‘Malaysia Boleh!’ – The campaign engineered to bolster the nation’s selfesteem into an attitude of ‘can do’ really had some bite. Ten years down the track, a spirit of healthy competition has gripped the country. Ever-so-often casting a sidelong glance at its neighbours as a benchmark for its own growth, the friendly rivalry has translated into an ambitious national project that aims to propel Malaysia into the status of a ‘fully developed’ nation by the year 2020.

The initiative that has everyone talking, the Economic Transformation Program (ETP) – launched on September 21, 2010 which strives to lift Malaysia’s gross national income to US$523bn by 2020 and raise per capita income from US$6,700 to at least US$15,000 (the world bank’s minimum threshold for high income nations) – promises change; and sets the stage for the rich subplots that currently play out in the Malaysian legal sphere.

Malaysia in 2011 boasts a flourishing economy with strong activity in its capital markets, Islamic banking sector and buzzing corporate activity in oil & gas, commodities, pharmaceuticals, shipping and construction. Many agree that the size and volume of deals have swelled, predominantly off the back of growing foreign direct interest into Malaysia. In line with the much anticipated liberalisation expected to take effect this year, trends of intensifying fee-competition, regional alliances, undercutting for market
share, consolidation, law firm spin-offs and a challenge to the traditional oldworld order of law firm hierarchies by younger, hungrier firms have spiked in the past 12 months.

The liberalisation process/ regional aspirations

A process that got side-tracked a number of times over the past decade, most recently in 2008 and then in 2009, law firms interviewed by ALB are certain that liberalisation will actualize within the next 12 months or so. “It’s still ambiguous which direction it would go but we are preparing ourselves for liberalisation. The bar council has made certain recommendations to the Attorney-General’s office. We are unsure of the outcome of those discussions,” Jeff Leong, Poon & Wong managing partner Jeff Leong said.

Preparations to meet foreign competition include plans to double headcount from 35 to 75 in the next three years via a series of mergers, lateral hires and organic growth. In March, the firm beefed up its M&A and takeovers/takeover defence practice group by appointing as Consultant Mr. Michael Lim, a former senior partner of Shearn Delamore and one of Malaysia’s most experienced corporate, M&A and takeovers lawyers. Additionally, the firm has a strong bilingual China Desk and trains up to 10 Japanese law interns every year. “In a world where China, Japan, Taiwan and South Korea are taking centre stage in the next decade, a sound and practical understanding of relational contracts and structuring successful business relationships in an Asian context is critical”, says Leong who actively handles transactions from these Asian markets.

Similar moves have been made by other firms in recent years. Rahmat Lim & Partners has partnered up with Singapore’s largest firm Allen & Gledhill and ATMD Bird & Bird has proved a growing trend of Singapore law firms establishing offshoots in KL with its tie-up with Tay & Partners. Naqiz & Partners set up a practice in Jakarta named Bastaman Enrico; Mohamed Ridza & Co signed up to Law World, an independent network of international law firms of which it holds exclusive membership as its Malaysian representative; Azmi & Associates launched a China desk and entered into a strategic alliance with PRC firm ZhongYin and Zaid Ibrahim entered the Australian market with a dual office launch into Melbourne and Sydney last year.  Additionally, Azmi & Associates is also presently being courted by Pimerus, an international network alliance that is seeking a Malaysian exclusive partner and a new development has witnessed Mohamed Ridza & Co contemplating a merger with a number of suitors. At the time of interview, three offers were on the table from a combination of both domestic and international firms.

Despite the optimism some law firms expressed, others vacillate in their views on the projected benefits of liberalisation.

“I think liberalisation will happen this year. The question is whether firms will come or not. The proposed amendments to the Legal Profession Act will allow for their entry, but whether they will take the bait remains to be seen,” Mohamed Ridza & Co managing partner Mohamed Ridza said.

