In the global market, there remain two great powers: English and New York law. While US law has gained an edge in recent years, the debate continues over which will emerge victorious.
The popularity of English law is one of the UK’s most enduring sources of soft power, having underpinned the huge global success of London’s law firms and projected British influence for hundreds of years. And yet it is rarely commented on.
Respect for UK traditions of the rule of law and judicial independence, the existence of a centuries-old body of commercial law and the international links of the British Empire have combined to make English law adopted out of all proportion to the size of the UK economy.
The clout of English common law is further embedded in its influence in the development – since the 1864 Geneva Convention – of accepted standards of international law.
Other sources of English law’s influence can be found in the emergence of the Eurobond market since the 1960s and the success of the City of London as a global finance hub, embedding English law in many areas of international contracts including syndicated loans, bonds and master derivatives contracts.
The 2008 book, Maps of World Financial Law by Allen & Overy (A&O) veteran Philip Wood, found English common law was the most widely used legal system in the world, covering 27% of the world’s 320 legal jurisdictions. In comparison, American common law was used by just 5% of the world’s population, while other major strands of global law, such as Napoleonic law, have relatively little international commercial use, despite rivalling English law in adoption by jurisdictions globally. Obviously, the wide use of the English language also helps.
In many markets, even US law struggles to match the popularity of the old country, thanks in part to fear of being dragged before US courts and resentment of American hegemony. But can the extraordinary success of English law continue in a multi-polar world, facing continuing globalisation of legal services?
It is widely accepted that the last five years have seen substantial inroads of New York-law dominated products in European capital markets, underlined by the vogue for European borrowers to tap US investors. The global dominance of US banks and the continued march of US advisers internationally also suggest that there will be increasing support to deploy US law contracts and products in other major markets.
‘The influx of American firms will inevitably bring New York law with them in Europe,’ says Audley Sheppard, co-head of arbitration at Clifford Chance. ‘It’s making inroads, but just inroads.’
Paul Olney, practice partner at Slaughter and May, picks up the theme: ‘New York law has become the dominant choice of law for high-yield debt. English law accounts for a comparatively small percentage. This has been a boost to the US firms practising in this area in London but, of course, there are many other types of financing and financing products where English law remains strong.’
Best and worst: Global 100 growth 2009-14
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REVENUE – BEST |
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| Firm | 2009 | 2014 | % change |
| Quinn Emanuel Urquhart & Sullivan | $442m | $972.7m | 120% |
| Perkins Coie | $424.1m | $635.4m | 50% |
| Kirkland & Ellis | $1,350m | $2,016m | 49% |
| Gibson, Dunn & Crutcher | $957.1m | $1,386.6m | 45% |
| Littler Mendelson | $354m | $487m | 38% |
REVENUE – WORST |
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| Firm | 2009 | 2014 | % change |
| O’Melveny & Myers | $907.6m | $733m | -19% |
| Hunton & Williams | $668m | $545m | -18% |
| Simmons & Simmons* | $501.6m | $420.1m | -16% |
| Freshfields Bruckhaus Deringer* | $2,215.8m | $1,927.1m | -13% |
| Linklaters* | $2,234.7m | $1,963.2m | -12% |
REVENUE PER LAWYER – BEST |
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| Firm | 2009 | 2014 | % change |
| Cadwalader, Wickersham & Taft | $781,000 | $1,102,000 | 41% |
| Kirkland & Ellis | $960,000 | $1,297,000 | 35% |
| Cravath, Swaine & Moore | $1,070,000 | $1,428,000 | 33% |
| Fried, Frank, Harris, Shriver & Jacobson | $764,000 | $1,019,000 | 33% |
| Quinn Emanuel Urquhart & Sullivan | $1,105,000 | $1,445,000 | 31% |
REVENUE PER LAWYER – WORST |
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| Firm | 2009 | 2014 | % change |
| Freshfields Bruckhaus Deringer* | $922,000 | $816,000 | -11% |
| Covington & Burling | $946,000 | $864,000 | -9% |
| Simmons & Simmons* | $537,000 | $506,000 | -6% |
| Wachtell, Lipton, Rosen & Katz | $2,430,000 | $2,312,000 | -5% |
| Loyens & Loeff* | $507,000 | $484,000 | -5% |
PROFITS PER EQUITY PARTNER – BEST |
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| Firm | 2009 | 2014 | % change |
| Alston & Bird | $909,000 | $1,665,000 | 83% |
| King & Spalding | $1,178,000 | $2,140,000 | 82% |
| Akin Gump Strauss Hauer & Feld | $1,108,000 | $1,835,000 | 66% |
| Eversheds* | $695,000 | $1,140,000 | 64% |
| Gibson, Dunn & Crutcher | $1,865,000 | $2,945,000 | 58% |
PROFITS PER EQUITY PARTNER – WORST |
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| Firm | 2009 | 2014 | % change |
| Garrigues** | $1,128,000 | $656,000 | -42% |
| Covington & Burling | $1,302,000 | $1,153,000 | -11% |
| Weil, Gotshal & Manges | $2,300,000 | $2,066,000 | -10% |
| Freshfields Bruckhaus Deringer* | $2,484,000 | $2,318,000 | -7% |
| Simmons & Simmons* | $894,000 | $860,000 | -4% |
* Note that for UK and European firms, these changes are based on US dollar performance. Fluctuating exchange rates mean those firms may have performed better in their home currency.
