Drifting eastwards: becoming multi-jurisdictional
If Woodward and Bernstein were advised to ‘follow the money’, law firms follow the client. Firms that operate in offshore financial centres have done exactly that.
As offshore clients have pulled back from structured finance transactions towards risk-transfer arrangements, so have their lawyers. And where offshore clients have internationalised, so have offshore law firms, opening offices in different jurisdictions during an expansionist and merger-filled era. This is not surprising given increased competition within the offshore legal market which intensified with the financial crisis.
Offshore firms are keeping close to the client - what professional services strategists call practising ‘client intimacy’. And clients have acquired more global tastes and less often need advice which is restricted to one jurisdiction. Internationalised clients are making the offshore market more global. Or, as Ingrid Pierce, a partner at offshore firm Walkers (and who was Cayman Islands counsel to the mega-merger between BlackRock and Merrill Lynch a few years ago), puts it: ‘Internationally minded clients are directing what we do.’
Andrew Bolton, practice group head of litigation and insolvency at Appleby, currently the largest offshore firm, agrees: ‘We led the way in mergers between different firms to get a multi-jurisdictional platform and clients come to us because we can serve their needs on matters deriving from different jurisdictions. Even in one particular matter it might have a BVI [British Virgin Islands] and Bermuda law element.’ This multi-jurisdiction offshore world is slowly creating two different groups of offshore law firms. A number of local firms continue to serve clients in one host jurisdiction, and then there are those who serve a global market. But in terms of where the power lies, Bolton says: ‘It’s the multi-jurisdictional firms that are taking the lead.’
Offshore law firms have also followed clients to Asia. This, of course, does not mean having offices there because there are plenty of offshore firms without an Asian base, and which successfully serve Asia-based clients or clients with interests in Asia from the Caribbean or Europe. But the pull eastwards has put greater demand on opening up a physical stronghold in Asia, not least because of the pressures of time zones (a painful 12-hour difference means that an Asia-based client who starts work at 8am does so just as its Caribbean-based lawyer is heading home).
Some firms have had a presence in Asia as a region for some time; Conyers Dill & Pearman, for example. But such firms have been followed by a host of newcomers - Walkers to Singapore in 2009 (to ‘open up India’, says Pierce), Collas Crill which opened in Hong Kong in 2011, and Channel Islands-based Mourant Ozannes in the same city this year.
Some have even ventured as far as Shanghai. Ogier has a representative office there and Appleby launches its fiduciary and administration service this month. The physical presence in Asia is about being ‘time-zone friendly’ as one firm puts it, offering ‘real-time offshore advice’. But it is also about that client intimacy, crucial in Asia according to one offshore lawyer who says: ‘Asia is a relationship-driven environment’.
However, the type of offshore work needed in Asia is changing. Originally, most of the work emanated from western companies investing in Asia. Now Asian companies have been investing much more outwards (as investment from the eurozone and North America has dipped). Paul Christopher, managing partner of Mourant Ozannes’ new Hong Kong office, explains: ‘We have opportunities that we didn’t have before. Now there is still money being invested in Asia but what is newer here is outward investment into other parts of the world. And the investments are different - more long-term. For instance, institutions and sovereign wealth funds in Asia are interested in buying commercial property in the UK. They think it is good value at the moment and a solid long-term investment in terms of returns.’
The third type of work emerging from Asia relates to firms advising on issues of corporate governance. As Christopher says: ‘Corporate governance is a new trend in the Asia region as a whole as businesses are striving to meet more demanding institutional investor expectations.’ It is not clear who is driving this, Christopher notes: ‘It is partly led by investors but to some extent businesses in Asia are investing more in a sustainable model.’ Mourant Ozannes chose Hong Kong over other options in the region because it sees it as ‘a bridgehead to the rest of the region’, as Christopher puts it. Other firms shied away from Hong Kong because of the intense competition there and opted for Singapore (which also acts as a gateway to India).
