Principles before profit. Distinguishing factors

The concept of a Shariah-compliant law firm is still in its infancy. Agha & Shamsi is filling a gap in the market, and for law firms around the world struggling with competitors popping up around them, it’s clear that the firm has been able to distinguish itself.

“I was very interested in setting up a law firm with an express ethical mandate, which serves the law ... and a higher spiritual purpose”

Oliver Ahga, Agha & Shamsi

It may also demonstrate that although firms with clients in the conventional banking and financial sectors have seen steady growth rates, their larger exposure to the economic downturn can also lead to their demise – as was the case with Heller Ehrman.

Agha says that the financial crisis has led to a positive outlook for work. “A lot of the problems in leverage, collateral debt obligations, hedge funds and the issues that have plagued the conventional banking system are largely not tolerated in the Islamic system,” he said. “I think that’s resulted in the implicit endorsement of the Islamic system, as it hasn’t been as affected.”

There’s also much benefit in being surrounded by a large base of the right clientele and resources in the Middle East. As the understanding of Islamic finance practices grows, it will become more accepted as an important and alternative method of financing.

Successful or not, it’s clear that Agha remains steadfast in his pursuit, with the concept of the wholly profit-driven law firm having to take a backseat. “We are confident that the firm will be successful; however it matters more to us that our success is rooted in doing this correctly,” he said.

“We don’t compromise on our principles or integrity.”

ALB

Principles before profit. International links

Having spearheaded DLA Piper’s global Islamic finance practice and its Saudi office, Agha left that firm in October 2008 [with colleague Peter Hodgins, following management differences within the Saudi office] with a view to establishing his firm alongside noted Emirati figurehead Dr Saeed Mohammed Al-Shamsi. In only a few months the firm secured an affiliation with Pillsbury Winthrop, putting to rest any thoughts that a Shariah law firm is less appealing for international clientele.

Although Pillsbury is unlike Agha & Shamsi’s offering, using a conventional business model, Agha says there is no conflict of interest in aligning with a non-Shariah compliant firm. “This is simply an arrangement between two law firms who have affiliated on a non-exclusive basis, and when it makes sense we co-operate on matters,” Agha explained. “We don’t share systems, client bases, staff or resources.”

Inevitably, questions arise on how the firms work together – how Agha & Shamsi maintains its Shariah compliance working alongside its affiliate on a contentious and potentially ribawi (interest-bearing) matter?

“While the firm could not work on an interest-bearing transaction – for example the documentation of a conventional loan – if we’re working on a large project in the UAE or the Kingdom of Saudi Arabia that had a conventional finance tranche, then subject to review and approval of our board we may be able to work on the permissible parts of the project. We would have to be mindful, of course, not to share in any fees from the impermissible representation – this would need to be clearly marked and delineated so there’s no issue,” Agha said.

“The whole reason we’ve set up the firm is to take a position and endeavour to develop a genuine Islamic finance practice. It would be hypocritical if we were to set up an ownership structure with an international firm and have that kind of financial backing from them where we’d be able to enjoy the revenues that effectively came from interest-bearing transactions.”

ALB

Principles before profit. Model of business

The law firm’s business model is unique, and to some it would seem to limit the firm’s chances of corporate success. By Shariah law, it cannot invest in funds linked to – or that bear – interest. It also maintains a Shariah board of scholars who provide rulings on the firm’s constitution, structure, deals and transactions, not unlike a corporate board, but un-secular.

Where most other firms are locked in decades-long competition around league table rankings to judge the number of deals closed, the Shariah-compliant firm may not be as competitive as its international counterparts. Agha’s firm cannot welcome every potential client; it must turn away those from certain businesses – including ‘conventional’ international banks, insurance companies, and clients linked to gambling and alcohol, and others from Islamically impermissible areas.

“We’ve had to turn away a fair degree of business that is by mandate, proscribed for us,” Agha said. “It’s a significant carve out, and the kind of work and clients we can work with are limited. That hasn’t been an easy decision because in this market it’s obviously helpful not to have to turn work away.”

Conventional work and clients are largely behind the success of the world’s biggest law firms. Global law firms are arguably dependant on these clients to survive. So can a new-model law firm thrive on its principles? The managing partner of Malaysian firm, Azmi & Associates, said that although Agha & Shamsi may have carved out a large portion of high-value work, there is enough business and global clientele to sustain it.

“The pool of clients might be limited, but on the other hand in a globalised world the market is huge. There should be plenty of opportunities for a Shariah-compliant law firm in crossborder transactions,” said Azmi Mohd Ali. “If a Shariah-compliant law firm has skill-sets needed by clients, then those firms will remain sought-after within those bounds.”

Agha & Shamsi’s clientele includes members of the royal family, Islamic mortgage financing companies, highnet- worth individuals, and of course, Islamic banks and entities. If client feedback is any marker, it seems the firm’s ‘niche’ status has been welcomed.

“The reaction from clients has been very favourable. They are generally pleased and intrigued by the concept of a Shariah-compliant law firm and have a very positive view of the firm’s ethical mandate,” Agha said. “We’ve had considered growth at our firm.”

Whether the rest of the legal industry follow in Agha’s pioneering footsteps remains to be seen. Azmi & Associates for one, welcomes the move, but did not say whether it would consider something similar. “We congratulate Agha & Shamsi on the achievement of their new business model, and look forward to working with them on cross-border deals between Malaysia and the Middle East,” said its managing partner.

ALB

Principles before profit

Meet the man behind the world’s first Shariah-compliant law firm who thinks this is the start of a new business model.

Moving from a high-profile position as the global head of DLA Piper’s Islamic finance practice, Oliver Agha went it alone earlier this year to launch the world’s first Shariah-compliant law firm in the UAE, Agha & Shamsi, a move which stunned and intrigued many in the legal industry.

