Portugal continues to navigate a deep recession, aided by its legal profession. But while the sale of state assets is providing some relief, firms are looking to their international practices to provide a bailout of their own.
The normally sedate setting of the Ritz Hotel in Lisbon became the focal point of Portugal’s malaise in April. A flash mob of angry protestors gathered outside the hotel urging the Portuguese government to `screw the troika’ in response to the severe austerity plans tabled to meet the demands of Portugal’s 2011 €78bn bailout by the International Monetary Fund, European Central Bank and the European Commission.
But by early May the government announced that it had passed the seventh audit of its accounts, winning the rubber-stamping of auditors from the troika, paving the way for the release of the latest €2bn instalment of bailout funding. This followed Portugal’s first ten-year bond issue in more than two years, with foreign investors buying €3bn in debt and bringing the country’s debt yields back to 2010 levels. The comeback is on.
But the country faces years of hardship ahead while the economic restructuring has presented the country’s lawyers with opportunities, it is clear that for many the solution to a number of their problems lies beyond Lisbon in international expansion.
Fire sale
Following the bailout deal, Portugal was forced to embark upon a €5bn aggressive privatisation programme across its media, aerospace, energy and infrastructure sectors aimed at reducing its budget deficit to 3% by 2013. It has already beaten that target.
But the fire sale continues, encouraging more foreign investment and sparking more interesting deals for law firms. A high point came in December 2012 when the airport authority, ANA Aeroportos de Portugal, was sold for €3bn to French construction company Vinci. PLMJ advised ANA, led by partner Jorge de Brito Pereira in Lisbon. Privatisations slated for 2013 include waste management group EGF, airline TAP and the post office CTT.
The insurance arm of the bank Caixa Geral de Depósitos is also up for sale, with legal advice led by Morais Leitão, Galvão Teles, Soares da Silva & Associados (MLGTS).
However, the privatisations have not resulted in the anticipated windfall of work for domestic firms and those who have benefited are the usual suspects, according to João Vieira de Almeida, managing partner of Vieira de Almeida & Associados (VdA). Although the work couldn’t have come at a better time for many, it is clearly not the panacea some expected.
`We had a strong year in banking but the nature of the work isn’t necessarily the same. We are not doing any acquisition finance.’
Joao Vieira de Almeida, Vieira de Almeida
Rui Amendoeira, managing partner of Miranda Correia Amendoeira & Associados (Miranda), comments: ‘Privatisation is a fairly limited package. You can count them on a single hand. Some have been delayed and postponed.’
There have also been constraints for the firms representing the state. Rui de Oliveira Neves, partner at MLGTS, says: ‘Privatisations are not a fantastic source of work, because if you are representing government, there are restrictions in terms of fees, and if you are on the side of the buyer, it’s a one-sided transaction. They don’t represent a significant part of our turnover.’
Amendoeira sums up the current domestic situation. ‘It’s been a challenging couple of years and for most law firms – pretty nasty,’ he says. ‘M&A work has reduced significantly and there has been a shift towards more work in litigation, restructuring and disputes. But that does not compensate for the work we have lost.’
Martim Morgado, partner at Campos Ferreira, Sá Carneiro & Associados, comments: ‘There has been a flow of transactions mainly driven by divestments from state-owned entities but our experience is that M&A activity has not picked up yet.’
VdA in particular points to a counter-cyclical increase in litigation, restructuring and arbitration work at the expense of M&A. João Vieira de Almeida, partner at the firm, says: ‘We had a strong year in banking but the nature of the work isn’t necessarily the same. We are not doing any acquisition finance, but restructuring, regulatory and bank recapitalisation.’
`Pricing has to be somehow readjusted to reality, and we have been doing that, but dumping is very dangerous for the future of the legal market and our profession.’
Maria Joao Ricou, Cuatrecasas, Goncalves Pereira
Significant deals may be sparse, but there has been the odd standout transaction, with Raposo Bernardo clinching a major domestic project, representing nine of the largest Portuguese banks and the Portuguese Entrepreneurship Association in establishing a fund, NEXPONOR. Managing partner Nelson Raposo Bernardo says: ‘The amounts involved are approximately €70m and we have advised on the whole operation.’
Aside from the privatisation programme, there has not been a steady stream of foreign investment into the country of late. However, law firms are hopeful that improved state reforms (see box, ‘Regulatory reforms’) will make things easier.
‘Portugal depends a lot on resolutions that will be taken by the government in the next few months. If they reduce the red tape, there will be lots of opportunities for foreign investment,’ says Tiago Caiado Guerreiro, senior tax partner at Caiado Guerreiro & Associados.
However, for the time being at least, squeezing a decent return from a dearth of transactional work is proving difficult.
Regulatory reforms
As part of its restructuring programme, the Portuguese government established a number of state reforms in 2012. These include amendments to its Labour Code of 2009 and the introduction of its `golden visa’ programme for foreign investors.
The main changes to the Labour Code are aimed at increasing the flexibility of the employment market and the promotion of greater mobility of employees.
Ines Reis, partner at Pedro Pinto, Bessa Monteiro, Reis, Branco, Alexandre Jardim & Associados (pbbr) and an employment lawyer, comments: `The new regulations for employment are similar to what is common in continental Europe, and Portugal has some features the others don’t. These are in relation to social security, stimulus to hiring, stimulus to unemployment, and so on.’
`Since the code was amended there has been a huge flow of work into our employment department,’ she adds. `I have noticed in particular that restructurings have increased. Corporations don’t have the same liquidity as they once did.’
Other law firms such as Miranda Correia Amendoeira & Associados, PLMJ, Morais Leitao, Galvao Teles, Soares da Silva & Associados (MLGTS), Kennedys and Linklaters have noted a surge of activity in their employment departments. Paulo Cruz Almeida, partner at Kennedys’ Lisbon office, says: `A lot of companies are downsizing, cutting their jobs and so on because of insolvencies. This is being done “collectively” not just individually. But it’s not an ordinary situation of unemployment. We are currently in a big counter-cycle.’
August 2012 was also when the golden visa programme for foreign residents into Portugal was introduced. It applies to foreigners who invest ¨500,000 in real estate in the country, and offers them freedom to move around within the EU. Unsurprisingly, this has already attracted a lot of interest for law firms, especially from China.
`We have retained two lawyers with both Chinese and Portuguese nationality in Portugal for this purpose, with a view to help overcome the language barriers and other difficulties,’ says Manuel Santos Vitor, managing partner of PLMJ. `I think it’s fair to say that we have rapidly set up a team to provide the necessary legal assistance for the visa themselves and the potential investments that come with it.’
While many law firms see the benefits of the golden visa regime in attracting foreign investors, some partners are sceptical about the legal work it will create.
Rui Amendoeira, managing partner of Miranda, comments: `I don’t think it will be relevant in attracting new businesses but I think people from eastern countries will be interested and I guess some people will use them as an entry point into the EU. A lot of Russians are buying property in the south, in the Algarve, but it is not law firms picking up all the work.’
Tiago Caiado Guerreiro, senior tax partner at Caiado Guerreiro & Associados, advises the Portuguese government on its economic reforms and says: `We made suggestions to the government, and proposals regarding the golden visa and reducing corporate income tax. I also suggested creating a system to make Portugal a platform for investment between Africa, South America and Asia. The government has been slowly approving things and I’m very hopeful.’
A buyer’s market
There is no doubt that austerity measures have taken their toll on law firm fees. Portuguese firms that enjoyed mutually agreeable rates with their clients in the past have been asked to lower them.
‘Six years ago, it was a lawyer’s market, and now it is a client’s market,’ observes one Lisbon partner.
Pressure from clients to drop fees has been a constant problem for law firms and is driven by competition, according to Nelson Raposo Bernardo. He comments: ‘Both existing and new clients have presented us with quite aggressive proposals from competitor firms. However, this did not mean that we automatically dropped our hourly rates but looked to offer new models of compensation, such as capped fees, specific grace periods, some risk sharing, etc.’
‘There is more pressure from the clients to get discounts and reductions – you name it,’ says Amendoeira. ‘But perhaps more worrisome for us is the fact that clients take longer to pay than they used to a couple of years ago. You have to chase them, which we were not used to doing. In the good old days, you would send the bill without demands or reminders on our part. That’s not the case anymore.’
While clients are piling on the pressure, law firms have had to become more creative in their fee menu. Amendoeira adds that standard fees for the firm are pretty much the same, but as Miranda now offers more capped or flat fees, the actual fee per hour charged is lower on average.
However, Maria João Ricou, co-managing partner of Iberian leader Cuatrecasas, Gonçalves Pereira in Lisbon, comments that the competition for low fees presents a challenge. ‘One of the main problems that we are now facing in the legal sector is that some competitors apparently made a strategic choice to lower their prices drastically as the way to fight against the decrease in work flow and avoid other measures,’ she says.
`It’s not about the flow of referrals, but becoming a better firm.’
Orson Alcocer, DLA Piper
‘We recognise that pricing has to be somehow readjusted to reality, and we have been doing that, but dumping is very dangerous for the future of the legal market and our profession.’
As clients drive down costs, so firms have to make their own adjustments. Although Portuguese law firms are reluctant to announce redundancies, they are more cautious in their hiring policies. Inês Reis, employment partner at Pedro Pinto, Bessa Monteiro, Reis, Branco, Alexandre Jardim & Associados (pbbr), says: ‘Large law firms are now facing the need to reorganise themselves and restructure their own workforce. Some partners have been moving out of those firms because there is no room for progression for all of them. It’s not the same as the good old days – there is a lot of movement in the legal market.’
Pbbr is a classic example of the spin-out model, formed in 2006 when Reis and six of her colleagues left Carlos Aguiar, P. Pinto & Associados. Pbbr today has 21 lawyers and, like many Portuguese firms, has not lost any staff during the past year but remains conservative in its hiring. Many local firms have chosen to keep headcount stable, and not replace individuals lost due to attrition.
Some law firms, such as Iberian giant Garrigues, have kept their numbers much the same as last year and not increased headcount. Diogo Leónidas Rocha, partner at Garrigues’ Lisbon office, says: ‘The crisis obliged us to be more conservative and we have only made hires out of necessity, especially in the tax practice.’ However, he adds that this year the firm has replaced individuals who have left, which is a change from the year before.
Closer to home
While international expansion dominates the agenda, at home the Portuguese legal sector faces the prospect of domestic liberalisation. Last year the government called upon the Portuguese Bar Association to amend its charter to allow for multidisciplinary practices (MDPs) and for non-lawyers to take equity in law firms.
This has aroused mixed feelings among the country’s lawyers, who may in the future combine or compete with other professional services firms. There is concern over whether it will create potential conflicts of interest if auditing and legal services are housed under the same roof as MDPs.
Some partners suggest having outside investors could benefit certain firms. `The top firms are not going to be affected but smaller firms may feel tempted to take on these opportunities,’ says Rui Amendoeira, managing partner of Miranda Correia Amendoeira & Associados.
According to Diogo Leonidas Rocha, partner at Garrigues’ Lisbon office, liberalisation may significantly change the Portuguese market. `If multidisciplinary practices are introduced, the legal sector in Portugal may change inexorably over the next two or three years, as auditing firms will start pursuing solutions where they can add legal services to their practice,’ he says. `This may be done by creating an internal legal division or even through a merger with a local reputable law firm. We may even face consolidation movements in the Portuguese legal market as a response to multidisciplinary practices.’
While others are less happy about the prospect, largely down to the traditional standing of Portuguese lawyers within the community, to Ines Reis, partner at Pedro Pinto, Bessa Monteiro, Reis, Branco, Alexandre Jardim & Associados (pbbr), the benefits outweigh the disadvantages. `The advantages are significant,’ she says. `If you take into account that [a liberalised profession] exists everywhere apart from Portugal, we are one step back.’
Foreign investment
Given the difficult conditions domestically, it is unsurprising that many Portuguese firms are keen to tout the significance of their international offices in keeping revenues ticking over. At Abreu Advogados, for example, 60% of its turnover comes from international clients and the firm enjoys an association with local law firms in Angola, Brazil, China/Macau, Mozambique (in partnership) and East Timor (in a joint venture).
The main draw for Portuguese firms remains lusophone and Francophone Africa. Similar legal systems and a common language place Portuguese law firms at a huge advantage.
Miranda recently announced its decision to expand into the Democratic Republic of Congo (DRC) through an association with local firm MBM CONSEIL, giving the firm its eighth outpost in mainland Africa.
3% IMF deficit reduction target, exceeded by Portugal in 2013
Amendoeira says that one of the attractions is that the DRC is a significant producer of mineral resources and has very active forestry, agriculture and utilities industries. ‘We don’t underestimate the complexity and scale of the market and welcome the opportunities,’ he says. ‘However, the most dangerous region by far for us right now is Portugal. Congo and Gabon are much safer places from a business standpoint. You have to expand abroad – there’s no other way.’
Meanwhile, Miranda also plans to open an office in Cameroon within the next few months to service its growing oil and gas and infrastructure projects practices.