** Garrigues became a full equity partnership in 2012, more than doubling its equity partner numbers.
Overpaid and over here
There is no doubting that US law has advanced in recent years. In April, Legal Business’ annual Global London survey of the top 50 foreign law firms in London found a 13% annual increase in the number of foreign-qualified lawyers in the City, largely driven by strong demand for US financing and securities law advice in Europe.
By agreement, though English law is still by some distance the most widely used ‘third-party’ law in Asia, New York law has made progress in the region as a growing proportion of Asian corporates aim to list shares and bonds in the US.
As such it was notable that Slaughter and May earlier this year achieved two firsts in one go: making its first lateral hire in the shape of Morrison & Foerster’s John Moore in Hong Kong as its first US-qualified partner in response to demand for US law advice and growing local law competition from New York referral partners in the region.
Outside the securities sector, the Asian Development Bank (ADB) has started to use some New York law in its financing of projects, something that would not have been the case ten years ago, notes Wang Ling, China managing partner of Australian/Chinese giant King & Wood Mallesons (KWM).
While the majority of ADB’s projects are financed using English law, traditionally favoured in the region thanks to the UK’s colonial and trading links, the use of New York law is widely acknowledged to be increasing in Asia.
Sidley Austin’s securities and corporate finance partner, George Petrow, who is also a member of the firm’s management and executive committees, says ‘more people in Asia are choosing New York law for transactions to English’.
‘American banks feel more comfortable using US law firms, especially in the bonds market, so there’s been a slight shift from English law to US law in finance generally,’ agrees Wim Dejonghe, managing partner of A&O.
An additional reason for the ascendancy of US law is the relative strength of America’s post-Lehman recovery, backed by a quicker clean-up of its banking sector, and many bluechip companies with strong balance sheets and money to spend on foreign acquisitions.
The impact is clear, with US firms growing at speed in London as they support US clients and companies backed by American finance houses as they invest around the world.
Nick Buckworth, European managing partner of Shearman & Sterling, says: ‘The increased importance of the US debt market for raising finance in the UK and Europe means that we are seeing greater use of New York law in the UK – an advantage for firms like us who are totally comfortable executing high-end transactions under English or New York law. That said, English law retains its global leadership as the governing law of choice for international transactions and while the influence of New York law will continue to grow I don’t see it overtaking English Law.’
Other lawyers note that the relative economic clout and appetite for foreign acquisitions by US corporates and sponsors has seen more New York law components entering into deals primarily structured under English law. Laurence Levy, head of European M&A at Shearman, argues that the litigious nature of business in the US means the country has developed ‘the most sophisticated legal market, with litigation having tested the law; and driven innovation in creating techniques to deal with issues that arise during M&A, such as hell-or-high-water, material adverse change (MAC) clauses and other risk-mitigating clauses’.
With New York law perceived to be more purchaser-friendly than vendor-geared English law, Levy believes that the gap between New York M&A practice and English has narrowed (Wood in his book argued that the defining commercial characteristic between different strands of law was seen in their attitude and treatment of credit, debt and insolvency).
Levy comments: ‘On more complicated M&A deals, it is best to consider using techniques under both systems. The law is flexible so you can use different practices to get the best result and solve problems people only used to one market aren’t necessarily familiar with.’
