WAITING FOR THE TURNAROUND
For all the talk of a robust rebound in 2023, Hong Kong’s dealmaking scene has been soft so far, compounded by lasting geopolitical upheavals and a slower-than-expected economic recovery in Mainland China. As a result, legal work hasn’t entirely returned in the same way. Law firm leaders share with ALB how they are working through this challenging period as they await the light at the end of the tunnel.
ALB: What kind of economic activities have returned in Hong Kong, and how has that impacted the demand for legal services in your firm?
SIMON CHAN, Hong Kong managing partner, Dorsey & Whitney: The return of economic activities and especially the return of easy travel in–and–out of Hong Kong, have been very positive for us. The reason is that our Hong Kong team functions as a pillar for our three Dorsey China offices, namely, Beijing, Shanghai, and Hong Kong. We work as one team with three locations in China. It is a strategy and unique Dorsey DNA that I spend time cultivating with our practice leaders in Beijing and Shanghai.
Also, most of our cross-border client matters will involve two or more of our China offices and often lawyers from our U.S., Canada, and London offices to draw on the right legal expertise. It is a sweet spot for us.
As such, the return of economic and travel activities brought several delegations of clients and our lawyers from our U.S., London, and mainland China offices to return to Hong Kong in the last few months. These delegations are important for the legal work that we do for our clients. These activities help drive up demand for legal services for all our various practice areas in Hong Kong such as our cross-border corporate work, intellectual property, cross-border dispute resolution, and global wealth and assets management practices.
BASIL HWANG, managing partner, Hauzen: Hong Kong’s economy has seen a rebound since the beginning of this year in the sectors hardest-hit by COVID – tourism, F&B, retail, consumer spending.
In the financial services, however (with the exception of fintech) – we’ve continued to see more litigation than deals, ranging from insolvency litigation, debt recovery, bond issuer defaults and resulting bondholder claims, employment disputes, regulatory disputes in the industry as firms restructure and downsize, and claims by private equity investors against non-performing or failed investments.
Since the Hong Kong government announced its all-in efforts to develop the Fintech industry in Hong Kong earlier this year, and especially with the new virtual assets exchange regime that came into force on June 1, we’ve seen a huge uptick in enquiries and work on exchange licensing, as well as requests for advice and legal opinions on setting up Fintech businesses in Hong Kong. We have also advised on licensing uplifts for licensed asset managers interested in taking on a larger exposure to cryptocurrency in their portfolios.
At the same time, the aftermath of the spectacular cryptocurrency collapses in 2022 – FTX, BlockFi, Three Arrows, Luna, to name a few – continues to resonate, with our work in crypto insolvencies and claims continuing to be strong.
During COVID, we saw a surge in online fraud involving recognised currencies as well as cryptocurrency - we continue to see a steady flow of work in this area as we help multiple victims recover stolen funds.
Separately, we’ve also seen an increase in inquiries for fund formations, including under Hong Kong’s Limited Partnership Funds and Open-Ended Fund Company regimes.
LIN WEI, managing partner, PC Woo & Zhonglun WD: Our firm is not quite the same as any other Hong Kong law firms since we are an associated firm between the mainland China firm Zhonglun W&D Law Firm and the Hong Kong firm PC Woo & Co. The two firms joined hands to establish our firm - PC Woo & Zhonglun WD LLP, which inherits the vast resources and advantages of both firms to provide comprehensive mainland China and Hong Kong legal services to our clients. We are also one of the first batch of association firms in the Guangdong-Hong Kong-Macao Greater Bay Area.
The post-pandemic era will release large amounts of cross-border legal services demands from those mainland China clients, who have been waiting for resumption in the past three years. The return of economic activities in Hong Kong, as well as the fact that travel between Hong Kong and the Mainland has fully resumed, have brought a significant amount of opportunities in terms of cross-border investment, financing, and dispute resolution in the Greater Bay Area. This has greatly benefited us as a mainland China-Hong Kong association firm, so we are in the position to offer one-stop premium legal services to our clients.
ALB: With Hong Kong trying to reclaim its position as a regional hub, what specific areas of legal work are you witnessing increased demand for?
CHAN: Indeed, the type of legal work that I see points to Hong Kong reaffirming that we are a legal hub in this part of the world again. Based on my recent hosting of our international clients and overseas legal teams visiting us in Hong Kong in the last several months, there is a rise in legal work involving dispute resolution involving U.S., UK, and Hong Kong/China-based litigants.
