I recently did some research on Hong Kong Stock Exchange (HKEX) filings, sifting through nearly 100 prospectuses to find out who the real legal executives are. are. This initiative was partly triggered by some conversations I had with capital markets lawyers at international firms that were once better known for representing Chinese issuers. Many of these firms, including Linklaters and Freshfields Bruckhaus Deringer, have since moved to advising primarily policyholders, although I noted that the switch may not have been voluntary.
My investigation was also prompted by what I thought I saw as the rise of US companies grabbing initial public offering (IPO) market share in Hong Kong. I had set out to find out whether this was due to the activity of certain sectors (think biotech, pharmaceuticals, healthcare and technology) or the ripple effects of US-China geopolitics or the China’s recent crackdown on data security, which inadvertently filled a pipeline with “back to basics” lists.
But something else emerged through my findings like the elephant in the room. A small number of Chinese law firms have sewn the market on Hong Kong listing boards. In first place were Beijing-based commercial and financial law firms, followed by Jingtian & Gongcheng, then in fourth place, Tian Yuan law firms. The firms advised respectively 29, 20 and 18 successful listings that were filed with the HKEX in 2021. The three firms acted for both issuers and underwriters. The offshore company Maples was in third place.
To give more context, Clifford Chance and Davis Polk & Wardwell, both ranked 7th, each advised 14 listings.
Last year, Jingtian advised SCE Intelligent Commercial Management and NetEase-backed music streaming site Cloud Village, which raised $225 million and $422 million, respectively. Han Kun’s law firms acted on 11 deals, including the massive $3.2 billion debut of JD Logistics.
None of the Chinese companies was lead legal counsel for any of their listing transactions.
And so, my line of questioning changed course. I spoke with partners from Jingtian, Fangda Partners and Han Kun over the past two weeks in an effort to find out why.
Some partners tell me it’s a trust issue.
According to two associates of two of the above-mentioned Chinese companies, the top-level decision makers in international underwriting banks, particularly for risk management functions, are Westerners, usually from the US, UK or Europe. . They said this explains an inherent preference to hire Western law firms or go back to their legal advisers, even if the work involved or the advice needed is primarily Chinese.
For Chinese companies, accessing legal panels from foreign institutions is not an easy task, said Nicholas Chan, a Hong Kong-based Jingtian partner, who frankly struck me as much less frustrated than other partners. who I spoke to. