An economy that has rebounded quicker than most in the region coupled with a chaebol-led wave of outbound investment is keeping lawyers busy in the land of the morning calm. ALB reports from Seoul on a legal services market that has recovered
Korea 2010: Outward bound
The Korean economy suffered like most others in the region during the dark days and months of the global financial crisis. Exports volumes fell off, the Korean won depreciated at a rate few had seen before and many analysts were predicting deep-seated and long-lasting recession for what was hitherto one of North Asia’s fastest growing economies. But if Korea’s experiences over the last 18 months were typical of other Asian countries during the GFC, what has been occurring over the past few months has been anything but.
Spurred on by a proactive government intent on establishing Seoul as an international financial hub in North Asia, exports have again started to pick up, the won is strengthening versus the greenback and the country’s nascent capital markets have deepened — for the first time attracting international interest — through sheer innovation and a number of new and exciting financial products such as sukuk, covered bonds and foreign dual-tranche IPOs.
Somewhat ironically, in years to come the financial crisis may be viewed as a watershed development for the Korean economy. As Min Euoo-Sung, the chairman and CEO of the Korea Development Bank (KDB) pointed out earlier this year, “It [the GFC] may have slowed our economy down…but it has given us time to think, time to take a breath; to evaluate where we have come and the next steps required for our economic development.”
The GFC is set to be just as profound for the nation’s legal services market. Korean law firms have emerged from the crisis rejuvenated and with a renewed sense of purpose. New players have surfaced and old ones have regrouped, reorganised or merged (or are looking to merge). The result is an increasingly fluid legal market hierarchy in the country.
However, it would be wrong to assert that any of these changes are ‘new’ developments. While they may have gathered pace during the financial crisis, these processes have been underway for much of the last decade and will continue to loom large in the future as the market grapples with the challenges presented by profound shifts in client behaviour, Korea’s changing role in the global economy and impending legal sector liberalisation.
There's a Korean saying which describes something changing so much that it becomes unrecognisable in the space of 10 years, typically describes how the face of Seoul has changed over the last decade. However it is perhaps just as apt to describe how far the Korean legal services market has come – and how much more change is in store.
NEXT: The Korea Wave
The Korean Wave
For much of 2009 cross-border activity in Korea mirrored the downward trend seen across the globe. Thomson Reuters figures indicate that cross-border volumes for the first nine months of 2009 dropped 46% to US$6.5bn, compared to the same period in the preceding year. The figures accounted for only 25% of the market.
Somewhat surprisingly, inbound activity took a 14% market share, up from 11% in the first nine months of 2008, reaching US$3.8bn – nearly 1.5 times more than outbound volumes. “The financial crisis of course had an impact on deal flow, especially for outbound deals which suffered due to a number of global issues plus the weakness of the won,” said Lee Jai Wook, a foreign lawyer with Kim & Chang. “However, we have seen a number of positive developments on the outbound side over the last few months and we like everyone else in Korea are hopeful that these deals will start to flow freely again,” he said.
The positive developments to which Lee refers were spirited Q3 and Q4 performances in which, courtesy of mid-market M&A, outbound investments outpaced inbound volumes by almost 300%. He is quick to point out that this doesn’t mean a return to the heady days of mid-to-late 2007. “It will be a long road to get back to that point,” he concludes. This is a sentiment shared by other lawyers ALB spoke to.
Sometimes overlooked in such analyses is the fact that outbound investment needn’t only be of the M&A variety. In many respects, outward FDI – transfer of capital, technology, know-how and experience overseas – has been just as important for Korea, if not more so.
Aided by government-backed economic stimulus in certain parts of the world, this type of outbound activity has remained relatively stable, much to the excitement of lawyers in the country.
“Outbound investments by Korean companies, especially in South-East Asian countries, have been a noticeable trend of the last few years,” says Kim Jae Hoon, a senior partner at Lee & Ko. “In places like Vietnam, Cambodia, Laos, Thailand and many others we see some of our largest companies helping build infrastructure, roads and energy facilities. Recently, we have also seen many of them set up bases in these countries to lower the costs of doing business there,” he says.