Similar reservations were expressed by partners of Baker & McKenzie affiliates Wong & Partners, who question the feasibility for foreign law firms to establish a physical presence in the Malaysia market, considering its close proximity to Singapore. “International firms operate effectively from where they sit now; many foreign firms have struck effective strategic alliances. In addition, legal spend is limited and the overheads of setting up an office might not be justified,” Wong & Partners partner Andre Gan said.

“We want limited liberalisation – because of the inequality in bargaining position. Various laws are being formulated and chartered towards that direction. The prime minister wanted to liberalise the legal profession the year before but again something threw a spanner in the works. What stopped it is never very clear but it seemed that the government gave priority to other areas of the economy. But recent developments has seen the government having told the Attorney General and the legal associations that it has to happen this year,” Shooklin & Bok partner Michael Tsu told ALB.

According to Zaid Ibrahim partner Paul Subramaniam, the changes affect smaller retail firms and the big firms very differently. “Malaysia is on track to liberalise, there is no doubt that it is going to happen sooner rather than later. Whether the smaller firms are ready to take on the challenges brought about by that development is debatable. Many have survived under a protectionist system so they face the challenge of an increasingly competitive market – we will probably see a greater number of firms merging, especially litigation firms, because of the increased efficiency of litigation; the courts pushing ahead with cases. For the larger firms operating mainly in the commercial field, it’s a changing landscape. The introduction of new legislation and regulation has meant that there is a greater degree of uncertainty of what used to be a fairly stable legal framework. Couple that with new takeover code legislation, which has only just come in December last year, corporate and commercial firms have now got to learn to play in a different very space. It’s not so much that there will be greater competition – it’s just that old frameworks will be replaced by new ones.”

Other firms such as Skrine had similarly contemplated regional tie-ups and launching operations offshore but had ultimately decided to focus on its domestic offering. The firm initially explored the idea entering the Middle East market through a new office in Dubai, but ultimately decided to focus on its local practice. Instead, the firm had decided that a focus on retraining and a change of mindset to engage and embrace the changes brought forth by a liberalising landscape are the chosen tools by the firm to stay viable.

According to Zul Rafique partner Mariette Peters the problem with the process lie in ambiguity of what liberalisation in Malaysia really means and the stop-start nature of its progress. “It creates a sort of awkwardness – the problem is, the bar council has been talking about liberalisation since 10 years ago but many of us don’t see it materialising. It’s not a liberalisation of the whole profession, but only certain aspects are getting liberalised. In the original plan, they had drawn up a structure to propose  ermitted practice areas.”

Spin-offs / A more equitable playground

Another sign that major tectonic movements are underway are the number of law-firm breakaways and spin-offs that have taken place over recent years. Notable senior level departures from Zaid Ibrahim, Zul Rafique, Albar and Lee Hishammuddin, have left to go it themselves. “Malaysia has always had the entrepreneurship – essentially the history of legal firms are dotted with people pulling out of established legal firms to set up spin-offs,” Gan said.

A few instances would include Iain Sedgley, a partner of Lee Hishammuddin since 1993, who left in 2010 to establish Sedgley & Co. Other examples would also include Raslan Loong has also in the past year experienced departures at the partner and associate level to new firm PM Tan George Chin. Lee Hishammudin lawyers left to set up Abdullah Chan last year. Strong boutique corporate firm Wong, Beh and Toh Advocates & Solicitors were also created by the partners of an old established firm in 2008. Less recent examples would include Mohamed Ridza, who left Zaid Ibrahim to set up his own practice and Zul Rafique, a firm spawned from Albar, Zulkifly and Yap which split in 1999 where Albar consequently became Albar & Partners.