Lino Torgal, managing partner of Sérvulo & Associados, which has partnerships with local firms in Angola, Mozambique and Cape Verde, says lusophone Africa represents a huge opportunity. ‘The economies are booming and attracting foreign investment that entails sophisticated legal work,’ he says. ‘The legal market there is capable but simply lacks the critical mass to deal with the scale of economic development.’
Nelson Raposo Bernardo says there is a real distinction between law firms who see Mozambique and Angola as targets for short-term gains and a handful of firms who view them as long-term projects. ‘These are very few – maybe five or six firms, but for those firms, both the Angola and Mozambique markets are a natural extension of the Portuguese market.’
Miguel Castro Pereira, managing partner of Abreu Advogados, says although oil has been a key driver of business in Angola, there are many attractions outside of this sector.
‘There are business opportunities in agriculture, telecoms, IT, fishing, energy, health, education and tourism,’ he says. ‘Mozambique is also eager to receive investments in (most of) the areas and investors should look at infrastructures such as transport and communications, agriculture and fisheries.’
However, João Vieira de Almeida says there are considerable regulatory challenges in setting up in these African jurisdictions. ‘You have to manage the distance and there’s logistics, quality control, operational matters – those are big challenges for Portuguese firms, but then, the cultural affinity is always there which helps.’
VdA is currently advising the Angolan government on the drafting of a new telecommunications legal framework, as well as an international consortium on a €200m investment deal for the construction of seven power stations in Angola.
International attraction
International firms have established a foothold in Portugal over the years but the most recent influx came in 2011. Kennedys opened its branch after merging with Almeida & Athayde and in the same year, CMS added Rui Pena, Arnaut & Associados to its ranks. DLA Piper also signed an exclusive relationship agreement with Portuguese firm Azevedo Neves, Benjamim Mendes, Carvalho & Associados (ABBC) after several months of negotiation in early 2011.
Two years on, DLA’s Madrid partner Orson Alcocer insists that the alliance has strengthened the firm in the region. `It’s not about the flow of referrals, but becoming a better firm,’ he says.
With over 30 lawyers and five partners in its Lisbon office, Linklaters is the only Magic Circle firm in Portugal and opened a decade ago. Managing associate Diogo Plantier Santos confirms that the firm is heavily focused on transactional work, as evidenced by its involvement in recent significant privatisations, including those of EDP.
The benefit of being an international firm in Portugal is client perception, according to Plantier Santos. `Historically, there have been rumours of other Magic Circle firms considering a presence in Portugal, but this never materialised,’ he says. `For foreign investors, a presence in Portugal is sometimes seen as a gateway, and inherent for Chinese companies that wish to have a footprint in Europe.’
Alcocer of DLA Piper’s Madrid office agrees and says: `I feel that some big Magic Circle firms look too much at the figures when choosing a law firm to partner with. Portugal can pay off in so many ways you cannot foresee.’
Brazilian links
Another game-changing region with which Portugal has an obvious cultural affinity is Brazil, although the strict Bar rules that limit the activity of international firms apply just as much to Portuguese firms. In addition, Portuguese firms report that the standard of quality among domestic law firms in Brazil is very high. There are a handful of Portuguese firms offering complementary services to Brazilian firms but they do not compete in a market where they would be easily edged out.
De Oliveira Neves at MLGTS explains: ‘Portuguese firms don’t go to Brazil to practise there, they go to Brazil with the client, and you need to liaise with Brazilian law firms. The logic there is working together and ensuring a swift transition for the clients when investing abroad.’
MLGTS has an 11-year-old alliance with Mattos Filho, Veiga Filho, Marrey Jr e Quiroga, one of Brazil’s largest firms with four domestic offices.
Abreu also has a desk in Brazil and one of its most significant deals of 2012 came from Brazilian clients: the firm advised Amil, Brazil’s largest health plan provider, in its acquisition of Portuguese group Hospitais Privados de Portugal, or HPP, for €85.6m.
The firm also assisted Brazilian aviation company Embraer last year in one of the biggest foreign investments in Portugal, purchasing the 30% share that European aerospace giant EADS held in Portugal’s OGMA aircraft maintenance company.
Meanwhile, VdA’s standout transaction in Brazil last year was advising on a €40m investment from private equity firm Stirling Square Capital Partners into Portugal-based Omni Helicopters International. The helicopter fleet is operated by its Brazilian affiliate, Omni Brazil. VdA advised on Portuguese law aspects of the deal, working together with Pinheiro Neto on the Brazilian side.
