China’s economy may be slowing but Hong Kong retains its longstanding appeal to international advisers. Marialuisa Taddia reports.
The special administrative region of the People’s Republic of China (PRC) has long attracted UK and US firms thanks to its common law-based system, independent judiciary and free economy.
Most major firms have a base in Hong Kong, nearly all squeezed into the pricey business district of Central, and the influx and expansion of foreign firms shows little sign of abating. Take London-headquartered Lewis Silkin, which last year chose a Hong Kong base for its first international office outside the UK. Or Addleshaw Goddard, which opened there two and a half years ago, with an initial staff of two that has now risen to over 30.
Established firms have also been growing at pace. Stephenson Harwood’s Hong Kong office, which opened in 1979, is the firm’s largest outside London with more than 100 fee-earners, including 19 partners.
Greater China managing partner Voon Keat Lai says: ‘We are likely to end this year ahead of our revenue budget again. We have grown quite quickly in the last few months with the arrival of three new partners and a large number of associates.’ This includes a seven-lawyer trade finance team from Eversheds earlier this year. The UK-headquartered firm plans further expansion of its Hong Kong office in all its main practice areas – corporate, disputes, finance and private wealth – Lai says.
Driven by finance
So what is the continuing attraction of Hong Kong for international law firms? That is easy.
Hong Kong is one of the world’s top three financial centres and so far China’s economic slowdown appears to have had a limited impact. Nigel Francis, head of Addleshaw Goddard’s Hong Kong office, confirms: ‘What makes Hong Kong tick is the financial services market, and demand hasn’t slowed significantly.’
Last year Hong Kong overtook New York as the world’s biggest initial public offering (IPO) market by the amount of funds raised ($25bn, according to preliminary Thomson Reuters data). It was still leading the global IPO rankings in the first quarter of 2016, despite falls in global capital markets in response to the slumping oil price and China’s decelerating economy.
As Kevin Chan, DLA Piper Hong Kong office managing partner, explains: ‘In the short-term the downturn has actually led to more work in Hong Kong, particularly in the capital markets. One example is the recent government intervention in the Chinese stock market [that] has pushed some enterprises to list on the Hong Kong Stock Exchange instead of Shanghai or Shenzhen.’ DLA advised Lanzhou Zhuangyuan Pasture Co Ltd, a dairy company in north-west China, on a HK$186.2m listing and IPO of shares on the Main Board of the Hong Kong Stock Exchange in October.
‘Finance has grown from a one-partner practice to a three-partner practice in the last year or so,’ says Herbert Smith Freehills’ Greater China managing partner Julian Copeman. The Hong Kong office – a full-service practice and the firm’s largest in Asia with 115 fee-earners, including 19 partners – recently hired William Ku from King & Wood Mallesons as a debt capital markets partner.
Present in Hong Kong since 1974, Baker & McKenzie has been around in the former British colony longer than most and currently has over 175 lawyers, including 51 partners. Milton Cheng, managing partner of the firm’s offices in China, Hong Kong, South Korea and Vietnam, says: ‘Hong Kong remains the preferred venue for capital-raising and facilitating global investments by Chinese enterprises.’
Hong Kong is also a ‘gateway’ to the world’s second-largest economy and acts as a ‘springboard’ for the China and Asia practices of international law firms. This is down to the ‘large concentration’ of multinational corporations and Chinese companies in Hong Kong, Cheng observes.
Hong Kong is one of the largest investors in China; and Chinese outbound investment is an expanding source of revenue for law firms which benefit from the continued interest by Chinese investors in real estate and other assets around the globe, Francis notes.
‘There is a huge Chinese appetite for quality assets to invest in, [and] that is likely to be outside China,’ he says. For example, Addleshaw Goddard is acting for Beijing Construction Engineering Group International on Manchester’s £800m Airport City development.
Addleshaw Goddard does not have an office in mainland China but this is ‘not in itself necessarily significant in terms of capturing outbound work’, Francis explains. Investment can originate from any of China’s 20 major cities and even those foreign firms which do have bases on the mainland only tend to have two or three, typically in Beijing and Shanghai.
Hong Kong is also deemed a good choice for more risk-averse western investors. Copeman says: ‘Hong Kong is a good way to get into China, and people feel comforted doing deals with Chinese companies if they can have Hong Kong law rather than PRC law, and Hong Kong courts rather than PRC courts. And HKIAC [the Hong Kong International Arbitration Centre] is very successful.’