As younger and hungrier firms battle it out in the corporate sphere, the three S-es – Shooklin & Bok, Shearn Delamore and Skrine – maintain their stronghold in the field of litigation and disputes. Although still very much associated with the old-world glamour of its tradition and legacy, there abounds no end to challenge to its prestige; now even in the litigation arena. Zul Rafique now poses a formidable force in its dispute resolution department, with the Abraham brothers now heading its litigation and arbitration practices. Cecil Abraham, the ex-managing partner of Shearn Delamore, has recently joined Zul, currently leading its disputes practice. Wilfred Abraham, a senior partner at Zul, who joined the firm a few years earlier, heads the litigation team. Cecil’s son, Sunil has also joined Zul, is an associate in the firm’s dispute resolution team. This move is an echo of the defection of Lim Teong Sit, the former head of Shearn’s head of financial practice, who took up an appointment as the managing partner of Allen & Gledhill affiliate, Rahmat Lim & Partners in 2008.

Malaysia’s progress as a country has long been shackled to the bumiputra hegemony (ethnic economic policies implemented by the Malaysian government in the 1970s) where the best talent are held back in favour of racial balance in top jobs. But some say, the tides are a-turning. According to managing partner of Azmi & Associates, Azmi Mohd Ali, the culture of using political connections is fading and the Malaysian playing field, taking a more egalitarian turn. “This would not disappear in the next five years but it is slowly on the decline. After the last election, there was a turning point where this started to take place,” he said.  “There is a lot of work in the country now – the Malaysian government intends to catch up with the rate of success of Singapore’s economy.”

Others concur. When asked if Malaysia has become more equitable, Peters agrees, having witnessed for the very first time, universities admitting students based on their merit, rather than their race. “The fading culture of political connectivity is exacerbated by the pressure to be transparent. It is the reverse-kind of treatment where some projects deliberately try not to engage bumiputra firms just to appear transparent. It cuts both ways.”

Market trends

The spurt of market activity on the stock exchange since Nov 2010 has reinvigorated capital markets practices across the country. New confidence has surged roundabout the time Malaysian Prime Minister Najib Razak announced an agreement signed between the Securities Commission of Malaysia and the Stock Exchange Board of India to pave the way for improved opportunities in cross border capital market activities.

Prior to the earthquake and tsunami disasters in Japan, strong interest from Japanese parties for M&A deals were also noted. “There has been strong acquisitional interest from Japanese companies – last year over 568 companies from Japan utilized the high value of the Yen for expansion overseas,” Leong said. “We have received multiple requests from Japanese companies requesting to but similar businesses here.”

According to Gan, Japan is one of Malaysia’s largest trading partners and will continue to be so. “Business has been good overall – there has been a steady pick up in M&A activity and in securities transactions. The size of M&A deals have gone up. This is predominantly off the back of growing FDI interest into Malaysia as well as interest from PE investors,” Gan said. “There have also been a lot of corporate restructurings involving sell down stakes in publicly listed companies.

This is part of a government initiative to try and introduce liquidity into the capital markets.”

At Wong & Partners, the firm has seen steady growth of between 15-20% in terms of time-keepers in the last 12 months. “Deal volume is commensurate with the percentage increase in timekeepers and is an indication of growth,” Munir said.

Booming interest in the energy – in particular the oil & gas industry – deserves a mention. “The energy sector is going to be increasingly more important,” Subramaniam said.

Skrine partner Audrey Choo attributes the government’s recent initiatives of giving incentives to attract oil and gas majors for the exploration of marginal oil & gas fields as a factor for the influx in work. The firm has recently been involved in having to negotiate contracts for several foreign players. “At the moment, our oil and gas practice group headed by partner Faizah Jamaludin is involved in a lot of upstream work,” Choo said.

“Transactions are on the rise, not necessarily in just M&A but also in joint ventures for Malaysia because of the particular structure of regulation for the oil & gas industry here,” Munir said. Particularly in the upstream business, Munir believes Malaysian plantation companies have been quite aggressive – as plantation businesses need to demonstrate growth. A key growth metric for plantation companies is the size of the plantation landbank. “They’ve been going out there and acquiring land for development into plantation, both in Malaysia and in Indonesia and even further afield. Some Malaysian companies are even going as far as Africa for outbound Malaysian investments.”

