South Korea is taking longer than expected to liberalise its legal market and Brexit has complicated matters further. Marialuisa Taddia reports.
South Korea’s legal market liberalisation has been slower than foreign lawyers had originally anticipated. Since the country’s free trade agreements (FTAs) with the EU and the US came into force in 2011 and 2012 respectively, as many as 28 foreign law firms have opened offices in South Korea in anticipation of the market’s full deregulation. Both FTAs stipulated that, in their fifth year of implementation, foreign firms could form joint ventures with Korean counterparts and practise Korean law.
But, to the disappointment of international legal outfits, implementing legislation restricts their shareholding in the joint ventures. This has put them off pursuing local mergers and prompted some to rethink their strategy.
What is more, the Brexit vote last June has heightened the risk for firms in South Korea: it is the EU trade deal that gives them the right to operate in the country and the UK does not yet have a bilateral trade agreement with the east Asian nation.
Yet foreign firms’ commitment to Asia’s fourth-largest economy (and the 11th-largest in the world) remains strong. ‘We see South Korea as a fantastic legal market,’ says Mike McClure, chief representative of Herbert Smith Freehills’ Seoul office, which opened in April 2013. ‘A number of very big multinational companies here are involved in commercial activity across a variety of sectors and geographies; that is very complementary to the skills that we have.’ Samsung, LG and Hyundai are just a few of the family-owned conglomerates (or chaebols) hailing from South Korea, which is a world leader in electronics, shipbuilding, steel and automotive.
The economy has other strengths: for instance, the highest level of broadband penetration in the world, with plans to invest $1.7bn in 5G by 2020; and a highly educated population, with three-quarters of South Koreans undertaking postgraduate level education, according to a Department for International Trade guide on South Korea.
Meanwhile, market liberalisation has led to an ‘increasing appetite’ among Koreans to work for international law firms, McClure observes: ‘Korean businesses are more and more comfortable instructing and working with international firms. They understand what we offer and the value that we can bring.’
Foreign firms based in South Korea currently focus solely on outbound work.
They operate as ‘foreign legal consultant offices’ and as such they only advise on foreign and international law, typically with a staff of little more than a handful of lawyers (or foreign legal consultants). Foreign licensed lawyers must register with the Korean Bar Association as FLCs to advise on the law of their home jurisdiction, international law and international arbitrations. The process can be ‘lengthy and bureaucratic’, says the Law Society, and candidates need at least three years’ experience of legal services in their home country of licence. It adds that the ‘vast majority’ of FLCs are either Korean nationals or of Korean descent, who have qualified abroad (typically in the US).
‘We are not allowed to practise Korean law unless we do a joint venture with a Korean firm, so we only advise on English law,’ says Michael Kim, an FLC and chief representative of Stephenson Harwood’s Seoul office, which launched in October 2014. Kim is one of five English solicitors in the Seoul team, which also includes an Australian-qualified lawyer, and paralegals.
So what are the benefits of an on-the-ground presence in South Korea? Stephenson Harwood, a shipping specialist, focuses on proceedings in the London High Court and international arbitrations. It also advises on shipbuilding and offshore contracts, ship finance and outward investment from Korea to Europe and central Asia.
The London-based firm opened in Seoul in part to defend its existing position in a more competitive market, but also to increase business from existing clients, including Korean conglomerates STX Corporation, Daewoo Shipbuilding & Marine Engineering, and Hyundai Merchant Marine. The firm does well out of South Korea: for instance, it is advising a power plant construction contractor, with the client’s claim predicted to amount to $1bn.
Foreign firms’ Korean offices also serve the important function of linking up local clients with other offices across the world. ‘By being in Seoul we can generate more business for the network,’ Kim says.
‘It’s about being close to Korean clients and offering them our global platform in order to help them raise debt internationally or make investments cross-border,’ comments Stephen Le Vesconte, Linklaters’ chief representative in Korea.
Le Vesconte, an English solicitor and projects partner, and New York-qualified corporate partner Hyung Ahn, who headed the Korean practice from Hong Kong, both relocated to Seoul from the former British colony to launch an office in July 2013. ‘Korea was a market that we were always interested in for our global project finance practice. We felt that we should move our Hong Kong-based Korean team onshore and at the same time bolster it by creating a dedicated Korea projects practice,’ Le Vesconte says. The Seoul office has a team of 11, including six lawyers; it focuses on equity and debt investments in energy and infrastructure projects, as well as M&A and capital markets.
Notable Korean clients include Trade Insurance Corporation (K-Sure) and the Export-Import Bank of Korea (Kexim). Linklaters is advising the two state-owned export credit agencies on the project financing of a power station in Chile that is sponsored by Samsung C&T Corporation and Korean Southern Power (KOSPO), one of the country’s largest utilities.
Other UK firms are reaping benefits from their Korean bases. HSF has one of the largest on-the-ground presences in the country with 10 registered foreign legal consultants in Seoul across three main departments: energy, corporate and M&A, and international arbitrations. ‘All areas are growing,’ McClure says. Last year the firm advised Korea’s Kosdaq-listed YG Entertainment on an $85m investment by China’s Tencent and Weiying Technology.
Clifford Chance, serving the market for 35 years now, opened an office a few years ago to better deliver in the areas of capital markets, M&A, banking and finance (including project finance) and arbitration, says office managing partner Hyun Kim. ‘It was a natural step for the firm to open an office when the opportunity arose back in 2012. It has allowed us to be closer to our clients and helps us develop new relationships – both Korean clients looking to invest internationally and international clients with interests in the country.
‘Partners from our global network have been working with Korean clients for many years; the office is a natural extension of our global network,’ Kim adds. Highlight mandates in 2016 reflect this approach. CC advised: pharmaceutical company Kolmar Korea on its acquisition of a 51% stake in Process Technologies and Packaging of the US, as well as on an 85% stake in CSR Cosmetic Solutions of Canada; the lead managers in connection with Regulation S note (for issuers outside of the US) issuance by South Korean conglomerate Doosan Infracore guaranteed by Korea Development Bank; and other Korean clients on European Commission antitrust investigations and abuse of dominance (through its Brussels office).
Breaking down the barriers
The Law Society has been at the forefront of efforts to persuade South Korea to open up its legal services market. President Robert Bourns (pictured) said: ‘The Law Society has been working with the Korean Bar Association to promote liberalisation of the Korean legal services market for more than a decade. Five UK firms [Herbert Smith Freehills, Stephenson Harwood, Clifford Chance, Linklaters and Allen & Overy] now have representative offices in [the country] and advise a wide range of Korean and international clients.
‘The market first liberalised as a result of the EU-Korea Free Trade Agreement (FTA). We believe further liberalisation of practice rules, for example to enable Korean and foreign lawyers to work closer together, would allow South Korea to continue developing as a destination for international investment and an important centre for legal services in the region.’
On the impact of Brexit on the Korean market for legal services, Bourns says: ‘Access to the Korean legal services market for UK firms is currently assured under the EU-Korea FTA, which the UK will no longer be party to when we leave the European Union.
‘We understand from meetings with the Korean Ministry of Justice that UK firms are highly regarded in Korea and that legal services will be a key component of any future trade deal with the UK, if applicable. We are working with the Korean Ministry of Justice and the Korean legal representative bodies
to ensure a smooth transition for firms and clients so that economic interests are safeguarded.’
Recent Society engagement in South Korea has been extensive:
- 20,000 members of the Korean Bar Association (KBA) received the Society’s recently published Doing Legal Business in England and Wales guidebook (in Korean).
- In October 2016, the KBA took part in the Opening of the Legal Year.
- In December 2016, Chancery Lane hosted the Korean Ministry of Justice to discuss innovation in legal services. It is also helping them pilot a training programme that would see UK law firms host young Korean lawyers.
- The Society’s president is scheduled to return to Seoul in September 2017 to promote the profession and the use of English law.
