A chapter for the Shanghai legal industry closed in 2010. Looking back, capital markets and M&A were the top two revenue contributors for top-tier firms; whether to merge was the major consideration for medium-tier firms; and boutiques felt the need to expand their business across China, instead of focusing only on Shanghai.
Importantly, 2010 was the first year China’s State Council officially approved the establishment of two major financial centres of business (international financial and shipping). There were also dynamic financial innovations and reforms going on, such as margin trading and short-selling trial programs on the Shanghai Stock Exchange, and a private equity (PE) pilot program involving Qualified Foreign Limited Partners (QFLP).
While the direct impact on Shanghai’s legal market of these is not yet clear, every lawyer and law firm is positive and prepared for more rapid growth in the next few years. According to the Shanghai Bar Association (SBA), by the time the “two centres” are established in 2020 the output of the legal services industry will have hit US$6bn.
Top-tier firms: Capital markets and M&A
2010 was a busy year for Shanghai securities lawyers, with constant work on IPOs, listings and following issuances on the exchanges in Shanghai, Shenzhen and Hong Kong. China’s capital markets have been the world’s most active in terms of number and total value of IPOs in the past 12 months. Recent statistics reveal that the Shanghai and Shenzhen stock exchanges had 349 IPOs in total, raising US$72.6bn, an increase of 155% from 2009, when RMB187.9bn was raised. The Shenzhen SME Board and ChiNext respectively attracted 204 and 117 IPOs, while prosperous capital markets have made Shanghai top-tier law firms enjoy a thriving year. AllBright, which is the largest law firm by headcount, enjoyed a growth rate of 20% in annual revenues last year and has seen over 30% of its income coming from capital markets.
“For Shanghai law firms, the main mandates from listings and the IPO sector were mainly from small and medium-sized enterprises,” says Wu Mingde, the managing director at AllBright. “The booming capital market owes itself to a strong rebound from the financial crisis and China’s multi-level policy on capital markets such as ChiNext, state-owned enterprise reform and support on emerging industries.”
As one of the top domestic IPO issuer advisers, Grandall Legal Group Shanghai office assisted more than 20 companies in their listing applications. The capital markets practice accounted for more than 30% their 2010 total revenue: recognizing increasing demand in the sector, Grandall’s Shanghai office expanded its partnership by hiring three specialist partners.
“In the next couple of years, the number of IPOs may no longer reach the size of this year, but capital markets will be relatively stable,” says Guan Jianjun, the managing partner of the Shanghai office.
In addition, King & Wood Shanghai enjoyed a 20% increase in its annual income, and has seen a 50% increase in the capital markets sector. In the past 12 months, another M&A sector has been hard to ignore as it brings different degrees of annual income growth to the top-tier law firms. Allbright has seen nearly 30% of its annual income coming from M&A sector, and Zhong Lun Shanghai office made RMB250mn from M&A. Boss & Young, specialising in foreign-related legal issues, does not reveal the figure, but admits that they enjoyed a great increase in the M&A sector.
“The M&A market was active last year, and we should thank the China Government for its push on industrial upgrading and state-owned enterprise reforms,” says Hubert Tse, a senior partner with Boss & Young. “M&A transactions will continue to increase as the companies which have raised a large amount of money through listings will actively seek M&A targets.”
A report from ChinaVenture showed that China’s M&A reached an historic record in 2010; there were 2,656 Chinarelated transactions for mergers and acquisitions in 2010, of which 2,057 involving US$169.64bn were made public.
Mergers
In 2010, to merge or not was one of the most frequently-asked questions among Shanghai law firms. While there were several failed attempts to merge, Shanghai firms Zhongjian Zhonghui and SG & Co led the trend. The most noticeable merger in 2010 was SG & Co PRC lawyers, formed through the merger of four law firms – Qinghua, Dongxin, Huali and Guolian. Led by partner Lv Yan, the consolidation has made SG & Co one of the largest law firms in Shanghai, and has brought in many new big clients such as Watts Water, Pin Insurance, and the state-owned Assets Supervision and Administration Commission of Shanghai Pudong New Area. Sources close to ALB say several other attempts by law firms to merge are ongoing.