The firm’s mantra is ‘Principle before Profit,’ and its founding partner is certainly principled. So much so, in fact, that early this year he went where others wouldn’t dare, at a time when the world’s economy was in turmoil from the first wave of the financial crisis. By going fully Shariah lawcompliant, Agha & Shamsi would be turning away many ‘conventional’ clients and big-ticket legal work, which is the foundation behind many of the world’s most successful law firms. What led to this sudden breakthrough and why, more importantly, the timing?

Agha says he’d been contemplating the idea for a number of years, and it was in fact, the perfect time, considering the growing number of clients in the Islamic banking sector. “There were a number of triggers for this, but overall, it was the right climate,” Agha said. “There are many Islamic banks and Islamic insurance companies who feel comfortable with a service provider with a similar mindset. I believe some clients would be best served if they had an independent base of lawyers that practiced their own conduct in accordance with Shariah, as well as offering Shariah services.”

The other ‘trigger’ was spiritual. Following Agha’s high-ranking corporate positions in the world’s biggest law firms (Clifford Chance’s Saudi affiliated firm and Fulbright), the independence that opening up a niche firm offered was highly attractive. “Having worked at large law firms my entire professional career, I was very interested in setting up a law firm with an express ethical mandate, which serves the law and … a higher spiritual purpose,” he explained.

“Of course it also means you can chart your own course – there’s a lot of independence in being a farmer waiting for the rain to come, rather than working on someone else’s land.”

ALB

The deal-blocker is dead: long live the deal-maker

The misperception of in-house lawyers and their legal teams as ‘business prevention units’, as one business leader refered to them earlier this year, must now surely have been corrected. A look at this issue’s ALB/Jun He Inhouse Top 25, a snapshot of the region’s most dynamic corporate counsel, provides ample proof that the role successful in-house lawyers play today is as commercial as it is legal.

The modern in-house legal department – taking regulatory, compliance and purely legal matters in its stride – acts as a business facilitation unit, helping its company bring complex transactions to completion with all the right boxes ticked. But while the new-look in-house legal team boasts a relevance and value to the business that many chief executive officers would argue has increased exponentially, the fact that things have changed so much, in many cases over just 10 or 15 years, means it also faces a unique set of challenges.

As corporate lawyers get ever closer to the executive, and many sit on boards and share the performance-based incentives of their fellow board members, the chances grow of the profession’s most important weapon – independence – being compromised. The 25 corporate counsel profiled in this issue of ALB have all developed programs to address this fundamental challenge as well as the many others they face.

The message for law firms is clear. They need to be acutely aware of the rarefied, prickly, exacting new atmosphere in which their clients operate, and should adjust the nature of their counsel accordingly.

As one of the featured GCs noted, external lawyers must work “as if they were in-house counsel.”

***

The modern in-house legal department – taking regulatory, compliance and purely legal matters in its stride – acts as a business facilitation unit, helping its company bring complex transactions to completion with all the right boxes ticked

ALB

Now everyone can own a law firm

Different types of lawyers and non-lawyers will now be able to jointly own legal firms, thanks to the introduction of Legal Disciplinary Practices (LDPs) in the UK – an effort by The Solicitors Regulation Authority to encourage more effective competition and increase access to justice.

The introduction of LDPs will allow law firms to be owned by different types of lawyers and a proportion of non-lawyers – a milestone on the journey to alternative business structures, which will allow for full non-lawyer ownership and for law firms to be listed on the stock exchange.

ALB

Weil Gotshal cancels NY jaunt

Graduates of Weil Gotshal & Manges hoping to tour the Big Apple this year are set to be disappointed after the US firm confirmed recently that they will be scrapping their New York vacation scheme in light of the economic crisis.

The firm – whose New York vacation scheme was launched just one year ago – joins a string of firms, including Norton Rose and Field Fisher Waterhouse, who have recently cut back their summer vacation scheme programmes due to the economic downturn.

Hill Dickinson, however, has bucked the trend by reportedly almost doubling its vacation schemes.

ALB

Blake Dawson Wiki-peed off after web revelations

Australian firm Blake Dawson, recently discovered that its Wikipedia page had been hijacked by an unknown contributor, liberally disclosing details of the firm’s alleged job and cost cuts on the online encyclopedia.

The additional information to the reader-written webpage included information on alleged staff cuts to come, mentioned Allens Arthur Robinson and Freehills and even disclosed salary details for the firm’s partners. “The firm’s partners receive an average of A$850,000 each per annum,” the mystery scribe reported. The firm had not yet confirmed the accuracy of the reports at the time of going to press.

ALB

Einfeld still undecided

Speeding kills – as many Australian billboards tell you – and it turns out it can also mangle your career.

It was believed that Marcus Einfeld, the former Australian Federal Court judge who was recently jailed for a minimum of two years for lying on statements to avoid a speeding fine, would agree to the NSW Bar Association declaring him not a fit and proper person to remain on the roll of legal practitioners. Thus having his name removed from the roll.

However, reports now suggest Einfeld may seek a six-week adjournment to decide whether to lodge a guilty plea for professional misconduct.

The matter is due to return to the Supreme Court next month and the NSW Bar Association will call witnesses, and ask for the matter to go to a hearing if Einfeld decides to dispute the point.

ALB

Robert Milliner, Mallesons. Tomorrow, the world…

Is one of the legal industry’s biggest names about to get even bigger? Chief executive partner Robert Milliner gives insight on the road ahead for Mallesons Stephen Jaques.



"Mallesons chief names Bhutan in three-year forward strategy.” It would make a great headline – despite being nothing to do with the firm. Robert Milliner is a trekking enthusiast and has his trips planned for the next three years – including a journey to the tiny Kingdom of Bhutan. Meanwhile, another kind of forward strategy is keeping him occupied. Recently reappointed as chief executive partner for a tenure extending through to 2011, he has been charged with the task of protecting Mallesons’ position as one of the genuine heavyweights of the Asia-Pacific legal service. However, the firm has ambitions beyond merely consolidating its achievements to date.