South Korea’s increasingly crowded legal market rewards specialists, be it in shipping, project finance or international disputes. From its base in Seoul, launched in September 2015, US firm Kobre & Kim focuses exclusively on disputes and investigations, with ‘a heavy emphasis’ on financial services and insolvency, the firm’s co-founder Michael Kim says.
‘We opened in South Korea to meet the market’s high demand for services that were not previously available within the country,’ he says. That demand includes: defence in US government investigations that have a Korea-related aspect (Kim, a former US Department of Justice prosecutor and a fluent Korean speaker, leads the team); representing Korean companies in offshore litigation, including in Hong Kong, Cayman Islands and the British Virgin Islands; and assisting them in enforcing overseas judgments and arbitration awards. ‘The segment of the market that we serve in Korea is primarily high-value disputes with a nexus to the region,’ Kim says, adding: ‘Because of our highly specialised practice focus and our model of not maintaining repeat clients, other law firms – both Korean and international – often work with us to handle the dispute-related aspects of a complex engagement to solve conflict of interest or other issues.’
Kim says that in its core specialty areas Kobre has ‘no competitors in Korea and has been working at maximum capacity serving the incoming work ever since we opened, and [we] have not faced price competition at all.
‘I think many would agree that supply exceeds demand in many practice areas. Demand has not been expanding sufficiently to justify the influx of foreign law firms. Of course, Korean clients have benefited tremendously in terms of price and service,’ Kim says.
Le Vesconte argues: ‘You have to take a more nuanced picture than just how many foreign firms have showed up in Korea.’ For example, in the areas of capital markets and project finance, Linklaters competes with no more than three firms based in Seoul, while other competitors serve the market from overseas, including Singapore, Hong Kong or Tokyo. But that is not true for M&A, which is ‘a really crowded area’, he notes, with both foreign and Korean law firms competing for a share of the market.
The dominance of US law firms in Korea (23 of the 28) is the result of strong historical links between the two nations. Yet there is no clear divide between the services UK and US law firms provide: ‘We are all competing for both US and English law work,’ Le Vesconte says.
McClure notes: ‘The fact that so many firms are here, and more are continuing to come, is testament to the strength of the market and the demand for international legal services.’ He believes the influx of foreign firms will boost the number of ‘quality international lawyers’ in Korea.
The implementation of the final stage of deregulation, however, has caused consternation among international firms.
Under the FTAs, liberalisation of the Korean legal market was to be implemented in three stages: the first allowed foreign firms to open representative offices in South Korea and advise on foreign and international law; in the second stage they were permitted to fee-share (or co-counsel) with Korean law firms; the third and final stage, to start in July 2016 and March 2017 for European and US law firms respectively, would allow South Korean and foreign law firms to establish joint ventures, employ local lawyers and practise domestic law.
But amendments to the Foreign Legal Consultant Act (FLCA) to implement stage three, introduced in March 2016, limit foreign participation in joint venture law firms to 49% of shares and voting rights.
‘We are quite disappointed,’ says Stephenson Harwood’s Kim. ‘We had expected that Korean lawyers would try and protect their market but this is far more than we had anticipated.’ Furthermore, despite the requirement to enter the joint venture as a minority partner, a foreign law firm would have unlimited liability. ‘We will have unlimited liability for an operation that we cannot control,’ Kim stresses. Stephenson Harwood had considered the joint venture option, but the current restrictions raise ‘risk management issues’, he explains. ‘So we have decided not to go for it. We will concentrate on what we are really good at, which is providing English law advice to Korean clients.’
Most foreign firms are not currently seeking joint ventures, especially while restrictions persist, the Gazette understands.
Other amendments to the FLCA introduced in March require that a Korean firm be in existence for three years before it can form a joint venture with a foreign firm. ‘The three-year requirement makes this impossible, since the Korean lawyers sought by US firms are spread throughout a relatively small number of long-established Korean law firms that now compete for in-bound international clients that require local legal services,’ the American Bar Association said in a letter to the Ministry of Justice of the Republic of Korea.