Of course, it’s not merely South-East Asia or infrastructure development that is on the radar. Just like the pervasive cultural phenomenon of hallyu which preceded them, Korean corporations have their sights set on so many sectors in so many markets that it is becoming increasingly difficult to single out only a few. “Russia and the CIS continue to be areas of great interest,” says Raymond Kang, a foreign lawyer at Yulchon. “Lots of Korean clients, especially in the automobile indutsry, are looking at establishing plants in Russia and CIS countries to invest in facilities. They are looking at the feasibility of consumer markets for Korean cars and as has been the trend before, when an automaker sets up manufacturing facilities in a new region, suppliers and contractors naturally follow,” he says. “India, China, the Middle East, and South America and of course the US and Europe are all of interest as well. Here, Korean companies are competing against and winning bids against larger US and European companies for very lucrative work.”
This was demonstrated most recently by a KEPCO-led consortium’s successful bid to design, construct and operate four units of 1400MW reactors for the UAE. In winning the project, which is worth US$40bn, the Korean consortium beat strong competition from France, the US and Japan. And sources close to ALB suggest that the Korean government is in advanced talks with other governments in the region to complete similar projects.Shin Hee-Gang, a partner with Bae Kim & Lee, sums up the mood of many Korean companies vis-à-vis outbound investment when he says “everything is possible and every corner of the globe is on their list.”
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The Korean diaspora: Korean law firms in Asia
The current wave of chaebol-inspired hallyu is good news for the nation’s law firms, who have long tied their own international aspirations to the inherently international inclinations of their country’s corporations.
Korean law firms are advising corporates on the whole gamut of legal issues – tax, employment, disputes, trade, due-diligence and investigations as well as company establishment. “There is a good amount of work being generated by Korean companies seeking to go abroad or already doing business overseas to keep us all very busy for years to come, ” says Kim Kyoung Yeon of Yulchon.
More than enough, it seems, to keep the coffers of their international offices full – if not overflowing. Most of Korea’s Top 10 law firms have some form of international presence (Kim & Chang, the country’s largest firm by headcount and the smaller Barun Law, are the only two law firms in the Top 10 without international offices; according to sources at both firms this is unlikely to change in 2010). China and Vietnam remain the most popular destinations for offices while Cambodia, Central Asia and former Eastern Bloc countries are gaining in popularity (see box). And, according to sources close to ALB, we should expect to see at least four international office openings in the first half of 2010. “We are looking at several opportunities at the moment,” says Yulchon’s Raymond Kang. “A second office in Vietnam, a PRC presence as well as Russia and the CIS are being looked at very seriously, but it’s one step at a time.”
Shin & Kim is casting the net just as wide. “We currently have an office in Beijing and by March or April of 2010 we will have added a Shanghai office to this,” said a spokesperson for the firm. “We are also looking at South-East Asia and Central Asia… but our expansion here is likely to be in the form of seeking out an alliance with a leading local firm.”
Just what continues to make international expansion into often challenging frontier markets such an alluring proposition for the country’s law firms? Is it enough to chalk up their global expansion to the usual confluence of factors (domestic market saturation, client demands and pre-emptive growth) that usually guides the developmental trajectories of most other law firms in the region?
Kim Tongeun, a partner with Bae Kim & Lee, says all of these issues are at the heart of Korean firms’ growth outside their own territory, but also suggests that cultural issues are just as important. “Many of the top Korean law firms have grown to a size where it is now a case of use it or lose it,” he contends. “Headcounts for most exceed 200 and the domestic market is becoming saturated and competition for top-end work is very fierce, so squeezing out this mass across the region is needed.” (It’s worth noting here that the Korean legal services market is estimated to be worth only KRW2trn (US$1.61bn); US firm Skadden’s revenue for FY2008 was around US$2.2bn).
“Getting into lucrative areas before others is also dictating a lot of this, but what is also evident is the somewhat unique nature of Korean business culture,” he said. Put simply, Korean clients feel more comfortable dealing with Korean lawyers in the foreign countries in which they operate. “This is a major element in the lawyer-client relationship in Korea,” says Kim. “It’s something that has become entrenched in the way they do business and been reinforced by their recent outbound expansion,” he says, adding that the complexity of some Korean laws is also a factor.
It’s not difficult to see why Korean law firms are bullish about their international strategies and why many are relishing the challenges that will come with legal market liberalisation.
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Tough times in-house: Corporate counsel seek critical mass
Despite the close bond between Korean lawyers and their in-house counterparts, many agree that the dynamics of this relationship is quickly changing. Much of this can be explained by how the role of corporate counsel itself has evolved over the past few years. Prima facie, in-house lawyers in Korea face challenges not dissimilar to their colleagues in other parts of Asia: budgets for external legal spend have been slashed and lawyers are being forced to handle more work in-house but the resources at their disposal are dwindling.