Merger ambitions

Last year, Mallesons revisited the idea of a merger with Magic Circle firm Clifford Chance, but talks were thwarted by the deepening economic downturn. However, Milliner does not rule out the possibility of reviving the idea. “We have a view that there are certain trends driving the legal profession – globalisation of business, the war for talent, the kind of career opportunities that talented people are seeking, further market segmentation – and, in light of this, the preferred option for the firm is more likely than not to be part of a global one. I doubt we’re alone in that view,” he says.

The global economic downturn has, of course, put a new complexion on these developments, but Milliner says that when positive times return “the planets may align” once again in favour of a merger. But there is no guarantee that the partner firm will be Clifford Chance; there is no exclusive understanding between them.

“Our [merger] criteria are clear,” Milliner says. “We are motivated by how we can better service clients, how we can offer our people better career opportunities and how we can best leverage the firm’s legacy and history. We are looking at firms and asking the questions: ‘What makes you successful? Will that still be there if we were to come together – and would it be enhanced?’ It’s about compatible cultures and clients.”

All this raises other questions. As Clifford Chance was considered a compatible partner in 2008, would it not presumably remain so in 2010? Wouldn’t Clifford Chance remain the forerunner? But this is speculation on which Milliner will not be drawn. “We aren’t going to try and second guess the future,” he states. “Our criteria are clear and we will maintain dialogue with a whole range of firms.”

And this “whole range” of firms is not necessarily limited to the Magic Circle. Milliner has been travelling regularly to the UK and the US to meet with his counterparts in top firms there. Some of these discussions take place at formal conferences, while others are meetings arranged privately. The objective, however, is the same – to share ideas, with an open mind as to where the dialogue might lead.

Best of friends

While Mallesons has built up a strong presence in China and Hong Kong, it is absent from other Asia-Pacific markets, eg, Singapore, Tokyo and New Zealand.

Firms Mallesons has worked with in these jurisdictions include Allen & Gledhill and Wong Partnership in Singapore; and Russell McVeagh, Chapman Tripp and Bell Gully in New Zealand. Milliner says it would be difficult to have exclusive relationships in each jurisdiction. “Some clients, particularly general counsel, will have views about who should be used in a particular market. In the smaller markets, you get conflict and alignment issues. Exclusive referral relationships do have their merits, but there are also issues around ensuring the same culture and approach,” he adds.

Mallesons and Minter Ellison are the only top-tier Australian firms with London offices and Mallesons recently secured Minters’ London managing partner, Robert Hanley. Milliner describes the London office as an important feature that distinguishes the firm from other Australian competitors operating in Asia. “The predominance of London as a financial centre has seen the dominance of English law. Many Asian transactions are subject to English law and we need to be able to practise it. So the London market is a critical part of being in the market and picking up changes in it,” he says. The office also advises on the ‘kangaroo bond’ market and Australian clients investing in the UK or Europe.

Market share growth

Evidence of a recent flight to quality is currently largely anecdotal – but there, nevertheless. For example, 2008 M&A statistics saw Mallesons and AAR increase market share. Milliner says there has been a discernible trend over the past 12 months, and not just in M&A. “Insolvency and work related to it is more sophisticated than before. The underlying financial structures are more complex – you’ve got boards needing detailed governance advice. And all this plays to our strengths,” he says.

The other factor is that Mallesons’ depth of talent means work can be undertaken reliably but at speed. Milliner says the firm advised on more than 10 equity capital raisings in the flurry between December 2008 and January 2009.

The firm is on track to record revenue results this year similar to those of 2007 and 2008, although Milliner says that this result will have been assisted by a strong performance in the latter half of 2008, when the full effects of the downturn were yet to be felt. The Asia part of the operation, which contributes 10–15% of Mallesons’ revenue, is following a growth pattern similar to that of the rest of the firm.

The firm is not planning any redundancies, although Milliner is not ruling this out down the track. “We have to be realistic; we are in uncharted economic times which may cause structural adjustment and certain types of work may contract,” he admits.

“We have a view that there are certain trends driving the legal profession… and, in light of this, the preferred option for the firm is more likely than not to be part of a global one. I doubt we’re alone in that view”

Historical ties

When NAB (National Australia Bank) recently celebrated 150 years of business, it acknowledged its longstanding relationship with Mallesons, which dates back to 1858. It was a salient reminder of the role that the past has to play in building the future. “Most businesses are proud of their legacy and, if you’ve been able to grow alongside that business, it reinforces the relationship,” Milliner says. “However, we never take that relationship for granted.”

Whether Mallesons continues as a stand-alone firm, or whether its name becomes part of a double-barrelled brand in the future, Milliner is keen to see that culture continue. “We have a long-term commitment to our clients. It’s a firm that is client relationship focused.”

ALB

Relocation: The Gulf is where it’s all happening. Weigh up your options

Exorbitant rent is one thing, but there are a number of other factors that anyone thinking of moving has to take into account. The largely work-in-progress road infrastructure often results in long hours stuck in traffic and those with children may also want to pay attention to the long waiting lists for international schools, as well as the high fees. “The community here is a large expatriate one so it is easy to assimilate. However, finding the right schools and then planning how to get your children to them is another matter,” says McDonald, who has a five-year-old daughter.

Career-wise, try not to buy into the hype. Many lawyers in the US and UK who are worried about the future of their jobs may consider moving to Dubai a lateral move to maintain or advance their careers. Given the heightened levels of activity in M&A work, the boom in the construction as well as banking & finance industries, among others, the temptation to grab-first-think-later is strong. But lawyers should not substitute due diligence with desperation.

“We are seeing more and higher quality resumes from lawyers worldwide in the last year. Some are from lawyers who have moved to Dubai, but have not been able to find quality or quantity in the kind of work they have been looking for,” says Jennifer Bibbings, a partner in Trowers & Hamlin’s Dubai office who has been in the Middle East for the past 15 years.

ALB

Relocation: The Gulf is where it’s all happening. Benefits and drawbacks

According to Abernethy, one of the biggest selling points that firms use to attract lawyers is tax-free income. UK firms generally pay salaries that are equivalent to the UK rate, which for an associate would amount to a significant increase in their after-tax income.