Moreover, joint venture law firms are banned from practising in such areas as employment, real estate and intellectual property. The ABA has described these and other provisions in the amended FLCA as ‘overly restrictive’.
International firms typically work with various Korean counterparts when their clients need local law advice. McClure explains: ‘We work with a number of different firms and usually we will refer work to a firm based on the particular specialism that is required. We want to make sure that we point [our clients] in the right direction and that they will be well looked after whichever Korean law firm gives them advice.’
Yet the inability to provide Korean law advice directly to clients has its downsides. Stephenson Harwood’s Kim says that joint ventures with ‘good- quality Korean lawyers’ would not only give foreign firms ‘better access to the Korean market’, but also avoid the inconvenience of acting as a middleman, while providing a ‘seamless’ service to clients. ‘We have always recommended good-quality Korean law firms to our global clients but we are just in the middle, trying to make sure they meet their requirements. It is a bit of a hassle,’ Kim says.
Lawyers also argue that restrictions on foreign law firms disregard the spirit of FTAs.
Kobre & Kim has no plans to enter a joint venture with a local firm, but co-founder Kim says much of the debate around potential competition for Korean firms from international firms practising Korean law has been ‘confused, often adopting the rhetoric of foreign lawyers “hurting” Korean lawyers by competing against them for the same business.
‘We are not talking about non-Korean lawyers studying for the Korean Bar and entering the market as brand new competitors,’ he says. ‘Instead, what we are talking about is the possible redistribution of existing high-value Korean lawyers from traditional “pure” Korean firms to the Seoul offices of international firms. In other words, after a full opening, the same Korean lawyers will be practising in Korea, except they will now have more potential employers bidding to get them to join their firms.
‘The more the market opens, the better the “star” Korean lawyers will do in terms of their personal compensation, and the better Korean clients will do in terms of being able to choose among more firms that offer Korean legal services,’ Kobre’s Kim adds, although he acknowledges that ‘the core management of traditional Korean firms will face more difficulties by having to compete against more firms to retain talent and hold on to their existing client relationships’.
One of the main concerns, reported in the local press and seen to be behind the latest FLCA amendments, was that foreign law firms would end up monopolising the best local talent and big corporate clients, particularly to the detriment of small to medium-sized Korean firms.
Further sector deregulation has not been ruled out, subject to changes in the Korean legal market. It is worth noting that, at an estimated value of KRW3tn (£2bn) a year, the country’s legal services sector is tiny compared to the UK’s (£31bn).
Despite Korea’s FTA with the 28 country-bloc, the only EU firms that have entered the market so far are British, and somewhat perversely they are now at risk of losing their right to be in the country, following the Brexit vote in June.
After the initial shock, the mood among British firms in Korea is one of cautious optimism. The government of South Korea is understood to be keen to push for a free trade agreement with Britain once the country exits the EU. In 2015, South Korea exported more than $7bn worth of goods to Britain, accounting for 1.4% of its total exports. Lawyers hope that there will be an interim agreement that could ‘grandfather’ existing trade measures, filling the gap between Britain’s exit under Article 50 and the coming into force of a new FTA.
Meanwhile, how are English firms in Korea managing the Brexit risk? ‘It is too early to have any fixed plan about what we are going to do, but we are monitoring the situation very closely and are optimistic that a solution will present itself that will allow us to stay in the country, whether that be a new free trade agreement or other arrangement. But we’ll do whatever we can to make sure we are permitted to stay here to continue to serve our Korean clients,’ McClure says.
‘We will obviously be looking at developments carefully as it will take some time for the details of the UK exit to be developed,’ Hyun Kim of Clifford Chance adds. ‘In the meantime, Korea remains an important market for the firm and we are committed to continuing to support our clients there.’
Whatever the outcome, English firms need certainty as soon as possible. In the meantime, even if optimism is the watchword, they are likely to be more cautious about investing further in the country.
Marialuisa Taddia is a freelance journalist