Underlying this are profound shifts in societal and corporate attitudes. Korea as a society is becoming increasingly litigious: over the past decade the number of law suits filed against listed companies has increased from 18 in 2000 to around 500 in 2009, according to statistics released by the Korean Exchange. This has not only increased the importance of the risk mitigation function that in-house lawyers play but has also raised their profile among Korean corporates who themselves are becoming increasingly savvy in the way they use legal services.
In-house lawyers are being used earlier in transactions, often finding themselves at the coal-face of dealmaking. “In the past we would usually be involved in a transaction after it had progressed through the initial stages,” said an in-house lawyer at Samsung, who declined to be named. “Now we are being asked to screen deals very early on, to give advice on deals in the works and in some cases actually negotiate the agreements which it is our job to draft.”
While the lawyer is quick to point out that this sort of experience and exposure to the business is “absolutely invaluable for lawyers,” he does concede that it places a strain on resources. “There’s no question that in-house lawyers in Korea are overworked at the moment,” he said. “I am fortunate in that I have a team of around 250 to work with, but ours is one of the larger ones in Korea… I wouldn’t want to be in-house at a company which only has a small legal team at the moment.”
LG’s in-house team is of similar size to Samsung, while Hyundai, Kia and SK all have in-house teams that are relatively well-developed. But these companies are largely exceptions to the rule. A recent survey conducted by the Korean Chamber of Commerce found that out of a sample of over 200 Korean companies, less than 30% had dedicated legal departments.
Even where a company has in-house lawyers, holding onto them has proven to be difficult. Many younger lawyers still prefer either to work for large law firms or to take up postings as judges and public prosecutors, meaning it is difficult for many in-house teams to achieve a working critical mass.
This circumstance has seen a number of Korean companies dip into foreign employment pools. The number of foreign lawyers working as corporate counsel has noticeably increased over the past three years in a trend which many believe will continue in the years ahead. “There is a real need to build critical mass of competent, experienced corporate counsel in Korea,” said the Samsung lawyer. “International hires, for the moment, appear to be one of the few ways by which this can be achieved.
And their presence will do more than just help build critical mass. “This is a positive development for the in-house community here as these lawyers bring with them their own experience and knowledge of how in-house teams operate in other countries,” said the in-house lawyer. “We already see it is having a positive impact in raising standards here.”
NEXT: The hermit kingdom opens
The hermit kingdom opens: Legal market liberalisation
Discussion about legal market liberalisation normally follows a predictable pattern: the process is inherently stop-start; actual talk about opening closed legal markets predates meaningful action in some cases by as much as 30 years; and one hears everything from neo-liberal critiques regarding the virtues of open markets to impassioned apologies for closed markets.
Korea has had all of this and more. Now, almost 25 years after the idea was first raised, the government has laid out a blueprint for the staged opening of its legal services market. Under the blueprint released early in 2009, foreign law firms from countries that enjoy an FTA with Korea will be permitted to establish representative offices. The plan envisages that full liberalisation should occur no earlier than 2016.
Despite this roadmap and numerous positive developments on the trade liberalisation front, the opening of Korea’s legal services market is far from a fait accompli. A number of hurdles remain, not least the fact that of three FTAs crucial to international law firms entering the country (US, EU and ASEAN agreements) only one has come into effect (ASEAN). While the EU FTA is expected to commence in Q1 2010, the agreement with the US isn’t expected to come into effect anytime soon – thanks largely to a recalcitrant US Congress.
To the delight of many it appears that the first foreign law firms into Korea may well be from South-East Asia. As ALB reported in 2009, the Korean Ministry of Justice has been approached by at least four law firms from ASEAN member countries (three firms are believed to be from Vietnam; the identity of the fourth, widely rumoured to be from Singapore, was not disclosed) and a few others have also expressed similar interest. These are moves which, given the ever-increasing trade volumes between SE- Asia and Korea, make a lot of sense.
Yet a number of hurdles still exist. The stipulation that foreign lawyers wishing to qualify for consultant status must have at least three years’ work experience in Korea and must have lived in the country for at least 180 days each calendar year is one that few of the relatively small firms from ASEAN states can meet. The managing partner at one Vietnamese law firm told ALB: “We are looking at entering Korea but under the current guidelines it will be difficult for us to do so.” This is a view also expressed by other law firms in the region.