According to Hays’ Guide to Salaries, most lawyers with at least seven to eight years’ experience can expect a monthly net salary ranging from US$11,600–13,369 at UK firms, and at least US$19,000 at US firms.

However, Coombe says the recruitment process for partners or managing partners has become quite complex, especially for candidates located overseas. Generally, senior level candidates must have Middle Eastern experience, a broad knowledge of the market or a portable client base.

However, the cost of living in Dubai is high and the 2008 Xpatulator international cost of living comparison revealed that Dubai was the most expensive city for restaurant dining and hotel accommodation. It was also the fourth most expensive city for clothing and fifth most expensive for rented accommodation.

Brimson agrees that the cost of living is expensive and the tax break is to some extent neutralised by high prices. Even living in an apartment can be extremely expensive, he says, and rates are equivalent to those seen in downtown London or Paris.

ALB

Relocation: The Gulf is where it’s all happening. Foreign invasion

The London and New York markets are currently “very quiet” for pure M&A, corporate and PE work, says Abernethy. Meanwhile, the UAE has not been so hard-hit by the economic slump and more large foreign firms have realised this and begun opening new offices. This year alone has seen DLA Piper and Gide Loyrette expand their practises in the Gulf with the addition of new offices, and Jones Day and Malaysian firm Zaid Ibrahim enter the region for the first time.

Brimson believes there will also be plenty of work in Abu Dhabi, since it is tipped to grow dramatically as a legal centre. He says that development plans for the city, the capital of the UAE, are extremely “ambitious”, particularly in the energy and infrastructure sectors.

Abernethy agrees, adding that Abu Dhabi and Dubai will provide “massive” and “unrivalled” work opportunities for at least a decade. “I am doing crossborder deals into India, Turkey the UK, Kuwait and Bahrain. A lot of the outbound investment is going to India. What we are working on is going into India, South Asia, Syria, Jordan and North Africa. Turkey is also a very popular destination,” he says.

Maria Coombe, manager of Hays Recruitment in Dubai, says that UAE law firms are looking to fill vacancies in practices such as corporate, banking, real estate, construction, projects, energy, oil, gas, shipping, IT and telecommunications. However, candidates must have a genuine reason for coming to the UAE.

“It is not enough to be interested because there is strong economic growth… Organising a visit to Dubai under your own steam and looking around is really valuable in deciding whether it is what you are looking for. It definitely adds weight to an application,” she says.

ALB

Relocation: The Gulf is where it’s all happening

The heat in the UAE may be off-putting, but lawyers are increasingly finding its business climate highly appealing. ALB discovers what practitioners can expect if they make the dash to the desert.

When Herbert Smith senior associate Jessie McDonald decided to move to Dubai two years ago, her intention was simply to join her husband who was stationed there and to stay in practice. But since arriving in the United Arab Emirates, the former university inhouse counsel has been excited by what her job Ц and the city Ц has had to offer.

The work here is of top quality, involving a lot of international work. The variety of work makes the job challenging as well as stimulating. I was also lucky enough to have colleagues from Australia who helped me to assimilate,Ф she says.

The reasons for the flood of lawyer relocations to the UAE in the last year are obvious. New opportunities, overseas exposure, tax-free salaries and the largely expatriate culture are commonly cited; however, at the core of the matter, the abundance of financial and career opportunities on offer is what really matters.

УThe Middle East is an exciting growth market where there is a huge amount of M&A activity. It is a lot more attractive than our [the New Zealand] marketЕФ says Andrew Lewis, a partner with Norton Rose.

Neil Brimson, managing partner of Herbert Smith in the Middle East, says lawyers are increasingly coming to the UAE because they want to work in one of the most exciting markets in the world, adding that the region has tremendous growth, second only to China.

Norton Rose partner Andrew Abernethy agrees. УIt is all coming out of this region; it is a place to rival New York and London. This is why a lot of lawyers from New York and London are flooding in. As an M&A lawyer, you want to be closer to the action and Dubai is where the M&A is happening,Ф he says.

ALB

KhattarWong’s Projects (Real Estate, Infrastructure and Construction). Practice Group well-placed to meet opportunities and challenges ahead

Whilst the current global economic downturn has affected real estate, infrastructure and construction in Asia, their importance has not diminished as these continue to represent pillars of growth in Asia. The Urban Land Institute and PricewaterhouseCoopers recently placed Singapore among the top five Asia Pacific cities for property investment in its 2009 regional report of Emerging Trends in Real Estate.

The Singapore Government recently announced it will invest S$18 to $20 billion in infrastructure projects this year. In the pipeline are a new International Cruise Terminal at Marina South, new roads and parks and the upgrading of schools, sports facilities and public housing estates throughout Singapore.

Other Asian countries are planning major infrastructure developments; in Vietnam, ports are being built and in the Philippines power assets are being sold. In China, work is underway on the Sino-Singapore Tianjin Ecocity, a joint development between China’s and Singapore’s governments.

KhattarWong’s Projects (REIC) Practice Group combines the experience and expertise of dedicated and trained lawyers and is well placed to handle project specific transactions for both domestic and foreign clients.

The Firm’s Partners involved in the Projects (REIC) Practice Group are Chia Ho Choon, Carla Barker and Anne Chua.

They have experience acting for infrastructure developers and contractors, business park developers, independent power producers, water treatment companies, aviation and aerospace companies, engineering companies, schools and hospitals.

“The Practice Group focuses on Project work, which enables the Firm and the Practice Group to get involved with clients from the inception of the projects to their completion. The combined expertise of our Partners enables us to assist our clients in all aspects of the project. This includes the initial formation or acquisition of the project vehicle; due diligence; the acquisition of land; liaising with regulatory bodies; advising on licensing and permits; advising on or drafting of construction and engineering contracts; dispute management; and assisting with the eventual sale or operation of the completed project.” These are the views expressed by Partner and Practice Group leader Chia Ho Choon.

With KhattarWong’s regional offices in Shanghai and Vietnam as well as the firm’s alliances with law firms in Indonesia, India, Malaysia, Thailand, Middle East, and network through Interlex, the Practice Group is well placed to assist its clients in their cross border real estate, infrastructure and construction deals.