One such example is the growing use in English law-driven structures of MAC clauses, which allow an acquirer to walk away from an acquisition if the target suffers a substantive change in circumstance before the deal closes. Companies are increasingly inserting MAC clauses in foreign acquisitions as a means of limiting exposure to shareholder litigation and retaining flexibility.
Case study: Linklaters
Along with its Magic Circle rivals, Linklaters has seen its revenues nose-dive since the financial crisis, a tough environment that has seen the 448-partner law firm evolve – thanks in part to two major partnership restructurings – into a leaner animal.
While there was no doubt that the City firm had taken a deliberate decision to focus on profitability and its market positioning over growth in recent years, its 2012/13 results, which saw a 1% fall in revenue in sterling terms, leaving its top-line 7% down on a five-year basis, underlined the more subdued mood at one of London’s most storied law firms. In contrast, Linklaters will view this year’s performance as a turning point, with a credible 5% hike in revenue and a 7% increase in average profits per equity partner (PEP) in sterling terms amid a sustained revival in confidence during 2014 with its PEP breaking $2m.
The more upbeat mood has been further marked with Linklaters this year unveiling rises in associate pay bands, while the firm made up 21 new partners, a high proportion compared to its peer group.
Managing partner Simon Davies says that the performance was driven in large part by a revival in western Europe, with Germany – historically a difficult market for the City giant – having a ‘standout year’ marked by major deals such as advising key client Vodafone on its takeover of cable operator Kabel Deutschland for €7.7bn.
The revival was also matched in southern Europe and its London base, where Davies cites a revival in high-end property work and a strong showing for Linklaters’ engine room finance practice across transactional work, and its expanding contentious and regulatory practice.
Underlining Linklaters’ intention to expand its relatively small contentious practice, which has historically lagged peers like Freshfields Bruckhaus Deringer and Clifford Chance, Davies also highlighted the firm’s rapid growth in arbitration, while conceding it is yet to challenge the top-tier players in the field across the full spectrum of arbitration work. Davies comments: ‘We’ve made heavy investment in the regulatory side. Both contentious and non-contentious are now becoming more visible in their returns.’
Davies argues that part of the firm’s growth is due to a more focused and aggressive stance on panel pitches as Linklaters moves to widen its franchise outside of financial services clients, citing ‘a demonstrable increase in our panel success rate over the last 12 months’. Major panel appointments in the last year include Shell, AIG, William Hill and Nationwide.
The firm experienced strong growth in work emanating from the financial services sector, built upon a ‘very buoyant banking and capital markets performance’ and having been selected to run big ticket IPOs, including the Royal Mail float and more recently the sale of TSB.
Despite the much-publicised loss of a high-billing private equity team led by Richard Youle and Ian Bagshaw to White & Case in the last financial year, the firm proclaims its ongoing commitment to the highly competitive buyout market, citing work for clients such as The Carlyle Group, Axa Private Equity, TDR Capital and Apollo Global Management.
The firm’s overseas alliances are starting to pay dividends too, with its associations in Australia with Allens and in South Africa with Webber Wentzel providing nearly 800 referrals between them since the agreements formed in May 2012 and February 2013, respectively. Davies argues this is a vindication of Linklaters’ surprise decision to forge alliances in the markets.
The opening of an office in Seoul last year extended Linklaters’ network in Asia and readies the firm for an expected rise in the importance of financial hubs in the region.
Despite Linklaters’ continued investment in emerging economies, Davies stresses the importance of developing its practice in the US, where the firm is often perceived to have fallen behind its big four London peers. Underlining those ambitions, Linklaters at the end of 2012 launched a small office in the increasingly key Washington DC market.
Davies calls the US market ‘the immediate opportunity from a revenue perspective’, as ‘no matter where they choose to invest, our message to US clients is that our network is as strong if not stronger than anyone else’s. It is a message that is gaining traction’.
Another challenger emerges
English law faces another growing threat that may eventually be as potent as that of the mighty US – in the shape of the fast-growing Chinese market and widespread expectations that PRC law will eventually be widely used globally as the country moves to become the world’s largest economy.
That expectation is driven as much by China’s growing appetite for foreign acquisitions as the political pressure on its state-owned enterprises to push for wider regional adoption of PRC law.
KWM’s Wang predicts that PRC law will be more widely used to govern major international contracts. However, it should be remembered that – for all the familiar claims that PRC influence would rapidly spread – so far such talk remains largely that, talk. There is little evidence of Chinese law being used in a substantive manner outside China.