The merger between Dacheng and Shanghai De Qin has also shown the benefits to be had from a strategic merger. The combination has made Dacheng the second-largest firm in Shanghai; and De Qin, well-known for its IP practices, has certainly brought more business growth for Dacheng. Another merger, between Zhongjian and Zhonghui, has enabled the new firm to extend its services and advice into a wider range of practice areas, including M&A, banking & finance and listings.
So far, Zhongjian Zhonghui has 105 lawyers including 33 partners located in Beijing, Nanjing, Wuhan and the Chongqing liaison office, and the firm’s business has started to grow since the merger. “Our recent report has shown the benefits of being a large-scale law firm. The volume of business since the merger has grown by at least 20%. Many new clients like China Eastern and the Chubb Corporation have been attracted to our legal service by our size and wider range of services,” says the managing partner of Zhongjian Zhonghui, Zhu Ping.
The reasons behind merging could be different for each firm, but the expectation of what a merger will achieve remains the same: to become bigger and stronger. However, many experts with insight into law firm mergers warn that this is not the only option for development, and a law firm with a condensed size has the possibility of earning good margins as well. While this may be the case, the desire to occupy more market share is still appealing to many law firms.
Boutique firms: Target the whole country
A large number of boutique firms have risen in prominence in the past 12 months. Shanghai’s Young-Ben Law Firm, mainly offering legal services as a perennial legal adviser, M&A and foreign direct investment adviser, saw a 20% increase in business last year. Legal advice and M&A and foreign investment are the top three business growth areas, and together contributed more than half of the firm’s total revenue. “The establishment of new financial centres will have a direct impact on our firm. In the next five years, we are planning to expand our target market to financial services, financial leasing and E-commerce businesses. In addition, we will send our lawyers overseas to get proper training on finance practice,” says Xu Yuzhou, a partner at the firm.
ForTran Lawyers, a tax law firm, had a thriving year in 2010 as its total volume of business and its partnership both doubled. “In 2010, the large number of M&A transactions and company listings in China both created an increased demand for tax-related legal work,” says partner Yan Xizhong. “We expect there will be more legal work for us during the establishment of new financial centres. Apart from our traditional areas, our firm will tap the business potential for legal advice on financial derivatives
as it is evolving.”
Meanwhile the Shanghai office of Clyde & Co, a leading aviation and shipping firm, enjoyed growth in its traditional areas including aviation, maritime and international trade. And those boutique firms not doing financial or shipping-related work had a busy year due to successful development strategies. Jianling Chengda, a newlyformed real estate and construction firm, is a case in point. The tightening policy on real estate did not affect the firm’s development; its volume of business increased by 30% in the last quarter.
“Instead of only doing business in Shanghai city, we are focusing on the whole country. That is why our business did not become affected by Shanghai’s depressed real estate market,” says Zhou Jigao, the managing partner of Jianling Chengda. “Unlike full-service firms, the development of boutique firms is largely affected by local government policies. Hence, having clients from all over the country will enable us to reduce the risk of non-supportive government policy in any particular area.”
This view is shared by Yin Yande, a senior partner of SG & Co and a member of the SBA. “The firms which are not doing relevant business with the establishment of two centres will be marginalised. Those firms should have strategic plans, either by targeting the needs of average people or by developing its business into the whole country.”
Communication and cooperation
The Shanghai 2010 Expo not only created legal service demand in areas like exhibition and construction, but also brought many outside visitors to Shanghai law firms. In 2010, more than 100 overseas and 30 domestic law firms visited Shanghai local law firms. “The communication and information exchange between Shanghai firms and domestic and overseas firms has increased the understanding and potential cooperation between them. The Shanghai Bar Association (SBA), as a social organisation for all the Shanghai lawyers and law firms, encourages open communication between different firms and lawyers,” says Qiao Wenjun, vice president of SBA.
