Hong Kong, notes Mayer Brown Asia chair Duncan Abate, is like a village: ‘If you are good, you can do really well, if you are not, everyone knows it.’
A village – it is fair to add – that has had more than its share of reverses in recent years. Much lauded up until the early 2010s as the gateway to China and the effective legal and finance capital for the Asia region, in the second half of the decade it has been dogged by protectionism, cut-throat pricing and an excess of lawyers.
The starkest challenge was no mystery. Long considered the foundation of Hong Kong’s professional services economy, the IPO market had been in fitful form for years. The funds raised through public listings fell 26% to $24.35bn in 2016 and by another 45% to $13.87bn the following year according to Thomson Reuters. Meanwhile, average rates for IPO work dropped sharply as intense competition depressed already competitive fees.
A few months into 2017, Davis Polk & Wardwell and Kirkland & Ellis lost one capital market playmaker each as Antony Dapiran and Dominic Tsun both resigned. The losses were particularly symbolic for two firms whose local expansion had defined the rise of Hong Kong’s legal aspirations during the decade.
Since launching a Hong Kong law practice in 2010, Davis Polk has invested heavily, with additions including Hong Kong Exchanges and Clearing (HKEX) vice-president Bonnie Chan and Clifford Chance (CC) litigator Martin Rogers, one of the best regarded contentious lawyers in the market. Kirkland being Kirkland had in August 2011 audaciously put its name on the map with an eight-partner team hired from Skadden, Arps, Slate, Meagher & Flom, Latham & Watkins and Allen & Overy (A&O), including Skadden corporate star Nicholas Norris.
But the signs of belated struggle went well beyond the oxymoronic pairing of Davis Polk and Kirkland. Cadwalader, Wickersham & Taft and Fried, Frank, Harris, Shriver & Jacobson both pulled out from the market in 2015-16, followed by fellow US outfit Troutman Sanders last year.
Meanwhile, the number of firms moving offices out of the notoriously pricey island’s central district into the cheaper Quarry Bay spoke of the problems with local costs. Freshfields Bruckhaus Deringer in particular turned heads in 2017 when it announced it was relocating to the east side of the island, joining neighbours including Bryan Cave Leighton Paisner and RPC. Several others followed, with Simmons & Simmons moving in January this year and Baker McKenzie in March.
Yet across more than a dozen interviews with partners on the ground, the mood is currently more upbeat, thanks not only to the battle-hardened optimism of locals used to the wild swings of the Hong Kong scene but also a surprisingly busy 2018.
International firms are talking with a bullishness not seen since the early 2010s.
The Hong Kong Stock Exchange provided the business community with a gift when in 2017 it drafted the most sweeping reforms to its listing rules in decades. In an attempt to make Hong Kong more attractive for tech companies, the rules, which came into force last April, allow both high-growth companies with dual-class shares and pre-profit biotech groups to list. The predicted boom duly followed, and Hong Kong regained its status of largest IPO market in the world from New York after funds raised more than doubled to $36.5bn in 2018.
The revival spread further. Even as outbound M&A dropped amid the trade tensions between China and Trump-led America, the much-touted Belt and Road infrastructure initiative kept many lawyers busy. As did the Greater Bay Area, the project launched in 2017 to connect Hong Kong, Macau and the Guangdong province.
There was also plenty for litigators and regulatory counsel to get their teeth into, with local advisers noting the tougher enforcement stance of the Securities and Futures Commission (SFC) under executive director Thomas Atkinson, which has triggered a number of investigations into the role of investment banks in IPOs.
International firms are talking with a bullishness not seen since the early 2010s. Rogers describes 2018 as the most profitable year ever for Davis Polk’s 90-lawyer practices across Hong Kong and Beijing. Meanwhile, Chan says Davis Polk closed nine Hong Kong and ten US IPOs for Chinese issuers over the year, including Tencent’s $1bn US listing of its music business.
The profitability of Kirkland’s Hong Kong practice has increased significantly as it grew its local lawyer headcount by 25% in the last two years to around 100.
Not that the lessons of the mid-2010s slump have been forgotten: both firms are focusing more strongly on high-end work, which they describe as still highly profitable. Both have changed their practice mix. Davis Polk’s capital market work is now more balanced between underwriter and issuer work; Kirkland turned its private equity, capital markets and fund formation-focused operation into a broader offering, adding restructuring in 2014 with the hire of Neil McDonald from Hogan Lovells and expanding its investigations practice with Cori Lable from Ropes & Gray in 2017 and Richard Sharpe from CC last year. Capital markets work is now only about a third of the office revenue.
They do not rule out further growth (Davis Polk is looking to expand its M&A practice) but in much more cautious terms compared to the start of the decade.