However, Nelson Raposo Bernardo says that the market is already saturated with sophisticated Brazilian law firms, siphoning off any real access to its clients. He comments: ‘There is no relevant Portuguese law firm that has opened an office in Brazil or been involved in any relevant operation.’
But Garrigues, as a leading Iberian firm, intends to establish its own footholds in the continent. In May the firm announced the end of its Affinitas alliance – which it launched in February 2004 – tying Garrigues with Argentine firm Bruchou, Fernandez Madero & Lombardi, Mexican practice Mijares Angoitia Cortes y Fuentes, Bogota-based firm Gómez-Pinzón Zuleta, Miranda & Amado in Peru and Chilean firm Barros & Errázuriz. The firm announced that as 26% of its clients were based in Latin America, it would be opening offices in Colombia, Mexico and Peru where it intends to practise local law.
Eastern promise
As part of the privatisation process, Chinese investment in the Portuguese energy market has continued. At the end of 2011, China Three Gorges – advised by Skadden, Arps, Slate, Meagher & Flom and Serra Lopes, Cortes Martins – paid $2.7bn for 21.4% of EDP, becoming the Portuguese power company’s largest shareholder. In May 2012, State Grid Corporation of China acquired 25% of Portuguese power company Redes Energéticas Nacionais (REN) for €287m. MLGTS acted for Parpública, the state-owned holding company, while PLMJ’s de Brito Pereira advised REN.
However, outside of the energy market there has been little investment.
‘Apart from the two privatisation deals last year, I do not notice a lot of interest from Chinese clients in Portugal,’ says Leónidas Rocha. ‘The Chinese market allowed Chinese corporates to be more aggressive on the price offered in the privatisations of both EDP and REN. However, it did not really correspond to a significant flow of Chinese investment in Portugal.’
Only a handful of Portuguese firms have established themselves in China and these include PLMJ, Abreu, Garrigues, MLGTS and Miranda. PLMJ has an alliance with one of China’s largest law firms, Dacheng Law Offices, which has 3,500 lawyers spread across 28 local offices covering the whole of China, in Beijing, Shanghai and Hong Kong, as well as an alliance with Macau firm DSL.
‘There is no relevant Portuguese law firm that has opened an office in Brazil or been involved in any relevant operantion.’
Nelson Raposo Bernado, Raposo Bernado
‘The Chinese market is very exciting and interesting, with deeper pockets than the Portuguese market,’ says Manuel Santos Vítor, managing partner of PLMJ. ‘In our case a physical presence has been possible as a result of these alliances.’
However, China doesn’t exhilarate everyone. Nelson Raposo Bernardo says that Portugal is no different than any other country in experiencing significant investment from China and the legal market should be more realistic.
‘We cannot feed the idea that the business generated from China will be a bonanza for law firms in Portugal,’ he says. ‘It may generate some important work – we have won mandates from the largest Chinese banks and the largest Chinese companies in the oil, mining, and shipping sectors, but in the end it will possibly not even reach 5% of our global turnover. I do not believe that there is any Portuguese law firm where the transactions with Chinese companies exceed 5% of its turnover.’
Santos Vítor comments: ‘Everybody is excited about China but at the same time, everyone is quite conscious of the times that we are facing, and clearly, jurisdictions like Angola and Mozambique bring better and closer opportunities than China itself.’
But two major Portuguese firms plan to utilise their lusophone connections a step further in Asia in 2013. Both PLMJ and VdA are planning on opening offices in the Portuguese-speaking country of East Timor by the end of the year.
60% – Abreu’s turnover from international clients
João Vieira de Almeida says: ‘It’s a very small country but they have just hit huge oil reserves and have a very powerful sovereign fund there. The government is developing the country very fast. We have spotted a niche and have know-how in both the utilities and the financial services sector.’
PLMJ is also looking to gain a foothold in the Pacific island. Says Santos Vítor: ‘Initially we will have one colleague – a fee-earner, and they will bring a senior associate, and we’ll see how it develops. There are four law firms there, each with different numbers of fee-earners. We’ll see what happens and, if, as we expect, the demand for legal services is significant, we’ll develop a real presence there.’
It is clear that geographical diversity is key to the survival of even some of Portugal’s leading firms. Given the state of the domestic economy in Portugal, investment from growing global economies will continue to provide some domestic relief, as it has done for the last few years. But to really get on, Portuguese firms need to continue getting out. LB