The Practice Group’s recent assignments include acting as local counsel for the proposed construction and development of a power plant in Singapore; advising on the preparation of an EPC contract, O&M and Project Supervision Agreements for Indonesian developers of a power plant in Indonesia, which also involved Chinese contractors; advising on the Particular Conditions of Contract for use in Vietnam in conjunction with the FIDIC Conditions of Contract; advising an aviation authority on tenders and contracts for development of new facilities (including a terminal hotel), and on privatisation; and acting for developers in a mixed business park with commercial, residential and hotel components.

“Our lawyers have a clear understanding of the legal issues and commercial realities of the specific industry” says Anne Chua, whose clients include power generation, water treatment and aerospace companies.

Carla Barker adds, “The team’s ability to intertwine different spheres of practice gives us the confidence to advise clients on complex legal issues”.

The Practice Group is supported by a team of experienced and competent lawyers. The team’s attention to detail, their industry knowledge and ability to provide speedy and practical legal advice gives them an edge with clients.

ALB

The silver bullet? Dispute resolution

Unsurprisingly, disputes and arbitration work is on the increase. “There is an increase in tensions between joint venture partners and parties to contracts,” Harris says. “There’s a lot more instances of parties trying to get out of contracts or taking a harder line as a result of the current economic situation.”

Needless to say, prevention is the best cure for disputes and Brells says it is important to implement an effective management of both contract and project. “Both sides of a project need to be aware of the ‘ins and outs’ of their contract. They need to be aware of where their particular risks lie within the contract, and to manage those risks as best as possible, and what their entitlements are under the contract. For instance, if there is a notice provision in the contract, be aware of its time limitations and your responsibilities to meet it,” he says.

“If there are project control requirements, use them and manage the project with them. They have been included for a reason. So often we see where the focus has been on getting the project built and contract administration takes a back seat.”

ALB

The silver bullet? Other infrastructure work

While buyers of infrastructure assets have been cautious of late, Harris says there is still a significant potential deal flow in infrastructure M&A. “In the first half of this year, buyers seem to be taking time to identify good assets and acquisition activity will likely pick up in the second half of the year,” he says, adding that China and possibly Japan are likely to be the source countries for this kind of deal activity.

Farrands, meanwhile, believes that infrastructure M&A is less buoyant than in the past. “There is a clear appetite for investment in infrastructure, but with asset prices still decreasing we do not see transactions increasing until its asset prices are seen to be at the bottom,” he says.

“There is a significant liquidity problem. A lot of the project finance banks have had to be bailed out by governments and have their own issues”

James Harris, Lovells Lee & Lee

Another area Harris tips to pick up is the need for political risk insurance. “It’s becoming an integral part of many infrastructure projects in emerging markets such as southeast Asia,” he says. “People are looking at the risk profiles of projects, their home jurisdictions and issues such as the capacity to exchange currency freely – Indonesia and Vietnam are two countries where political risk insurers could become active again.”

ALB

The silver bullet? Financing

Harris states that the finance aspect of infrastructure projects has changed: “There is a significant liquidity problem. A lot of the project finance banks have had to be bailed out by governments and have their own issues,” he says. “Also, the Royal Bank of Scotland, which was involved in quite a few Asia projects, has announced that it’s closing its project finance business.”

The result, Harris says, is that it has become more challenging for lawyers to create a loan structure that will work: “The terms for credit are very different now. Previously, the tenor of a loan might have been 15 to 25 years, but now that has shrunk to typically five to seven years. Fees have increased and interest margins have shot up,” he adds.

Has the funding situation put any projects in jeopardy? Harris says he is not aware of any deals which have been cancelled as a result of a lack of liquidity, but he notes that some have been put on hold for restructuring. And while he says that recent government commitments to boost infrastructure spending will help, he believes the real key to getting banks involved again is the involvement of multilateral agencies such as ADB and IFC in transactions.

Ironically, the fact that Hong Kong has had less resort to private funding to date means that its projects are better insulated from the vagaries of the economic downturn. “The vast investments of the [announced] infrastructure projects are government funded, so there should not be a significant issue for Hong Kong,” Farrands says.

ALB

The silver bullet? Local rivals

Singapore and Hong Kong are naturally better placed than their developing regional neighbours to secure funding for projects. However, Hong Kong has lagged somewhat behind Singapore. “There has been talk of projects such as hospitals, prisons, new bridges, but these have been slow to get started,” Harris says.

It is a shortcoming with which the Hong Kong government seems to have come to terms. “In its policy address in 2007, the Hong Kong Government admitted that it had neglected infrastructure development,” Brells says. “Given the huge budget surplus, the government decided to push ahead with major infrastructure development to redress this imbalance.”

He says that this commitment has been stepped up following the economic crisis, with a string of major projects such as the West Kowloon to HK Border express link and the Hong Kong-Zuhai- Macau Bridge currently under way.

And Sam Farrands, managing partner of Minter Ellison’s Hong Kong office, disagrees that Hong Kong is lagging behind Singapore in terms of infrastructure projects investment. “The only aspect [where there might be a lag] is with respect to significant private sector participation over the last five years. That lack of private sector participation is set to change with projects such as the West Kowloon Cultural District, Hong Kong-Zhuhai Macau Bridge and the Kai Tak Development, including the East Cruise Terminal,” he says.

Minter Ellison has recently enhanced its infrastructure team with the addition of Hilary Cordell and Fiona Connell, along with their team, from Hong Kong boutique firm Cordells. Minters will be particularly looking to leverage the combination of Cordells’ expertise in planning, development and environmental law with Minters’ major projects and infrastructure focus. “Planning and environmental law has not been a big practice area in its own right in HK, and there are few dedicated practitioners in these areas,” Farrands says. “The combined strengths will help secure our involvement in major development projects.”

ALB

The silver bullet? Regional overview

The Singapore government put a PPP program in place in 2004 and has since been successful in getting a number of projects off the ground.