London’s Magic Circle is not doing badly either, reflecting its long history and traditional strengths in the local market. Linklaters added 30 lawyers over the last year-and-a-half to its now 200-strong team, including disputes partner Andrew Chung from Goldman Sachs in April 2018. Freshfields and CC are well respected for IPO and litigation work, while 55-lawyer Slaughter and May made two rare, showy investments with the recruitment of investigation and litigation partner Wynne Mok from the SFC in April last year, and corporate partner Jing Chen from the listing division of HKEX. Baker McKenzie’s 161-lawyer office remains well-respected as one of the most established in the local market.
And as some quit the market, more arrived with CMS launching in 2016. The firm now has over 35 lawyers locally after an aggressive expansion round over the last 12 months. Last year it launched an association with former Troutman Sanders partner Shirley Lau’s new boutique to start practising local law. ‘We are going to be profitable in our first year of operation,’ says CMS Hong Kong co-head Tim Elliott. Morgan, Lewis & Bockius and Charles Russell Speechlys opened in 2017, Gordon Dadds the following year, Cooley in March 2019.
‘Hong Kong doesn’t have an independent economy anymore’
End of the story? Not quite. Hong Kong’s inexorable gravitation towards China brings fresh challenges to international advisers. China-based companies are now an essential part of every firm’s client base, with huge implications. Firstly, Hong Kong’s outlook is now inseparable from China’s, whether it is trade wars or economic slowdown. As Hogan Lovells’ local managing partner Owen Chan puts it: ‘Hong Kong doesn’t have an economy independent of China anymore: it’s a major financial centre and part of China.’ Second, the days of the ‘expat deal’ are numbered. It used to be common for firms to move their lawyers to Hong Kong from the US or UK with generous travel allowances. But now clients increasingly demand Mandarin speakers… and lower prices.
Hong Kong’s inexorable gravitation towards China brings fresh challenges to international advisers.
But perhaps the most significant development is the advance of Chinese law firms. Naturally closer to PRC clients, Chinese leaders such as King & Wood Mallesons (KWM) and Fangda Partners are growing their local headcount at a clip. In a sign that their appeal is growing, last year Fangda hired a four-lawyer team led by capital markets partner Colin Law from Shearman & Sterling, while KWM’s headcount rose 22% to 243 in 2018.
Hong Kong’s traditional elite, of course, effects a dismissive air, claiming PRC firms operate in a lower-margin space, leaving global firms to handle high-end instructions. But no-one really doubts the mid-market has become tougher than ever on pricing.
And the impact of China’s influence goes beyond economics. In autumn 2018 the Hong Kong Law Society put forward proposals requiring firms to employ two domestic-qualified lawyers for each foreign lawyer, twice as many as before. By consensus the move was triggered by concerns that Chinese firms were taking market share from Hong Kong independents, deploying cheaper staff and pushing prices down.
But the proposals were met with shock by the international legal community. Most firms claim to be not too far from matching the increased quota. But with continued concerns over costs, the need to hire more local-qualified staff is not going down well. Some also point to the fact that finding Hong Kong-bred lawyers of the required standard is tough, while in recent years it has become more difficult for foreign lawyers to pass the local qualification exam.
The opposition was almost unanimous, with firms insisting that any damage they suffer will hurt the image of Hong Kong as an international hub. The Law Society is currently considering the feedback, with a decision expected in the coming months.
While the feeling is that the proposals are unlikely to be implemented in full, indications of a protectionism gripping the local market are being met with unease (and likely jubilation in the rival hub of Singapore).
Hong Kong has long been Asia’s most liberal legal market. All international firms have to do if they want to practise local law is strike an alliance with a local shop (often made up of their own lawyers) which they can absorb under their own brand after three years.
Hong Kong-bred practices have had little protection against the arrival of foreign outfits – and have been all but wiped out from the top of the market. Deacons’ 300-strong team is the only local independent which gets some cachet from BigLaw, while the storied local leader Johnson Stokes & Master merged with Mayer Brown in 2008. The rest is mainly a collection of small boutiques.
The latest signs are that the Chinese firms’ aggressive expansion might trigger a change of tack from the Law Society. International firms, meanwhile, are caught between the growing influence of China and the locals’ attempts to react.
So, yes, Hong Kong can still be profitable, its capital markets remain a force to be reckoned with and its image as a gateway to China is not going away. But as ever, this jurisdiction is not for the faint-hearted or lawyers of a short-term mindset. The post-Lehman hopes pinned on Hong Kong as an Eastern El Dorado are not coming back but most global firms remain convinced that this particular corner of the global village will be worth more than a few jostles with the neighbours for years to come.