Even if the entry of foreign law firms is still some way off, the country’s domestic law firms are busily preparing for their eventual arrival. From mergers to alliances to the launching of new practice areas, the hiring of foreign attorneys and moves towards greater specialisation, much of the activity witnessed over the last year is evidence that liberalisation is already having a visible impact on the complexion of the legal market. “Merger activity will feature heavily again in 2010,” said Kim & Chang’s Lee. “We should see some consolidation in the market; some smaller firms will merge and so will some of the larger players… it remains a good way for firms to achieve the size to remain competitive.”
But mergers aren’t being pursued for the same reasons they once were. Hwang Mok Park’s merger with dispute resolution specialist firm Hanseung, and Shin & Kim’s admission that it is on the lookout for a merger partner both indicate that mergers which add additional expertise, balance and synergy, rather than just size, are becoming increasingly important. “We were in discussions with Hanseung for about six months before the merger and we were clear from the start that we wanted it to be about obtaining something that strengthened our practice rather than just about size,” said Park Sang Il, a managing partner with Hwang Mok Park. “Hanseung brought specialist litigation skills to our firm at a time when ours were still developing,” he says. “If you look at the size of the Korean legal market, you have to question sometimes whether a merger is efficient…we did it for litigation, but you look at full-service synergies and have to ask what is the point. A merger just to increase headcount is of no use.”
It’s a similar story at Shin & Kim. “We are currently seriously thinking about an acquisition or a merger – it’s one of the growth objectives we have for 2010,” said a spokesperson for the firm. “What we are looking to get is a synergy and balance … something that will knit with our banking & finance and M&A practices… this could be in the areas of litigation, IP and even health or pharmaceuticals.”
Balance is the key according to Lee & Ko’s Kim. “Through economic down times or liberalisation, balance is the only thing that will get a firm through,” he says. “To ensure that your firm is balanced so if one area goes down, you can make up this shortfall in another area of practice.” According to lawyers ALB interviewed, Lee & Ko is widely perceived to be leading the way. The firm has sub-divided itself into 30 specialist teams which cover the full spectrum of corporate and commercial law. Lee & Ko’s organisational model is the envy of many others.
But the initiative, according to Kim’s fellow partner Chang Yong-Jae, is only now paying dividends. “It has helped us weather the financial crisis,” he says. “But it’s not something that you can achieve in a short space of time; we started the process 20 years ago and we still regard it as incomplete.”
Chang’s sentiments give an insight into the challenges involved in implementing such a process, especially given the fact that most firms now bear little resemblance to the firms they were when they started practicing. Mergers, alliances, recruitment drives and a sometimes unpredictable Korean economy have all taken their toll on the structure of firms in Korea, leaving them a little incongruent. “We badly need to address issues regarding the shape of our firm,” said one partner. “Our growth path hasn’t been planned and when you start out as a firm that handled mostly dispute resolution work, as we did, then branch out into corporate work, it is a big concern.”
As firms implement these strategies, many expect the levels of competition at the top end of the domestic market (which are already cut-throat) to increase. However, it is incorrect to assume that this is the only source of competitive pressure in the Korean legal services market.
While the largest firms continue to cast the most conspicuous shadows over the legal arena, the emergence of specialist players and boutique law firms will also play a big role. Manifestations of this already exist in some areas, IP being most widely cited. Here, the smaller law firms (those that have not been subsumed as the IP arm of full-service players) are mounting a fierce challenge and have the portfolio of clients to prove it. “We can count Microsoft, Sun Microsystems and Philip Morris, among others, as our clients,” says Cho Tae-Yeon, a named partner at IP boutique Cho & Partners. “We have these clients because of the service we offer. We try to operate like a US law firm: to offer personalised, highly specialised and industry-focussed advice.” The recent success of firms below the seemingly impenetrable trio of Kim & Chang, Lee & Ko and Bae Kim & Lee is something that Thomas Pinansky, a senior foreign lawyer with Barun, says is indicative of the fact that the Korean legal services market is quickly maturing. “People are gradually realising that the smaller guys do work which is just as good just as often as the bigger players in the market... it will take some time to be displaced, but the feeling that bigger is better is slowly eroding.”