“In Singapore, the public sector construction demand is expected to increase to between S$17bn and S$19bn this year with projects slated to proceed this year such as the MRT [railway] projects, including the Downtown Line, the North-South Line Extension and Jurong East Connection,” says John Brells, Asia-Pacific managing director of Hill International.

Lovells Lee & Lee managing partner James Harris says that there has also been a reasonable amount of infrastructure activity, particularly in the transport and power sectors, in Indonesia, Vietnam and the Philippines. “In Vietnam there is a port capacity shortage, which led the government to look at ports and related infrastructure such as roads and rail. There is a strong potential for work there, however, I’m not sure that the projects proceeded as far as many would have liked before the financial crisis hit,” he says.

The financial crisis will also have an impact on attempts to raise capital to fund infrastructure in India. The India Infrastructure Finance Company, a government SPV which provides funding assistance for infrastructure projects, was recently authorised to conduct multi-billion dollar capital raisings via the issue of tax-free bonds. However, some estimate that the country faces the challenge of raising close to US$190bn over the next three years to fund key infrastructure projects – a considerable feat, particularly given the liquidity crisis.

ALB

The silver bullet?

Infrastructure has long been touted as the cure-all sector that will spark a new period of prosperity for law firms. But are expectations now running too high?

A familiar refrain is reverberating in legal practices throughout Asia. It goes something like this: yes, the economy is in recession; yes, there may be worse to come; but help is at hand in the form of government stimulus packages. Upgraded investment in infrastructure and resultant legal work will provide a much needed boost for firms.

The optimism is to an extent well founded. With governments and their partners sinking billions into infrastructure, it is inevitable that a demand for legal services will be generated as a result of these project and firms will take their share. But some regions may benefit more than others and the inevitable question persists: where will the private sector funding come from?

ALB

Japan: From cooperation to competition. Part 5

The observation that foreign firms appear to have not been as successful in Japan as they have in other liberalised legal markets across the region appears to be borne out by the unusually high number of FLFs that have abandoned their offices in Tokyo, either due to economic hardship or to take up the opportunities on offer in the boom Chinese market. However, according to many lawyers at FLFs, such an assertion would be erroneous.

“There may be a perception that foreign firms have not been successful in penetrating the legal market in Japan but that is misconceived,” says Wigmore adding that those who hold such a view use size as a measure of success and operate on the assumption that FLFs and DLFs operate in the same sphere.

“Comparing international and domestic firms on the basis of the size and strength of their Japanese law practices is meaningful only if the goal if the goal is to compete head to head with Japanese domestic firms. Holstein concurs adding that this is not the strategy employed by many international firms in Japan including his own. “Many foreign law firms have made the strategic decision not to compete in the domestic law market. We and most of our peer US firms have chosen instead to focus on international law practices and play to our strengths: outbound investments, financing and high-end cross border deals where we work collaborartively with the big four domestic firms. This model has been successful for us.”

And it is not only Milbank that has a successful practice. The likes of Skadden, MoFo, Paul Hastings and Linklaters are known as firms who are making solid, profitable inroads in the market. Even so, the general market perception is that some other firms are struggling, especially the second or third tier international firms, and some lawyers believe there may be significant movement at the lower end of the market.

Siegel says that any such activity is likely to occur quietly and it is likely that even those with their ears to the ground in Tokyo won’t hear much about it.

“I don’t think there will be many new foreign firms opening offices in Japan this year, but there will almost certainly be some closures,” he says. “But we are unlikely to hear about this, these will most likely take the form of global firms ‘merging’ with small local practices – looking to pull out their ex-pat attorneys in this way to reduce costs and save face.”

ALB

Japan: A drag on foreign firms: the three-year requirement

The need for foreign lawyers employed by international law firms operating in Japan to have three years international experience under their belts prior to being registered to practice in the country is simply a “drag on foreign law firms” according to lawyers ALB spoke to.

When foreign law offices were first allowed to set up shop in Japan some 22 years ago the requirement was set at five years’ international experience and in 2005 this was reduced to three – but this is still not good enough, say international lawyers in Japan.

“The Bar Association has insisted on making the conditions here for foreign lawyers very difficult. It has got to a stage where it impacts our ability to work, expand and essentially bring clients to the Japanese market,” says the Tokyo managing partner at one US-based firm.

For others it’s a move that screams protectionism, a move designed to push foreign law firms operating in the country to employ graduates of Japanese law schools instead of looking to their international offices to fill vacancies.

“This is part of broader moves to make conditions inhospitable and could well be viewed as protectionist. In some instances it’s hard to place lawyers to come to Japan and this is yet another difficulty,” says another managing partner at a US firm operating in Tokyo. “If the intention of such restrictions is to encourage us to employ Japanese graduates this is not the correct way to go about it. While graduates of Japanese law schools are of an increasingly high calibre, they often lack the technical and language skills of international lawyers.”

Indeed, the situation has got so bad that even domestic law firms are calling for an overhaul of the system. “The domestic law firms in Japan need foreign law firms to be operating optimally. It will get to a stage when domestic law firms, foreign law firms and even the economy start to suffer,” says the managing partner of one domestic firm.

Add to this other restrictions imposed on foreign law firms, for example prohibition on them opening additional branch offices in Japan, and many are crying foul. And while ALB understands that foreign law firms in the country are currently in negotiation with the authorities to relax such restrictions, the consensus is that foreign law firms shouldn’t hold their breath: the lifting of such restrictions, especially in the current economic climate, may take some time.

ALB

Japan: From cooperation to competition. Part 4

Notwithstanding debates regarding the business models of international firms, referral agreements and increased competition, the consensus is that DLFs still dominate the legal sector in Japan. A glance at the empirical evidence seems to support such a view. After 22 years it is DLFs who are the largest, who have the greatest pulling power for domestic clients and local graduates and, arguably, are the most profitable.

