-sharing model that incorporates discounts. ‘In the last 10–15 years, Korean companies have expanded their internal legal departments and now get the most out of the firms that they use,’ says Yong Guk Lee.
‘In some cases that presents challenges. For example, as they’ve become more sophisticated, they’ve become more focused on pricing. However, increasingly, Korean companies look not only at pricing but also at capability,’ he adds.
Given that many Korean clients now insist on beauty contests, with government-invested companies required by law to go through a bidding process in order to retain counsel, Yong Guk Lee says that having a clear strategy can only take a firm so far. ‘Being successful isn’t rocket science: you try to make good relationships with clients and do good work. What’s most important is experience. That’s the differentiating factor. Firms that have a long deal list are those that get hired.’
Although it’s been seven years since Korea’s legal market liberalisation began, many international law firms are yet to be clear on what to do with their Seoul offices. ‘You have to look at Korea as part of a broader global strategy given that Korean companies play a key role in the global economy,’ says HSF’s Dongho Lee. ‘This means you have to be flexible over hourly rates and fee arrangements, but it also means there are some high-value matters for Korean clients that make this flexibility worthwhile.’
Stephen Mulrenan is a freelance journalist. He can be contacted at firstname.lastname@example.org