But with Singapore pitching to be Asia’s legal hub, is Hong Kong losing its shine? The city-state’s Singapore International Arbitration Centre (SIAC) is an increasingly popular venue for international arbitrations, including among Chinese parties, and Singapore law is becoming a popular choice for cross-border deals in the region.
‘Singapore is coming to be perceived as a more genuine international centre and it is succeeding in attracting a degree of investment that would have otherwise considered Hong Kong,’ Francis concedes, but he adds: ‘Hong Kong and Singapore serve different markets and different needs. From my perspective it is equally important to be in both markets.’
At Stephenson Harwood, the Singapore and Hong Kong offices are ‘closely integrated’, especially in the areas of finance and corporate, Lai says. HSF’s Copeman observes: ‘People talk a lot about the Hong Kong-Singapore rivalry but it is rather overstated. Singapore has been doing a lot to try and attract people into using SIAC, building itself as a disputes hub for south-east Asia, and it’s done a good job with that. But it’s a bit like saying why are you in London if you have a Paris office?’
UK-led insurance specialists Kennedys opened an office in Hong Kong in early 2000 that now has 41 fee-earners, including 11 partners. ‘Over the last 10 years we have seen the emergence of two fairly distinct areas of operation for legal firms in the region, with Hong Kong serving Greater China and Singapore being a regional hub for south-east Asia. Some of our clients also maintain their Asia-Pacific regional offices in Hong Kong,’ partners Rupert Skrine, Richard Bates and Peter Cashin tell the Gazette. ‘To that extent our Hong Kong office and Singapore joint venture office are complementary. To serve global clients it is important for us to be in both places.’
There are other advantages – not least the relative ease of establishing in Hong Kong compared with other parts of Asia. ‘There are serious restrictions on practising local law [for foreign firms] in Singapore,’ says Chan, adding that a base in Hong Kong can also provide support to other offices not only in China but also Asia generally. ‘Because of the legal restrictions, no international law firm maintains huge operations in China or other countries in Asia. Hong Kong as a base can always lead projects or provide support to the offerings in these offices.’
Most international firms operate as Hong Kong general partnerships and as such advise on Hong Kong law as well as the law of their home jurisdictions or third jurisdiction laws, provided they are competent to do so. To become partners and establish a Hong Kong partnership, foreign lawyers must qualify in Hong Kong law, which is relatively straightforward. Foreign lawyers must pass the Overseas Qualified Lawyers Examination and satisfy a three-month residence requirement, according to a new guide on doing legal business in Hong Kong compiled by the Law Society’s International Division.
‘We are a Hong Kong partnership and the partners are all Hong Kong-qualified lawyers,’ says Copeman, who is dual-qualified in England and Hong Kong.
Law firms practising in Hong Kong can now also operate as limited liability partnerships (LLPs), following a new law introduced in March. But there are some important differences with the UK model. ‘The LLP system legislation as introduced in Hong Kong does not provide the same degree of protection. It only serves to protect an individual partner in relation to the acts of another partner of which they are unaware,’ Francis says. It is still early days, but he adds: ‘I don’t know that anyone saw it as being a particularly significant change such that they should rush to [take advantage] on the first available day.’
Of greater significance is the Closer Economic Partnership Agreement (CEPA), a free-trade agreement between mainland China and Hong Kong which gives preferential treatment to Hong Kong law firms in China. CEPA permits Hong Kong-based law firms with representative offices on the mainland to operate in association with up to three mainland Chinese firms. In March, Stephenson Harwood entered into such an association with Guangzhou firm Wei Tu that allows the UK firm to offer a ‘one-stop service’ for Hong Kong, English and PRC law advice. The firm has representative offices in Beijing and Shanghai.
‘The ongoing liberalisation of the legal sector in China, which allows for greater collaboration with PRC law firms, is also seen as an added benefit for law firms with a strong base in Hong Kong,’ Cheng says. Last year, Baker & McKenzie entered into a ‘joint operation’ with Beijing’s FenXun Partners in the Shanghai free-trade zone.