Dixon says this is due to size and age-old issues like fees and legal costs. “The bulk of international work for the last several years in Japan has been inbound; hence domestic lawyers are key to serving clients. Many transactions require large numbers of attorneys – merger due diligence, large scale securitisations; few foreign firms have sufficient numbers of Japanese attorneys in a sufficient variety of fields to provide full service for these large transactions,” she says.

A theme running through this decade has been large-scale consolidation among DLFs most of which have sought critical mass to maintain their competitive advantage over each other and the threat of foreign firms. It started with Nagashima Ohno’s merger with Tsunematsu Yanase & Sekine back in 2000, and was followed by others involving the present big four, such as Anderson Mori’s combination with Tomotsune & Kimura, and Mori Sogo’s merger with Hamada & Matsumoto. The result, when including the latest merger of Asahi Koma & Nishimura & Partners, is that each of the Big Four now boast in excess of 300 lawyers.

Fees are another area where DLFs still hold sway. “Foreign firms are rather expensive,” Dixon says, “with hourly rates for junior associates matching the hourly rates of very senior attorneys in Japanese law firms. Although some foreign firms charge a lower rate for their Japanese lawyers compared to their non-Japanese lawyers in order to remain somewhat competitive with local firms, they rarely match the market completely.”

They are also unable to match the local firms in terms of their ability to attract the nation’s best and brightest lawyers. “Japanese lawyers remain very independent,” Ishiguro says. “When they finish university, they look to come and work at one the Big Four firms – this has been a trend of the last decade and it will continue in the future, not least of all because of some of the difficulties that international firms are facing in their US and UK headquarters. Domestic firms are the preferred choice because of this and the high quality work we can offer.”

Hara also notes that despite the international appeal some FLFs operating in Tokyo may have, DLFs continue to attract young Japanese lawyers because of their ability to offer the same high calibre international work as their foreign counterparts.

“Although many Japanese law firms have been handling a lot of domestic work lately, we still offer our lawyers the ability to work on complex crossborder transactions and allow them to get the international exposure that is considered important that way,” he says. “In choosing to come to a domestic firm they can see a clear path to partnership and progression – this is not always clear in international firms.”

However, lawyers at FLFs said that even if young lawyers wanted to come on board, there would be no guarantee that international firms would employ them with one partner stating that the technical ability and English language proficiency of some Japanese graduates is not comparable to that of US or UK law school graduates.

ALB

Japan: From cooperation to competition. Part 3

Ever since Japan opened its legal market to FLFs in 1987, relations between the domestic and international counterparts have been firmly based on cooperation. Rather than competing for each other’s market share, a clear division has existed between what belonged to each. FLFs advised on international law and their international clients on entering the Japanese market, while DLFs advised domestic clients on their operations both in Japan and overseas. If a matter called for either specialist international or domestic advice, the firm involved would refer the matter to a DLF or FLF of their choosing, thus creating intricate and lucrative networks of referral agreements.

However, regulatory change, law firm consolidation and economic shifts over the past few years have all acted to undermine this once quiet consensus. DLFs and FLFs are now beginning, ever so slightly, to encroach on each others’ turf and this is most apparent in relation to the big ticket items in Japan: transactional work and M&A.

“Domestic law firms have started to move directly into competition with foreign firms in these areas of late,” says Ken Siegel, managing partner of Morrison & Foerster’s Tokyo office. “When foreign firms entered Japan back in the late 80s these areas were almost their exclusive domain, but what we are seeing now, either through the establishment of international desks, international law departments or the hiring of gaiben [foreign attorneys] is that domestic firms are making a real end-run in this area.”

Bonnie Dixon and Daniel Hounslow of local firm Atsumi & Partners are two such gaiben – the first foreign lawyers to be elevated to partnership at a DLF in Japan. For Dixon the bubbling competition between domestic and foreign law firms has been dented somewhat by the onset of the global economic crisis. “Prior to the recent financial crisis I would have said that foreign firms are strong competitors for securitisation work, but that is not relevant now [the market for securitisation in Japan is at its lowest point in 15 years, according to the latest Thomson Reuters statistics]. Foreign firms may still maintain a competitive edge over domestic firms for private equity and fund formation work.”

But according to Darrel Holstein, Tokyo managing partner at US firm Milbank, it’s not so much a case of DLFs competing with international law firms, nor all FLFs making a charge for a greater share of the domestic market. It’s a specific type of FLF that is shaking up the status quo.

“The international firms with large numbers of bengoshi of those in joint ventures or alliances with substantial local firms present the biggest threat to large independent domestic firms because they compete directly with them for domestic law transactional work ,” he says.

However, as Holstein’s colleague and fellow partner Gary Wigmore is quick to point out, the service offered by integrated or JV firms is not always equal to that offered by independents like the Big Four.

“The large independent domestic firms offer depth and quality of service on Japanese law matters. Some of the JV firms have had success in developing domestic law practices, but most are not at the same level of the big four. I think the joint venture strategy can only work long term if you are offering something special and unique,” he says.

Holstein and Wigmore go on to note that when they need to bring a local firm on board they rarely look outside the top four or five firms in the market and even more rarely to a joint venture firm.

MoFo’s Siegel, however, disagrees with those who question the long term viability of the joint law venture model or those foreign firms who have chosen to establish a critical mass of bengoshi within their ranks.

“Our Tokyo operations have been extremely successful and if there is any sign that this model, that is, the development of Japanese law capability, is not feasible in the long run I have not seen any indication of it. We have some 110 lawyers here and all are extremely busy. We not only act for international clients but some of the largest companies in Japan are also regular clients,” he says.

And it is not only Siegel singing the praises of his firm’s model, domestic lawyers firms also single out MoFo’s Tokyo office as one of its most profitable worldwide.

ALB

Akai Izumi, Sullivan & Cromwell, ALB Japan Law Awards: 2008 International DealMaker of the Year

Akai Izumi, co-head of Sullivan & Cromwell’s Japan practice and the winner of the International Dealmaker of the Year award at the ALB Japan Law Awards 2008, has seen the legal market come full circle since foreign lawyers were allowed to enter the market some 22 years ago.