Wang observes: ‘We are seeing continuous demand from our clients for English law documentation on transactions that involve UK, African, Middle Eastern and Asian counter-parties. For example, on the banking side, Chinese banks are often involved in financing transactions in Hong Kong and will normally use either Hong Kong law or English law for the finance documentation. In some cases, where the international borrower is the subsidiary of a Chinese state-owned entity or another Chinese company, the Chinese bank will utilise PRC law documentation.’
Despite the rapid emergence of China as the world’s second-largest economy, there remains a host of reasons slowing the wider adoption of PRC law, including fears around the independence of China’s courts, the relative youth of its legal profession and concerns over state surveillance. By a similar token, Chinese regulators’ hardline approach to investigating alleged bribery at UK drug manufacturer GSK underlines claims that local watchdogs adopt a tougher approach to foreign firms than some feel is applied to domestic companies.
Wang concedes that PRC law is not a competitor to English law for outbound work as yet, with KWM still to see Chinese law applied to a major international contract.
Many still expect growth in the use of PRC law documentation in international transactions, but hard evidence of business interest is hard to find.
Wariness of the might and self-interest of the economic giant that is China also underlines some of the reasons that US law has not been established as the legal equivalent to the US dollar.
Certainly it is clear that the fear of being dragged in front of US claimants and regulators is a major factor in limiting the international adoption of New York law.
Jonathan Scott, senior partner at Herbert Smith Freehills (HSF), argues English law is strong in Africa, the Middle East, Russia and Asia – particularly Japan and South Korea. He comments: ‘The Chinese and the Russians are hesitant about contracting under US law. They’ve been pushed back with some of the acquisitions they made and it comes down to politics – people are just not comfortable contracting under US law, when they have a choice. We’re still doing a significant amount of work in the energy and natural resources space, including outbound China work in south-east Asia, Africa and South America to a lesser degree, where the Chinese still seem to be very comfortable to contract under English law.’
The domestic-driven approach of the US courts and arbitration system is also seen as pushing contracts in emerging economics towards English law.
Many report a fear of bias towards a domestic party and there are concerns about the unpredictability of US courts. Such is the lack of warmth for a rather outdated set of arbitration rules provided by the American Arbitration Association, White & Case partner David Goldberg says: ‘The US is heading towards a domestic-only market.’ Governing law in arbitration has traditionally been influenced by where the contracted institute was based and it took time for some contracts to start to differentiate between the most often used arbitral institution, the International Chamber of Commerce in Paris and French law, but English law is seen as travelling well in arbitration.
Likewise, many argue that much of the current growth in US-driven financing is due to sharp shifts in financial markets favouring US investors. If such conditions were to continue, there would be at least a reasonable possibility that local law products would be developed for products like high-yield bonds and private placements. It is also entirely possible that shifts in finance markets could turn against borrowers tapping US investors.
Taking Britannia with you: ten highlight emerging market deals structured with major English law elements for Slaughter and May
The City firm advised:
Kosmos Energy on $1bn reserves-based facilities to fund the appraisal and development of the Jubilee field located offshore of Ghana.
Seadrill and North Atlantic Drilling on a long-term investment and co-operation agreement with Rosneft to pursue growth opportunities offshore and onshore in the Russian drilling market.
RWE on arrangements with LetterOne Group, the investment vehicle of Russia’s fourth-richest man Mikhail Fridman, for the sale of RWE Dea for €5.1bn. RWE Dea is the holding company for RWE’s upstream oil and gas business, with interests in 14 countries, including Algeria, Egypt and Libya.
European Investment Bank, African Development Bank and Qatar Petroleum International on the financing of the Mostorod oil refinery project in Egypt, the largest-ever project financing in Africa, comprising $2.6bn in debt and a further $1.1bn in equity.
PTT Exploration and Production, Thailand’s national petroleum exploration and production company, on a recommended offer for Cove Energy, an Africa-focused oil and gas explorer based in Mozambique, for £1.2bn.
Diageo on its tender offer to acquire a further stake of up to 26% in United Spirits, the leading spirits company in India.
CIMB Group, a financial services group operating in South-East Asia, on its acquisition of The Royal Bank of Scotland’s corporate finance, equity capital markets and securities businesses across Hong Kong, Malaysia, Indonesia, Singapore, Thailand, Taiwan and Australia.