Also, with Hong Kong’s status as a legal and finance hub, I also see a rise in inquiries concerning our work for family offices, private wealth, and asset protection to futureproof the VUCA environment for our clients. I expect demand will also improve in the second half of this year for international capital markets and M&A to help strengthen Hong Kong’s position as a legal and financial hub and commerce gateway between China and the West.
HWANG: We’re witnessing increased demand for regulatory advice in the Fintech/cryptocurrency area. Requests for assistance with fund formations under the LPF and OFC regimes have also seen a gradual rise.
We’re also seeing a lot of the bond defaults, especially in the Chinese property sector, coming home to roost as we pursue bondholder claims against issuers.
The other area that is showing strongly is insolvency in the financial markets – from private equity and hedge funds to cryptocurrency platforms. We’re also seeing a growing number of regulatory investigations.
All the above tend to be lagging indicators, as investors who have lost money come to the realisation, sometimes a year or two after the event, that they need to pursue their claims in the courts if they are to have any hope of meaningful recourse, and on the other side debtors or others who have received investment are forced to defend themselves.
To be sure, in terms of a geographical trend, many Chinese investors are taking a rekindled interest in Hong Kong as a regional hub, often in conjunction with Singapore. We often tell clients that in order to either establish a footprint in the region (in the case of clients from outside Asia), or to internationalise (in the case of Chinese clients), they probably need to have a presence in both cities – Hong Kong and Singapore – which happen to be jurisdictions in which we are capable of assisting them.
LIN: Based on our experience, in recent years, especially during the pandemic, one of the specific areas with increasing demand for legal services, besides traditional IPOs, would be capital markets with regard to resumption of trading, liquidation and restructuring of Hong Kong-listed companies. We believe that this increased demand stems from Hong Kong’s role as a regional capital market.
ALB: Are there any emerging legal trends or regulatory changes resulting from the economic recovery that your firm is closely monitoring?
CHAN: I would say 2023 is the year of AI. As a legal trend and regulatory development to monitor it is certainly the use of AI in all walks of life including our own legal industry. Our firm formed an Artificial Intelligence Task Force. I serve as a member of the AI Advisory Team for the Task Force. At Dorsey, we have access to various AI-based legal techs. As such, I am closely monitoring this trend from 360 degrees to ensure that we find the right model that adds value for our clients.
HWANG: As a Singaporean, a decades-long permanent resident of Hong Kong, and a lawyer qualified in both jurisdictions, I often get asked about the competition between the two cities. Much has been said about the astounding popularity of Singapore in recent times, and questions asked about how Hong Kong compares (together with much hand-wringing anxiety on the part of those in Hong Kong).
One thing that’s clear is that the competition (and, less-often mentioned, collaboration) between Hong Kong and Singapore is good for both cities. We’ve seen them develop in competition, and also in tandem, in the emerging field of cryptocurrency regulation. This has resulted in them becoming the leading Fintech hubs in Asia, and indeed internationally.
We are also seeing them compete, and as a result each grow their respective pies, in asset management, family offices, technology, trade and innovation. I think this is very exciting and will ultimately drive growth and create opportunities for everyone in the Asia-Pacific region, and everyone participating in the region.
LIN: A lot of cross-border insurance business was not able to carry out during the pandemic or was impacted by the pandemic. The reopening of control points between mainland and Hong Kong since the beginning of this year has secured the increasing demand for cross-border insurance legal services.
For example, our firm is engaged in a project involving more than $1 billion strategic investment in an insurance company listed on HKEX. The project was actually launched before the pandemic. However, it was not until recently the project has reached substantial phases for negotiation and drafting documents.
Apart from insurance, as Hong Kong is one of the world's largest financial markets, investment funds and cross border corporate finance have grown relatively fast in the last six months, from which we could sense a demand for regulatory compliance in this regard, especially for insurance, funds, and other financial services.
ALB: Financial Secretary Paul Chan Mo-po recently called this the "golden window for development" for Hong Kong. How has your firm adapted its growth strategy to capitalise on this window?
CHAN: Yes, we are doing more to capture the golden window of development opportunities for Hong Kong. For us, this is translating into a positive forward-thinking strategy for building a legal business infrastructure to capture Hong Kong’s development opportunities for our city.
The theme for our Hong Kong teams will certainly be being closer and working alongside our clients and network of contacts in the Greater Bay Area. Several of our firm’s lawyers know the GBA well. They grew up there. We have an in-house GBA committee to focus on integrating our practice, know-how, and soft skills with GBA opportunities. As you know, even the ecosystem of apps used for smartphones in China requires acquiring a new skill set to navigate the GBA well. In doing all this, we want to be the lightning rod that brings Dorsey’s legal practices and service offerings in our global 21 offices to the Greater Bay Area and beyond. It has been a role that Dorsey played well since we opened here in Hong Kong in 1995.
