Shanghai 2010: Expo-nential growth

Recent visitors to Shanghai will have noticed the growing army of blue soldiers: thousands of haibos, the blue mascots shaped like the Chinese character for ‘person’ (人), standing on every intersection of the city. Large construction and renovation projects have dominated much of the city as preparations for May’s Shanghai Expo 2010 set into full swing.

The expo, themed “Better City, Better Life”, is expected to attract between 70 and 80 million visitors and will be a significant event for Shanghai. Aside from the opportunities brought by the World Fair, the city remains a key focus for international and domestic law firms.

Shanghai’s 2009 GDP grew by 8%, equivalent to US$281bn, and exceeded the size of Hong Kong’s economy for the first time in decades. So at the tail-end of the crisis, law firms here have much to look forward to.

Inter-Asia deal pipeline

While dealflows between China, Europe and the US are still dominant, one of the most notable changes in the legal market is China’s increasing business with neighbouring countries.

In 2009, many intra-Asia deals were completed, benefiting both domestic firms and international firms with a presence in Shanghai. Law firms such as Shimin Law Offices have noted an increase in intra-Asia work, especially related to Japan. “We’ve always worked mostly on Japan matters when it comes to Sino-foreign transactions, but we’ve recently received an increased number of enquiries regarding Japanese businesses,” says Qi Bin, partner at Shimin. “It could be because Chinese companies have increased their understanding of Asian business cultures and legal structures over the past few years, and now that they are more familiar with those environments they are also more comfortable in operating there,” he says.

Chen & Co has also profited from intra-Asia deals. “There is a new element of heightened interest in M&A. In the last two months we have handled three cases: one was an acquisition of a domestic retail chain by the Lotte Group in Korea,” says Seth Libby, of counsel at the firm.

While many international firms have been hit hard during the financial crisis, others have successfully weathered the storm by riding the intra-Asia tide. A notable amount of deals are happening with the Middle East, Singapore, Korea and Japan.

These trends are highly profitable for firms like WongPartnership, one of several Singapore firms with offices in Shanghai. “The most significant trend obvious to us is China’s growing interest in the Middle East, South- East Asia and India,” says Gerry Gan, the Shanghai-based partner and head of the China practice at WongPartnership. The firm recently completed the US$201m sale of Tianchen Rose plaza, situated in Shanghai, to AM Alpha (Singapore), an investment advisory services company.

“We see ourselves as being very relevant in Sino-Asian deals. We also see more inquiries from Chinese companies about the Middle East. Tapping into this region, we are growing our client base and hope to be able to continue to leverage that trend with our office desks and partners in Malaysia, India and the Middle East,” Gan adds.

Another firm also enjoying mandates from the Chinese interest in neighbouring countries is Japanese firm Mori Hamada. It acted for Asahi Beer in its US$688m acquisition of Tsingtao Beer from Anheuser-Busch InBev.

However, in working with Chinese clients the Japanese firm has adopted a significant change in perspective. “We’ve traditionally represented Japanese corporations on their share sales to Chinese corporations but now we hope to switch sides to avoid conflicts of interest,” said Yoshi Iteya, partner at Mori Hamada. “We now choose to advise Chinese clients instead.”

Notably, Mori Hamada shares a close working relationship with Shanghai’s Guoce Law Firm, as part of its strategy to obtain more Chinese referrals.

Arbitration offsets quiet market
Shanghai’s relative economic health over the past 12 months has brought not only more Sino-foreign business but also a corresponding rise in the number of commercial disputes, an increasing number of which are being solved through arbitration.

This growth is also partially driven by a number of new arbitration centres established recently. The Shanghai Court of Financial Arbitration was established in December 2007 and the Shanghai International Shipping
Court of Arbitration opened in May 2009. The latter, set up by the Shanghai Arbitration Commission, will settle disputes involving shipping traffic, logistics, transport, maritime affairs and port construction.

On the other hand, since its establishment the Court of Financial Arbitration has heard 98 cases with claim amounts of up to RMB6.3m. Cases included disputes on loans, insurance claims and equity investments, and financial disputes involving banks, insurance companies, PE companies and financial institutions. Eighty-one cases have been settled so far with a successful settlement rate of almost 83%, with amounts ranging from RMB60,000 to as low as RMB2,900.

The increased awareness of dispute resolution, specifically arbitration, has prompted firms which previously exclusively focused on transactional work to venture into this space during the financial slowdown. Many firms have launched dispute resolution practices and some others have built on their existing (and sometimes neglected) arbitration practices.

Martin Hu & Partners (MHP) is one firm exercising its foresight by boosting its dispute resolution work. “In 2009, we have seen good growth in this sector, especially from disputes that arise from failed corporate M&A and JV transactions. Seeing that, we’ve strengthened our dispute resolution capacities with new appointments,” said managing partner Martin Hu.

During this time dispute resolution has thrived with increased disputes deriving from economic instability. Notably, specialist firm Jin Mao PRC Lawyers achieved a 20% increase in revenue and a 10% increase in headcount over the course of 2009. The firm, along with competitors Llinks and Fangda Partners, have all taken on medium to large-sized foreign enterprises as clients.

“This year we plan to expand our dispute resolution practice and are especially keen to utilise our arbitration expertise for cross-border matters, now that there seems to be an immediate need for international expansion, since more and more dispute cases require Chinese arbitration expertise,” said Jin Mao partner Henry Mao.

