Could 2012 be the year that law firms made the big leap in Asia? Evidence certainly suggests so: Law firms with large established offshore practices like Appleby Global, Bedell Cristin, Maples and Calder, Ogier and Walkers have recently opened new Asian offices, and are preparing themselves for stiffer competition.
Many of these firms have been carrying out their practices out of their Hong Kong offices for several years, and are now starting operations in Singapore.
“We understand that a number of our competitors have plans to open offices here,” says John Rogers, managing partner of Walkers, which opened its Singapore office in 2009.
“Previously, we used to fly down from Hong Kong four or five times a year,” says Rogers, who calls Walkers’ Singapore office growth “dramatic”. “Physical presence in Singapore is necessitated by its existing status as (the) legal and financial hub for the region.”
Stephen Adams, partner at Bedell Cristin, which started its Singapore operations in July, says that its decision is already paying off as there have been direct approaches from new clients.
For offshore law firms, physical presence is key. Adams says that the decision by many offshore law firms to open a Singapore office is, in fact, part of a defensive approach. “Many of their competitors were already located here and were speaking to their clients directly,” he says, while adding that for Bedell Cristin, Asia is a totally new market.
No doubt, then, that it is a compelling situation for the other offshore firms in Asia to invest in a new office.
In September, Cayman Islands-based Maples and Calder became the latest offshore firm in the Lion City. However to its credit, its approach was not just to react with a token presence. It relocated two partners, Nick Harrold and James Burch, and a corporate lawyer Tom Katsaros, to provide for a “full-service, full-execution office” in Singapore.
According to Harrold, the new office will provide Cayman Islands and BVI advice on hedge and mutual funds, private equity, structured and asset finance, corporate law and trusts for high net worth individuals.
Although Singapore has been the main focus destination for offshore law firms looking to expand their reach from Hong Kong, it has not been the only one. For instance, Ogier decided to first open an office in Shanghai, which it did in July 2011. However, the Singapore market still remains in its reckoning.
According to Nathan Powell, Hong Kongbased partner at Ogier, “that is something we always consider as we spend a lot of time in Singapore”.
The increasing interest of these firms in Asian markets can also been linked to stagnant growth prospects in traditional centres. As a result, they have to explore other financial centres to gain extra growth and expansion. “If they wish to grow, they have to invest in new regions, new offices and tapping into new sources of work,” says Powell.
THE ASIAN MA RKET
In Shanghai, Ogier’s small office with one lawyer is fully dedicated to business development in China as it does not have the licence to practice law there. Powell says that offshore-related work in mainland China includes IPOs in global exchanges, pre-IPO investment, private equity, individual investment and litigation advice in shareholder disputes.
China also has a growing appetite for overseas investments for which its companies might be utilising offshore structures, says Frances Woo, the managing partner of Appleby Global. “Many of the vendors and the companies they acquire are quite familiar with the offshore structures,” she says.
However, due to language and cultural reasons, it is not very straightforward for international firms to service Chinese clients. As expected, they have been adapting to achieve the required level of client satisfaction. Not only do the offshore law firms hire legal professionals who are native Mandarin speakers, but they also keep their pricing flexible. “Some of the Asian clients can be pretty fee-sensitive,” says Powell.
Finding local lawyers well versed in offshore law can be a problem. So they are given in-house training by senior international lawyers posted in Asian centres. According to Woo, having offshore lawyers based in Asia also helps in the timely completion of the transactions. She also says that these days, it is not difficult to find lawyers willing to be stationed at Asian locations.
RELATIONSHIP WITH BIG FIRMS
Offshore law firms are always aware that their role in any transaction is restricted to a secondary one in comparison to the main law firm. This also makes them overwhelmingly dependent on onshore firms
for getting business, especially in corporate transactions.
“Most of our work is sourced through large international law firms with whom we work on large transactional matters,” says Adams of Bedell Cristin.
The situation forces them to maintain a dual client focus – one on the main client who initiates the transaction, and the second on the partnering onshore law firm. “We do get direct instructions from underlying clients for the deals, but the majority of our instructions come from offshore law firms,” says Andy Randall, managing partner of Walkers’ Hong Kong office.
The situation changes slightly once firms establish themselves in the region. “Many of our clients, including multinationals and listed entities, are already using offshore vehicles, and they often contact us directly,” says Woo of Appleby, which has been present in Hong Kong for the last 25 years.
A direct relationship with clients may work in simpler transactions like incorporations of holding companies. But for complex transactions, a local counsel is always part of the team.
STREAMS OF WORK
The increase in business opportunities for offshore law firms is also linked to the rising levels of investment in Asia. According to Rogers, growing Asian economies are fuelling the demand for cross border investment. “There is going to be more use of offshore centres to facilitate that mobilisation of investment flow,” he says.