On the non-contentious side, we help Chinese and Asian clients access Western markets. For the contentious side, we help our Chinese and Asian clients get the best legal help that they can get to ensure fair and just treatment in their regulatory investigation or judicial process under the current VUCA geopolitical environment.
HWANG: Hong Kong has gone through some quite challenging times over the past few years. Many have wondered, particularly, in the thick of the COVID years, when we would see the light at the end of the tunnel.
I believe that the financial secretary is right to be optimistic, and that Hong Kong is now in the process of a meaningful recovery. The difficulties of the past few years have also provided Hong Kong with an opportunity to examine and reinvent itself.
We’ve seen many competitors leave the field in the past few years. In contrast, we’ve stayed and indeed adopted a deliberate strategy of careful growth during that time. Our firm has doubled in size in the last two or three years, mostly by the addition of senior practitioners with a following. I’ll admit that that’s of course easier to do when you started small.
We’ve focused our practice in the last few years on litigation, contentious regulatory work, and insolvency, which has proven to be a successful strategy for us.
I believe the time will soon be ripe to grow our corporate and transactional work capabilities, a practice area which I think everyone would agree has seen hard times in the past two to three years. Our recent practitioner additions are evidence of our building the foundations for that growth. I do not rule out more headwinds in the remainder of this year, which usually means more contentious engagements, but am optimistic about deal work from next year onwards.
LIN: We definitely wish to take advantage of the integration and advancement for legal services industry in the Guangdong-Hong Kong-Macao Greater Bay Area. It will also bring opportunities and challenges to our legal service business in Hong Kong.
The most obvious opportunity would be that more mainland China companies and Chinese-funded companies will be expanding their business in Hong Kong, which could bring growth in legal services demand. In this respect, our background of mainland China-Hong Kong association gives us the superiority to provide a variety of legal services in both practices during this "golden window for development.”
ALB: Going forward, what are some of the new opportunities and challenges you expect to see in the Hong Kong legal market for firms like yours?
CHAN: To me, the Great Bay Area opportunities and artificial intelligence are both topics that present amazing opportunities and unique challenges for us in the Hong Kong legal market. In my management philosophy, I coach a “we-win-and-learn” motto to inspire others to achieve greatness. As such, I expect we will embrace all the new opportunities while treasuring the lessons that we encounter on these two topics.
HWANG: By far, the most significant of the headwinds I’ve mentioned above is the global competition between China and the U.S., and the uncertainty and disruption it is causing all around the world, and particularly in Hong Kong.
President Xi’s speech in Hong Kong on July 1 last year, and re-affirmations of that position ever since by senior Chinese officials, has made it clear that Hong Kong’s position as China’s international finance, trade and legal centre is important to China.
As long as the Chinese economy maintains its trajectory, Hong Kong as China’s centre for law in international commerce and finance should grow in prominence globally. Hong Kong also plays an important role as a commercial and legal nexus between mainland China and ASEAN – and while the two are already each other’s largest trading partners, I believe that relationship has much more room to grow.
Aside from Southeast Asia, we are also seeing an increase in interest in Hong Kong as a regional base by European, Central Asian, Middle Eastern clients, perhaps as a result of the Belt and Road Initiative. That is an opportunity we are already starting to take advantage of.
As challenges go, the uncertainty brought by the U.S.-China competition remains the most significant one for Hong Kong as an international centre for finance, trade and law – no one really knows how this will play out in a few years. Our strategy for dealing with this is to remain lean and adaptable, while looking for opportunities amidst the disruption.
LIN: We have seen growth in issuance of legal instruments and agreements in terms of reciprocal recognition and enforcement of civil and commercial judgments between Hong Kong and the mainland China, especially concerning marriage, family, commercial and civil matters. Also, legal service demand for solving disputes like marriage and family dispute, civil and commercial disputes has been increasing upon recovery from the pandemic.
However, there are few experienced lawyers who can handle the legal culture difference or are familiar with both legal practices of mainland China and Hong Kong.
This would be an opportunity, as well as a challenge, for us to prepare to embrace the growth of demand in such areas. We aim to train lawyers to be experts with the expertise through participating in large numbers of cross-border marriage, family, commercial and civil disputes.
We will be pursuing this goal and take full advantage of our position as a mainland China-Hong Kong association law firm with both mainland and Hong Kong lawyers, in order to better serve and provide high quality legal services in the areas of marriage and family law, civil and commercial law, to our mainland China and Hong Kong clients in the near future.