Foreign lawyers also appreciate Hong Kong’s business-friendly culture. The World Bank’s Ease of Doing Business 2016 report ranks it fifth out of 189 countries. Antonia Grant, who heads Lewis Silkin’s Hong Kong office, says the firm chose the city not just because it is ‘a perfect hub’ for Asia-Pacific, but also because ‘the regulatory aspects of doing business are fairly straightforward. You have got a really simple and low-tax system. There isn’t any real restriction on the scope of business here. It just seems very open’.
Hong Kong has its downsides. Low income tax means that salaries work out higher in Hong Kong than in London, but Copeman observes: ‘The tax rate is much lower but the cost of living is much higher, and it sort of equals out.’
‘People in Hong Kong are used to living in smaller flats, but much more centrally, and rental [prices are] very high,’ he adds. Food doesn’t come cheap either: ‘Some of the prices at the shops are pretty shocking.’
There is also schooling, which is ‘phenomenally expensive’ compared with the UK, Grant observes, while Kobre & Kim partner Randall Arthur says: ‘Air quality is an issue that the Hong Kong government and the public are very concerned about.’ The government is undertaking a number of initiatives to improve air quality, he observes, but ‘Hong Kong is very much a victim of what comes across the border, and there isn’t very much the Hong Kong government can do to control that’.
Firms are also faced with space issues and soaring rents. ‘One issue for us is real estate because rental prices over the course of the last three years have gone up 35%-45%,’ says Francis, who has been in the city for over 30 years. This is mainly the result of increased demand from mainland companies which are opening representative offices and branches in Hong Kong, and the lack of new grade-A office space in the core business district of Central.
There are other options. One is to move out of Central to cheaper non-core areas such as Kowloon, Causeway Bay and Quarry Bay. ‘In Quarry Bay there is a substantial amount of space available of a high quality. The question is whether firms are prepared to relocate out of Central, which is traditionally where law firms have been based at what is equivalent to a Canary Wharf-type new financial centre,’ says Francis. ‘Quarry Bay currently offers rental deals which are half the price of those in core Central, but Hong Kong is a market where people consider an extra 10 minutes as adding substantially to their journey.’
Registered foreign lawyers
Sources: Doing legal business in Hong Kong, Law Society International Division
Major financial institutions such as Credit Suisse, Morgan Stanley and Deutsche Bank have already relocated to non-core districts such as the International Commerce Centre in West Kowloon.
And, of course, there is political instability. Under Deng Xiaoping’s ‘one country, two systems’ policy, Hong Kong’s life as a special administrative region lasts until 2047. But, Lai notes: ‘There is a growing mainland influence over Hong Kong politics.’ There has been unprecedented unrest manifested in the 2014 pro-democracy street protests, and, at the start of the Chinese New Year in February, there were violent clashes between riot police and activists over the government’s decision to ban unlicensed street food vendors, a local holiday tradition, from the central district of Mong Kok.
Firms, however, do not perceive much, if any, mainland influence over Hong Kong regulations. ‘Many regulations are changing fast but mainly in response to changes in US and OECD countries,’ Lai says. This a boon for lawyers. A new Competition Ordinance based on EU practice came into effect on 14 December. Copeman says: ‘Our competition group has had an awful lot of work recently advising Hong Kong companies on the impact of [its] introduction.’
Another regulatory milestone was last year’s Insurance Companies (Amendment) Ordinance. This introduces in phases an independent insurance regulator, increased regulatory supervision and the direct regulation of insurance intermediaries, observe Skrine, Bates and Cashin. Corporate insurance work at Kennedys is consequently ‘on the rise’.
Another growth area is ‘regulatory defence’, advising corporate clients in investigations, prosecutions and other enforcement actions brought by Hong Kong’s financial services regulators, including the Hong Kong Monetary Authority and the Hong Kong Securities and Futures Commission (SFC).
‘The SFC is fiercely independent and takes tough action against any individual or company that breaches security laws. Action is taken against entities from many domiciles, including the PRC,’ Skrine, Bates and Cashin tell the Gazette. In line with the international trend, firms including Herbert Smith Freehills and DLA Piper have also seen and anticipate further growth in their corporate crime and investigations practices as anti-corruption laws from the US and other countries extend their tentacles globally.
Returning to China’s outbound investment – the big story for many foreign firms in Hong Kong – this was given added impetus by Xi Jinping’s 2013 One Belt, One Road (OBOR) foreign policy initiative that aims to connect China with 65 countries in Asia, Europe and Africa.