Swiss Re on a $450m investment into Richard Li’s insurance vehicle, FWD Group. FWD’s insurance and pensions business spans Hong Kong, Macau and Thailand.
SingTel on its exit from Warid Telecom of Pakistan, in which it held a 30% stake that was sold for $150m.
Bupa on its $355m acquisition of Quality HealthCare, the largest private clinic network in Hong Kong.
Source: Slaughter and May
Victorious for now
While many UK lawyers have concerns about the long-term position of English law, conversations with a significant number of senior lawyers reveal a consensus that the credibility, neutrality and commerciality of English law has gone a long way towards reinforcing its position.
A&O’s Dejonghe picks up the point: ‘Many American lawyers worry about English law taking over in litigation, arbitration and corporate.’
English law is still widely deployed in contracts in Asia and remains the default option in much M&A and finance. Myanmar has just opened its legal market to overseas law and the majority of the inbound financing and M&A deals being done are governed by English law.
Stuart Bedford, a corporate partner at Linklaters’ Singapore arm, comments on the balance between third-party and local law in Asia: ‘The big deals and the big cheques are written off the back of English law docs. However, there’s more local financing done in local law and in local currency, and that will increase as those economies grow and those banks become more solvent. That will only go in one direction.’
Bedford likewise notes the popularity of English law-derived contracts among Japanese banks and corporations.
There is also further support for the English law cause in the rapid wave of development in Africa, a market in which English law is typically used in projects, financing and arbitration.
The growing number of disputes emerging from Africa – a region where just 1.6% of HSF’s arbitration cases were emanating from in 2008 and that proportion has now risen to 3.5% – is producing a greater number of disputes under English law, given its prevalence in the region. The same is true of Asia, where HSF’s arbitration caseload has risen from 31.5% in 2008 to 41.3% in 2013.
Edward Poulton, a disputes partner at Baker & McKenzie, comments: ‘English law is by far the most popular non-domestic law for arbitration coming out of the Middle East, Africa and the CIS.’
Matthew Saunders, head of international arbitration at DLA Piper, says the majority of the group’s work comes from emerging markets, namely the CIS, Africa, Turkey and Central Asia. ‘What’s happened is that those places have seen economic growth and investment in infrastructure, telecoms, roads and power plants, but that investment is still risky even if the economy has picked up,’ he says, with English law often provided in the contract to solve such disputes.
However, there are increasing concerns around the use of economic sanctions and the potential for assets to be discovered during the course of discovery in English courts, particularly among high-net-worth individuals and company executives. With seven Russian executives and 17 Russian companies subject to EU and US sanctions, one Magic Circle partner warns: ‘It’s inevitable that Russian clients may start to look further abroad to places where they’re not going to be subjected to the sanctions.’
The trend of English law being used in emerging economies has even extended somewhat to Latin America, surprisingly, given how New York law has long-dominated in the Americas, according to several lawyers interviewed for this article.
Joe Tirado, co-head of Winston & Strawn’s international arbitration group, says: ‘There’s been more export of English law than ever before. As English companies invest in Latin America, they are often able to impose English law and it is often accepted as the neutral law. It’s on the up.’
These similarities have given English law a boost in other areas too, such as shareholder disputes, due to many offshore jurisdictions like the British Virgin Islands (BVI), the Cayman Islands and Cyprus – where the assets often reside or the company is registered – being based on English common law. The London Court of International Arbitration statistics saw growth as a result of English law governing disputes over such assets, registering 51 new cases with BVI parties, compared to 26 in 2012.
English law, despite the domestic slowdown in M&A work, has actually made up ground in M&A, according to some corporate lawyers. Olney comments: ‘Some US institutions will be keen to transact using New York or another US law but it’s not dominating non-US cross-border M&A and transactions.’
Ultimately, the consensus view from senior practitioners is that English law, despite facing unprecedented challenges to its position over the decades ahead, has so far adapted well to a multi-polar world.
As with financial markets and currencies – once a legal system is established as a widely-used commodity, it is very hard to displace. As the UK gears up to celebrate the 800-year anniversary of the creation of the Magna Carta in 2015, the titan that is English law looks set to retain the upper hand for a good while yet.
As HSF’s Scott sums up: ‘While US lawyers travel well, I’m not sure that US law travels. [These firms] are all recruiting English lawyers. That’s indicative of how well English law is travelling.’ LB
tom.moore@legalease.co.uk