A trend of consolidation has also surfaced in the country’s robust finance and insurance sectors. “Foreign companies have taken strategic and in some cases, majority stakes in Malaysian insurance companies in the past 12 months,” Gan said. “There is increasing interest also in banking, with local banking groups acquiring others.”

Mohamed Ridza & Co has also seen a bevy of M&A work, in particular oil & gas. The latest contract the firm had concluded was a risk-sharing contract – the first of its kind – involving Petronas, local and international oil and gas companies. The firm has seen a staggering 70% jump in general corporate work, involving mainly oil & gas, real estate, joint ventures and M&A.

Price Wars

The issue is an age old battle that has reared its ugly head fiercer than ever before in the preceding 12 months. Despite the requirement to abide by the Solicitors Remuneration Order, which came into effect in 2006 to regulate the cost of non-contentious work, many market observers remarked on the exacerbated trend of undercutting the market amongst its players in the past 6 to 8 months.

According to a number of law firms interviewed, banking & finance and intellectual property practices face the harshest price wars, with some competitors slashing fees by up to 50-60%. “We are maintaining our scale. The problem is that the banks are under pressure from their clients and as a result, pressure their lawyers to cut fees and that is not right,” Mohamed Ridza said. However , the Bar Council has managed to solve some of these issues with linking the undercutting which itself is a breach of the Solicitors Remuneration Order with the validity of PI insurance cover taken by law firms.

Price competition and discounts are more prevalent in what Subramaniam terms as the ‘plain vanilla banking & finance deals’ but he maintains that deals that involve bespoke complex financing structures such as legal support for corporate investigations and multijurisdictional cross border listing exercises have not experienced undercutting to the same degree.

Most lawyers disagree. “There is some degree of undercutting, not only in banking matters but in other areas as well. They hope to get some work by doing that – but we stick to the rules, we cannot and do not compete with that,” Skrine partner Mohamed Ismail Shariff said.

Incidents in 2006 and 2007 have the issue of law firms slashing their fees in their desperation to secure work brought up in a partners’ meeting at Zul Rafique. The managing partner took the stance to never succumb to client pressures for fee discounts and the firm has seen instances where bids were lost to firms quoting lower rates. “We have seen this at all levels – big firms, mid-tiers – where banking & finance and IP suffer intense fee competition,” Peters said.

The hiring squeeze

Hiring challenges for the legal sector in Malaysia only got more challenging. According to Shooklin & Bok managing partner Too Hing Yeap, the firm’s biggest problem to date is getting sufficient numbers of the right caliber to service their clientele. “There are two aspects to the hiring problem – numbers are hard to come by – the physical number of quality graduates is fewer than we need and because of that, the pressure on pay and perks are pushed up. This is additionally worsened by the changes in the courts whereby cases are being accelerated. Good for the public of course and good for the industry, but it exacerbates the manpower shortages,” he said.

Another major factor that has contributed to this problem: Singapore. “We can’t compete with Singapore, no matter how hard we try,” Peters said. It’s not just a multiple of 2.4 for currency – its 2.4 x 2.4 – because even dollar for dollar, Singapore pays more. Before the conversion, they already pay better. It’s just not possible.”

According to Peters, the firm has faced this challenge for the past six months or so. It’s the retention rather than the hiring – it doesn’t matter how much money you pay them, you’ll always find someone paying them more. It’s fee pressures and salary competition.”

Gan holds the same view. “Competition for talent has been around for a long time, but it has been exacerbated now because of the success of Singapore, and the thriving businesses in Hong Kong and China,” he said. “So many of our lawyers, especially those in corporate, securities and finance – those with ‘portable’ skills who can plug themselves into another jurisdiction – are relocating and we have found this to be an issue across the board.”

According to others, many lawyers are in fact, being actively recruited and headhunted by Singapore and Hong Kong law firms, with Singapore facing its own hiring pressures. “The challenge is to get lawyers who have 3-4 years PQE in corporate,” Mohamed Ridza said.

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