There is another attraction to Hong Kong and that is the city is seen as a major litigation hub, and litigation, such as fund disputes, shareholder disputes and trust disputes, has been a boom business for offshore law firms. Bolton explains: ‘The last few years has been a very busy time. Appleby’s work is financial services-based - financial contracts, funds, professional services and so on. So following the financial crisis there has been an enormous amount of financial litigation work.’ The firm, Bolton says, receives instructions in Hong Kong or on Asian litigation ‘because there is a Cayman or BVI element to the dispute such as in the structure or vehicle used in the transactions and, of course, this is very common’.
In fact, the level of work is such that Appleby is establishing a permanent litigation team in its Hong Kong office serving Asia as a region.
It is litigation season in the offshore market and firms are representing big names in big cases. One widely reported dispute involved US companies Softbank, Yahoo! and the Chinese-based Alibaba Group in which Appleby acted as Cayman Islands counsel (and for which it scooped Deal of the Year 2011 from the China Business Law Journal).
The dispute surrounded Alipay (the equivalent of PayPal operating in Asia) which had been transferred to another company, thus leaving that company and Softbank and Yahoo with less access to the growth of the Alipay business. The case was settled before it went to court, but its significance was that it resulted in weakened confidence in Yahoo’s ability to operate in - and gain from - a booming Chinese market.
Most cases are never reported, however, and are often heard in one of the highly specialised new courts. There is a new Commercial Court in the British Virgin Islands (BVI) for the eastern Caribbean and a new financial services division of the Grand Court in the Cayman Islands. The BVI court’s judge Edward Bannister QC is from 3 Stone Buildings in London, and is reported by offshore lawyers to be ‘very quick at turning judgments round’.
Andrew Bolton, practice group head of litigation and insolvency at Appleby, says: ‘There is an assigned judge in these courts and clients have more faith in them. There has been a knock-on effect on the ability to take issues through the courts because of their greater expertise and focus. It makes clients more comfortable about bringing proceedings, particularly in far-away places, both geographically and culturally, and it is in tune with what they understand and know about offshore financial centres.’
There is also a cultural shift at play as dispute resolution in Asia becomes more common. Bolton explains: ‘In Asia, the sheer volume of activity has increased hugely and this leads to more litigation work. But also, over the last decade there has been a shift in attitude to dispute resolution. Originally, there was a reluctance to participate and there was innate caution about courts. But this has changed with more willingness to trust in a judge of a foreign jurisdiction.’
Yet even in boom practice areas such as litigation, client intimacy is crucial because the offshore market, like its onshore counterpart, is highly competitive, with firms raiding each other’s jurisdictions (non-Cayman Islands firms such as Harneys moving into the Cayman Islands; non-Channel Islands firms moving into the Channel Islands (such as Walkers)) and finding ways to differentiate themselves. In recent years, there have been a number of high-profile mergers such as Mourant du Feu & Jeune with Ozannes (and there was even talk of Mourant Ozannes merging in turn with Walkers but in the end talks collapsed); Collas Day and Crill Canavan; and Appleby and Isle of Man firm Dickinson Cruickshank.
Much of this links in with the expansionist, multi-jurisdictional outlook which is being brought about by a more globalised client base. But new offices can also quickly tap into new opportunities. Walkers has expanded into many places recently such as Jersey, Ireland and Dubai. Some of that is about achieving a multi-jurisdictional offering but in somewhere like Dubai, there are good referral options too. As Pierce says: ‘In Dubai, we can cross-refer by working with local lawyers - they may have clients onshore who want to spill into offshore, and vice versa.’
Other firms have had a strategic rethink and decided not to merge but to sell off part of their business, namely their corporate services arm. Walkers announced in March that it was selling its Walkers management services division as Mourant du Feu & Jeune did a few years previously. There are differing views about the success of this strategy; Jonathan Culshaw, a partner at international firm Harneys, says his firm is holding on to its fiduciary and administration business, and that offering ‘fully integrated corporate services’ is important ‘because we believe that this provides great synergies for clients wanting a one-stop shop and a useful revenue stream to help our firm grow’.