The major investment activities in the region, according to Rogers, are related to debt finance, equity investments in pre-IPO booking, and project financing in India, Indonesia, and China. For dedicated
offshore work, some lawyers depend upon the offshore companies listed on the Hong Kong Stock Exchange.
According to Powell, in the last two years, fund formation has been a big source of work for offshore law firms in Asia. “A lot of money has been created here, and more people want to invest their money,” he says.
However, the situation is not the same with the IPO market, which according to Powell, is at the moment, slightly subdued due to the uncertainty in the global economy. However, pipeline enquiries have not been significantly affected.
The IPO market may well be an indication of a much bigger change, as according to Harrold, there has been a gradual shift of focus from capital markets work to mergers and acquisitions. However, it did not
affect Maples’ overall workload as offshore structures are applicable in both types of transactions, he says.
In fact, the applicability of offshore structures is even wider. According to Woo, most of the multinationals intending to start operations in Asia would invariably be looking for neutral jurisdictions that could provide flexibility, and are familiar to them.
She also says that with the rise of the Indonesian and Malaysian economies, more work has been created for offshore law firms, including transactions related to sovereign wealth funds.
Furthermore, offshore vehicles are also preferred over local companies for simple and cost- sensitive operations like ownership of property. The requirement of hiring an auditor and cumbersome statutory filings for companies incorporated in Hong Kong, for example, makes them expensive to operate, says Woo.
Offshore centres also attract Asian clients who are interested in private trusts, wealth planning, and asset protection. “Most of the trusts created for the personal wealth management of their high net worth clients involve sophisticated corporate structures based in BVI, Bermuda, Cayman Islands and Jersey,” says Marcus Dearle, managing partner of Withers Hong Kong and Singapore. “Business is very strong, and we expect it to continue to grow.”
In developed Asian economies, markets have become more sophisticated, structured, and efficient. However, huge disparities still exist between other economies. “Different parts of the region appear to be in a different part of the economic evolutionary cycle,” says Randall, “Offshore structures applied to Mongolian deals today are the same that we have implemented 15 years ago in China, or five years ago in Vietnam.”
However, the legal and regulatory disparities in different countries in the region have a hand in the promotion of offshore structures.
According to Woo, these disparities make it imperative for the businesses to use corporate structures that are based in neutral jurisdictions. “For the companies involving in cross border transactions, offshore structures reduce the level of complexity,” she says.
CHOICE WITHIN OFFSHORE CEN TRES
The Cayman Islands and BVI remain the most popular offshore financial centres for clients in Asia. Highlighting their advantages, Harrold says that both of them have creditor and investor-friendly legal systems, which are based on English common law and offer a stable political environment with adherence to international regulatory standards. They are also tax-neutral jurisdictions, not dependent
on any double-tax treaties.
According to Woo, Cayman Islands-based vehicles are recognised by the United States and the European Union for listing on their stock exchanges, which facilitates a lot of the cross border deals.
Courts in these jurisdictions are also highly efficient, says Powell, and there are number of advisers in the region with expertise in these jurisdictions.
Occasionally, lawyers often choose more than one offshore destination, as seen recently in a deal undertaken by Appleby. Woo says that it used three offshore vehicles in one deal involving a Nasdaq-listed budget hotel group, which had most of its assets in Asia.
Appleby acted on behalf of JP Morgan and Credit Suisse, who were the arrangers for various investment banks that raised the money for the hotel company. The hospitality group was a Cayman Islands-registered entity that utilised BVI and Mauritius vehicles to manage its assets in China and India. “If they had not set up such a structure, it would have been quite difficult to manage the cross border holdings within Asia,” says Woo.
In some cases, for complex corporate structures, law firms often advise the use of BVI companies to act as holding and financing vehicles.
While Cayman Islands companies are regularly used as listing vehicles on the Hong Kong Stock Exchange, the practice has also been seen recently on the Taiwan Stock Exchange, says Harrold. For hedge funds, private equity funds, and unit trusts, Cayman Islands-based vehicles are the favourites, he says.
Some offshore locations are specifically linked to various Asian jurisdictions. Woo says that due to strong and beneficial double tax treaties, Seychelles-based vehicles are the first choice for investments in Indonesia. The same is the case with Mauritius, India, and several African nations.
However, says Woo, the choice of specific offshore locations for Asian ventures still depends upon the structure and the purpose a company wants to achieve. If a company intends to reduce its share capital at some point of time in the future, then the Caymans is not a suitable destination as it mandates a court procedure, whereas Bermuda or BVI law requires only shareholder approval to effect the change.
There is certainly no shortage of offshore solutions, and it is only the requirement and willingness to apply them that matters. Harrold is quite hopeful and says: “As clients in Asia become more familiar with
the advantages of using offshore solutions, the use of such structures will become more prevalent.”
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