‘[OBOR] is essentially a framework to encourage Chinese companies to invest in infrastructure projects across those routes and countries,’ Copeman says. This is a boost to [HSF’s] energy and projects finance practices. The Hong Kong office has recently been involved in the funding, through Chinese companies, of an OBOR infrastructure project in Pakistan.
Baker & McKenzie is also working on a number of transactions involving OBOR projects. Cheng says the firm is ‘uniquely positioned’ in this regard given its presence in 28 out of the 65 countries covered by OBOR.
Firms also report an increase in disputes, which tend to rise when the economy slows down. ‘In the last year we have seen quite a rise in disputes emanating from investments in China where people are pulling out from things that haven’t gone well,’ says Copeman, who heads HSF’s disputes practice in Hong Kong. There has been an increase in international arbitrations in particular, although it also conducts litigation in the local courts. The firm has represented US-based New Cotai LLC in a complex dispute between the shareholders in a British Virgin Islands (BVI) and Macau joint venture (established to develop and build a $2.4bn entertainment and hotel resort in Macau) that went before the Hong Kong Court of Appeal.
Kobre & Kim, an international boutique that specialises in litigation and investigations, reports a similar trend. Many Chinese companies are incorporated in offshore jurisdictions such as the BVI and the Cayman Islands where the New York-headquartered firm has offices. ‘We are seeing an increase in joint-venture and shareholder disputes involving foreign parties that have invested in Chinese companies through offshore holding vehicles, whether incorporated in Hong Kong or the BVI or Cayman,’ Arthur says. The firm’s lawyers in Hong Kong (the firm has no outposts in mainland China) regularly work with colleagues in the Caribbean on such cross-border disputes.
Kobre & Kim has also seen ‘considerable growth’ in the area of commercial fraud, asset tracing and recovery, acting for ‘very large’ foreign companies which have been the victim of frauds in Hong Kong, some worth ‘tens of millions of US dollars’.
This work includes obtaining freezing injunctions and other court orders from the local courts. ‘Hong Kong courts are very sophisticated,’ Arthur observes. ‘It’s quite easy to get before court quickly if you need to move with haste. The judges are very familiar with the types of procedures and the applications we are making. They are not much different to courts in the UK and Australia, [which are] common law jurisdictions.’ One indicator of their sophistication is that Hong Kong courts often hear cases in both Chinese and English.
Singapore’s SIAC may be competing for Chinese businesses (both SIAC and HKIAC recently opened offices in mainland China) but, as Francis says: ‘The HKIAC is very active and Hong Kong is now the disputes resolution venue of choice for Chinese corporates and businesses. It is capturing a significant proportion of Chinese disputes work.’
Arbitration is suited to international disputes involving mainland Chinese parties because the mainland courts will not generally recognise or enforce foreign or Hong Kong court judgments. Furthermore, arbitral awards made in Hong Kong are readily enforceable in all east Asian jurisdictions, including mainland China, according to the HKIAC, which was established in 1985.
So, despite competition, there are still opportunities for foreign firms with the right strategy.
From its base in Hong Kong, Lewis Silkin focuses on employment and ‘global mobility advice’ to corporate clients across Asia-Pacific, and collaborates with local and regional firms as part of its membership of the Ius Laboris alliance.
Grant says: ‘The market is saturated with law firms, but there aren’t that many firms that offer a “one-stop shop” for those services. Many of our clients don’t want to work with five or six different firms across Asia, so if they have needs in China, Korea, Japan or Hong Kong they just come to us and we handle the whole project with our partners in those jurisdictions.’
But the firm also wants ‘to break into the high-net-worth market in China’, providing immigration and nationality advice to wealthy Chinese who wish to settle in the UK and apply for indefinite leave to remain or British citizenship. China doesn’t recognise dual nationality, but holding a British passport also opens up routes, for now at least, to the rest of Europe. Lewis Silkin is targeting ‘second-tier Chinese cities where there is significant amount of wealth but perhaps a little less sophistication’, in terms of immigration law, wealth management and other advice for the rich, Grant observes.
It is not just the right business plan but also commitment to the city that firms must demonstrate to succeed in Hong Kong. It may be a transient and changeable metropolis, but as Grant puts it: ‘Potential clients really want to understand how long you intend to be in Hong Kong and that you are not a flash in the pan. Here for a year and then gone.’
Marialuisa Taddia is a freelance journalist