If strategies differ, there continues to be the same pressure on pricing and delivering legal services in a more lean and efficient way, including trying different business models. Linda Martin is a corporate and finance specialist at Thorp Alberga, a boutique firm with offices in the Cayman Islands and Hong Kong which was restructured two and a half years ago and is now rapidly expanding. She explains how they are trying out a different model: ‘We are partner-heavy and we built it that way. We started with a clean slate, which meant we were able to build our firm for exactly what is needed right now. What that means is that we are not a transaction factory, as the demand for highly commoditised and compartmentalised work has tailed off. What we are finding instead is that there is a greater need for advisory work, complex unpicking of distressed transactions, where we are able to add value at a high level. We are very senior and well known in our fields. We have low overheads and a very focused headcount, which allows us to offer highly competitive and flexible pricing.’
Not only is there competition between law firms, there is competition between jurisdictions too, as Culshaw explains: ‘Jurisdictions are in competition on a global basis. Our core business is BVI law which is the leading offshore corporate domicile by some margin. A great deal of thought has gone into making its corporate law as commercial, clear and flexible as possible, meaning that BVI companies are used globally for a wide variety of purposes from simple holding company structures to complex joint ventures and listing vehicles.
‘It is a robust model which can be contrasted with jurisdictions such as the Channel Islands which have very limited penetration outside Europe and Bermuda which is heavily dependent on a single business line and vulnerable to adverse regulatory change.’
Competition is also increased by political and economic volatility. The Arab Spring, the crisis in the eurozone and a number of imminent presidential elections have made for interesting but uncomfortable times for investors. As Pierce says: ‘These events have both a direct and an indirect effect; indirectly, uncertainty in the market means clients aren’t investing in the same way or to the same extent. At the moment, any reduction in investment activity has been counterbalanced by restructuring and insolvency work, and this work has grown since 2009 and shows no signs of tailing off. But the direct effect is also there: we are affected by regulatory changes which follow such events.’
Culshaw picks up on the last point: ‘I believe offshore jurisdictions should be watching two potentially adverse trends. The first of these is pressure to bring in prescriptive funds and investment management regulation which is more appropriate to the protection of retail investors in onshore jurisdictions.’
The second trend, he says, is the temptation for governments in offshore jurisdictions to introduce protectionist legislation. Capital has a choice and that choice is partly determined by the quality of the service providers and lawyers in each relevant jurisdiction. ‘Governments should be attracting and not blocking talented professionals from overseas… [Likewise] offshore lawyers are often of more service to each jurisdiction’s economy, working in Asia or in Brazil, explaining and promoting offshore products, and helping to document structures in real time, resulting in increased company registration and related revenues flowing back to the home jurisdiction.’
So for offshore firms facing these trends, following the client may not be enough in years to come. But at the moment it is standing them in good stead. As Culshaw concludes: ‘I don’t know what the world will look like in five years’ time and I don’t need to know. If the firm’s partners and employees continue to support each other and try every day to do a better job for clients, we will continue to thrive.’
Walkers in Ireland
Walkers, one of the largest offshore firms, has started to give tax advice. Its Dublin office has a new department undertaking tax structuring and advisory work. Ingrid Pierce, a partner at Walkers, explains: ‘This is completely new, a huge departure for us as we are usually advising clients that the tax implications are minor.’
Anthony Smyth heads this department, which opened in March 2011 and now has six members: ‘It has derived from demand from clients for advice on financial instruments into Europe. Walkers wanted to deliver that in-house in Ireland which had become a global hub. The tax service flowed from that. So far, business is doing well.’
Walkers’ move into Ireland was considered quite a departure (as was Maples and Calder’s when it arrived back in 2006). Not because of any concerns over the country’s economic health (Ireland has clung on to its low corporation tax rate of 12.5% even through the crisis), but more because it has plenty of its own onshore lawyers. One of the subtleties of the offshore market is that it has not traditionally put itself in competition with the onshore market - quite the opposite: it has been able to cross-refer.
Linda Martin, a corporate and finance specialist whose boutique practice, Thorp Alberga, is very much staying offshore, says: ‘Ireland makes sense and there will be opportunities there, but we get a great deal of work referred from onshore firms so we have no intention of competing with them! Onshore firms will be reluctant to refer work to an offshore firm that is a competitor in a jurisdiction.’
Offshore firms in Ireland argue that they are not treading on anyone’s toes because they are still focusing on Cayman and BVI law. That may have been true initially but with the new tax services provided at Walkers it may no longer be the case.
Polly Botsford is a freelance journalist