International firms have also focussed on their dispute resolutions practice. Singapore firm WongPartnership’s Shanghai office launched its dispute resolution practice last year, gaining a gaggle of clients by being aware of tight budgets and pricing accordingly. The firm has also enjoyed mandates from existing clients in this area. “Because of our M&A and corporate-side work, clients who ran into problems during the GFC came to us for dispute resolution advice,” says Gan. “We are also seeing more Chinese clients and have recently acted for a listed PRC company relating to a power plant project dispute in India.”

Herbert Smith, meanwhile, boosted its PRC arbitration practice by appointing new lawyers and shuffling existing specialists to its Chinese offices. May Tai, a senior associate with the firm, was relocated to Shanghai from the international arbitration group in London.

Salans also made a practice area shift last year. “Driven by changing client demand, we are shifting our business model from advising on FDI, M&A and investment in real estate to focusing mainly on restructuring and arbitration,” said Bernd Stucken, head of Salans’ Greater China practice.

While aware of their new competitors, most domestic firms which specialise in dispute resolution in Shanghai remain composed. “There will definitely be more firms who want to break into the dispute resolution market – but the sector is hard to penetrate because dispute resolution practices require a very solid foundation and talent for this practice is difficult to train,” says Jin Mao’s Henry Mao.

Capital markets work to increase
The Shanghai Stock Exchange has provided opportunities for many homegrown companies and enterprises, but the board is set for big changes that could help close gaps and build foreign relations. A raft of measures has been approved to give investors more sophisticated investment options.

Previously, mainland investors were only able to bet on stock going up but the State Council has approved trials of short selling and margin trading that would allow profit from falling markets as well.

In addition, in 2009 the Exchange also announced plans to launch an international board that would allow foreign-invested companies to sell shares denominated in RMB for the first time, making it possible for many large ‘red-chips’ such as China Mobile, Lenovo and China National Offshore Oil Corporation (CNOOC) to return to domestic capital markets for listings and IPOs.

Leading international financial institutions in China such as HSBC, Bank of East Asia and Standard Chartered are keeping their eyes open for opportunities, and consequently law firms are positioning themselves as the first port of call for those seeking preliminary discussion and study. “We are keeping a close eye on the Shanghai Stock Exchange’s launch of the international board, allowing foreign-invested companies to go public and raise local currency,” says Mark Green, partner and head of the China practice at Minter Ellison.

While specific rules and regulations regarding the new international board are yet to be released, this will undoubtedly open a new chapter for China’s equity market and capital markets practices in law firms.

“Now that foreign enterprises and domestic red-chip companies can list in Shanghai, it has created a higher demand for legal services and also a broader spectrum of legal work. We will be providing daily operational, regulatory and pre and post-listing legal advice for foreign and domestic enterprises,” says Charles Guan, the managing partner of Grandall (Shanghai). “On the whole, capital markets in Shanghai will become an
allrounder, providing many options for companies who are looking to raise funds,” he added.

No wonder then that capital market legal advisors have been upbeat about their future prospects. While IPOs are tightly regulated, lawyers say the pipeline for listings in Shanghai remains promising. Local firms have consequently launched and boosted capital markets practices to take part in the action. “An increasing number of small-to medium-sized companies, most of which are scattered in Shanghai, are looking to list and so capital markets holds great potential,” says Jin Mao’s Henry Mao.

Others have launched to keep up the pace with their existing clients. “Following our clients’ intended business path, we’ve launched a capital markets practice and are expanding our expertise in this sector, so when our clients pull the trigger and list, we will be ready to provide that service,” says MHP’s Martin Hu.

Lawyers migrate to local firms

Given Shanghai’s ambition to develop itself into a leading international financial centre by 2020 it’s not surprising the demand for lawyers is constantly increasing.

A trend is clear: lawyers are moving from leading international law firms to domestic firms. After courting international experience and exposure, lawyers (many of whom are Chinese nationals), are returning to domestic firms, aware of the expanding possibilities in the Chinese market. Shanghai firms are also luring lawyers with international backgrounds to deal with cross-border work.

For example, Jade & Fountain lured Song Liwei from Gide Loyrette Nouel and Jeffrey Yang, who has worked with Freshfields and Herbert Smith. Shanghai-based MWE China netted three lawyers from international firms for its partnership – Helen Zhang, Henry Chen and Joseph Zhou. Han Kun poached two partners – Cao Yinshi and Hwang Leikang – from Clifford Chance. And AllBright, the largest law firm in Shanghai, has also appointed two senior members – Richard Lee from Simmons & Simmons and Louis Meng from K&L Gates – to its international corporate group.

Shanghai firms attribute this trend to their new direction. “If you look at the evolution of domestic law firms, they are moving more in the direction of international firms. They are looking to establish practices and procedures common to an international law firm. In the past, there have been three or four domestic firms trying to play in that market but we are seeing more small firms pushing for that market as well,” says Chen & Co’s Libby.

While domestic firms are trying to lure lawyers from international firms, these lawyers are also enthusiastically chasing new opportunities. “Lawyers with international experience know how to sell their expertise to domestic firms. It is no longer simply about a pay package, but a sizeable platform that can propel their career paths in the long term,” said David Yu, a partner at Llinks.

However, it would be erroneous to think that the switch to a domestic firm means a compromised pay package for the best talents. “We are looking for lawyers with an international sense, and Chinese lawyers who have worked in international firms can balance international expertise with local know-how,” says Yu. “When we do find them, we secure these lawyers with a higher pay package and offer them a decent balance between work and lifestyle. At Llinks, partners get to choose their specialties and stick to them.”

Domestic and international firms charge very different rates and given that, local firms are becoming the ‘go-to firms’, especially when they are becoming increasingly capable of providing international expertise. ALB