“The legal market has progressed from being a small community with a comparatively small number of lawyers and low demand for legal services to a very well-developed legal sector. The entry and expansion of international firms has contributed to increased competition between domestic and international firms and overall this has benefitted the legal sector, Japanese businesses and the economy as a whole,” he says.

And while the Japanese economy may be hurting at the moment, Akai believes a rebound is on the cards and that the nation’s relatively strong conglomerates will be leading the charge.

“The outbound M&A market is quite stagnant at the moment and will remain that way the first half of 2009,” he says. “The management of most companies have adopted a defensive stance at the moment and that has a lot to do with economic uncertainty. The focus has been on securing liquidity on balance sheets as opposed to looking to expand.”

Akai says that while economic certainty is the key to kick-starting the sector, the release of Q1 financial results and 2010 financial projections is likely to reveal a need to look for strategic acquisitions abroad. “The financial results and projections may affect a change in the conservative outlook adopted by some Japanese companies. What we may see is the market may pressure some of these companies into action, shifting their focus away from just liquidity concerns to taking active steps to implement strategic plans and expansion.”

Some of this market pressure is already telling on the country’s capital market. According to Thomson Reuters statistics, February was one of the busiest months for Japan’s capital markets since mid-2008. Secondary offerings increased 173% and proceeds from follow on offerings raised 183% more from the same period last year – not necessarily evidence that things have turned the corner, but positive signs nonetheless. “Capital markets have been slow and will probably remain that way for a while.” “But that is only one side of the story. The flip side is that, despite the market conditions, companies need money. They need capital to make up for poor financial performance, need shareholder equity and capital on their balance sheets. There is a strong demand for these financing transactions at the moment.

“Companies need to find a balance between confidence of the market and their own needs. This may result in some companies going out at the market more aggressively and I think this will be what happens in the second half of 2009,” he adds.

ALB

Japan: From cooperation to competition. Part 2

Prior to the 16-year-long slump of the Japanese economy that began in 1990, there was little call for the involvement of law firms in the business transactions of Japanese companies. With government bureaucrats heavily involved in economic development and business decision-making, and little in the way of litigation, lawyers were, according to Toru Ishiguro of Mori Hamada & Matsumoto, an “unnecessary evil”.

But things changed as the samurai nation emerged from the despairing depths of the “lost decade”. Suddenly law firms faced a different world, where businesses made their own decisions in an increasingly litigious society, forcing even the most conservative industries to become more aggressive.

As a result, law firms played a much bigger part in the domestic economy, as businesses came to realise the importance of the need for advice. Nagashima Ohno & Tsunematsu chairman Hisashi Hara estimates that in the 1980s, 80% of legal work was garnered from cross-border transactions. Compare that to the current market, where Hara says the breakdown of work handled by the top domestic firms in Japan was articulated as a clear 70:30 division. Seventy per cent was accounted for by domestic work, while 30% was supplemented by cross-border M&A and transactional type work, with FLFs attracting the lion’s share of it owing largely to their international clientele.

But even this is changing. In fact, the changes here have been one of the more noticeable trends in the market over the past 12 months. So, are Japanese lawyers coming full circle and returning to their roots as transactional lawyers?

According to Ishiguro, upping the amount of cross-border work coming into the firm is high on his firm’s agenda. “There has been a general move among all domestic players to invest more attention into cross-border elements of the market and we are now seeing the fruits of this policy pay off,” he says. Ishiguro’s firm has long had an international desk, but has recently seen its market share and that of other DLFs increase substantially in a short period of time.

Nagashima Ohno & Tsunematsu is also making in-roads, but Hara says that any increase in this area will have to preserve the amount of local law work DLFs are doing.

“All of the Big Four firms feel that domestic work has become so important and we don’t really want to harm that,” he says. “But cross-border work now is extremely lucrative, so the challenge is how to use what we have resourcefully and how to pick up this work without having to say no to local law work, which has enabled us to grow and thrive.”

One need only look at the table on p49 and see just how much of the M&A market DLFs have to realise that they may have struck this balance already – a balance that will serve them well in an economy that is once again teetering on the precipice of another lost decade.

And while there are those that say DLFs returning to their roots, coming full circle and increasing the amount of cross-border work they handle is an added bonus, to others, it is a necessity, as the cooperative status quo between DLFs and FLFs slowly but surely gives way to increased competition.

ALB

Japan: From cooperation to competition. Part 1

As this edition of ALB went to print, the 22nd anniversary of the enactment into law of the Special Measure Law Concerning the Handling of Legal Business by Foreign Lawyers (the law) passed without ceremony or fanfare. Proof that for many in the Japanese legal fraternity, liberalisation is an ongoing process – evidence that there is still plenty more to achieve despite an impressive evolution.

Japan’s present day legal sector is virtually unrecognisable from the one that existed prior to 1987. The presence of foreign law firms (FLFs) has irrevocably reshaped the complexion of the legal sector, lifted standards and changed the way business law is conducted in the country. Not only has their presence proved useful in helping wean Japanese business off government support and onto the welcoming bosom of business lawyers, it has also helped the development of domestic law firms (DLFs), who have gone from strength to strength.

The Japanese ‘Big Four’ (Anderson Mori & Tomotsune, Mori Hamada & Matsumoto, Nagashima Ohno & Tsunematsu, and Nishimura & Asahi) have gone from modest-sized firms to legal leviathans, casting a shadow over the legal market. After 22 years it is the DLFs who dominate the arena.

And while this is not likely to change in the foreseeable future, the cooperative consensus that has so far typified the relationship between DLFs and FLFs in Japan is set to change. In fact, the more observant may have already noticed signs of this occurring: from joint law ventures to the hiring of Japanese graduates by FLFs and gaiben by DLFs – if the past 22 years were about cooperation, it seems the next 22 will be about competition.

“The international law firms with large numbers of bengoshi [Japanese attorneys] or those with JVs or alliances with substantial local firms present the biggest threat to large independent local firms because they compete directly with them for domestic law transactional work.”

Darrel Holstein, Milbank

ALB