In order to increase understanding and friendship between local firms and foreign firms, last year SBA organised a few visits between Shanghai firms and foreign representative offices in Shanghai. In September, 10 lawyers visited the foreign representative offices of firms including US’ White and Case, Jones Day and Hogan Lovells’ Shanghai offices. “The visits to the foreign representative offices started a new form of communication and cooperation between Chinese and foreign firms which was also welcomed by both country’s firms,” says Qiao.
Additionally, the SBA’s desire to expand its membership is another way of promoting communication between local firms and non-local firms. Last November, it announced a proposal under which foreign, Hong Kong and Macau lawyers working in their firms’ Shanghai representative offices would be given the opportunity to join the Bar Association. As special members, they will enjoy the same benefits as mainland lawyers such as attending various legal training courses and lawyer representative meetings. This proposal is welcomed by most lawyers, including those from non-mainland and local firms. Vivien Chan, the founding partner of Hong Kong firm Vivien Chan & Co, says “we have been looking for cooperation with Shanghai firms, and the proposal of the SBA will bring us more opportunities.”
“Shanghai law firms and international firms each have their own advantages. Close cooperation with local firms will help us offer better legal service all-round to our clients,” says Ik Wei Chong, a partner at Clyde & Co’s Shanghai office. In fact, the greatest need for cooperation is within local Shanghai law firms – as the city is working towards the establishment of two centres, the hope is that this will create higher demand for legal services.
“Active communication and cooperation reflect the open attitude and adaptability of Shanghai lawyers, who are used to being perceived as working alone and not interested in cooperation. Apparently, there will be many cross-border deals and transactions during the establishment of the two business centres, and they can’t be completed by one single law firm,” says Yin.
“Cooperation is the mainstream in the Shanghai legal industry,” adds Qiao. “Shanghai has the country’s largest number of non-mainland lawyers, many of whom have extensive experience dealing with capital markets, M&A, securities, IP and maritime law. We are hoping that the cooperation between them and the local profession will improve the quality and strength of the Shanghai legal services market, and help Shanghai law firms become bigger and stronger.”
Prepare for the establishment of ‘two centres’
China’s State Council issued an opinion to ‘Promote Shanghai Becoming an International Financial and Shipping Centre by 2020’ in March 2009. According to the opinion, by 2020 Shanghai should have a pool of internationally competitive financial institutions, a multi-functional and highly internationalised financial market system, a pool of financial professionals and a compatible system of taxation, credit, regulation and law. Every portion involves offering a vast array of legal services such as PE and VC, FDI, banking & finance, insurance, marine insurance and regulation, and ship finance.
However, its impact on the legal industry last year was not very clear. As King & Wood Shanghai partner Zhao Xiaohong says, “the effect of building two centres did not have a direct influence on our business growth last year, nor on the other law firms. But from now on, every move of the Shanghai law firms will be connected with the establishment of two centres.”
The view is shared by Chong, “Shanghai’s ambitious goal in becoming a shipping hub did not immediately generate a dramatic increase in legal work last year but that is to be expected as this is a new and bold initiative. However, we expect the impact would gradually be felt in the near future” added Chong, “With the anticipated rise in demand for legal services in shipping and transportation over the next few years, we are actively looking at recruitment and the possibility of transferring some of our best and most experienced shipping lawyers from other offices to work in Shanghai so as to better service our Chinese and international clients.”
“The establishment of two centres is a great opportunity for law firms to grow in the next five or 10 years. Law firms will adjust their business structure based on the needs of the two centres. In the near future, it also will change the pattern of the law firm industry. A few real top-tier law firms which can compete with international firms will emerge and will also marginalise some firms which are not coping well,” says Yin. “How great the influence of the two centres on the legal market will be will show in the near future.”
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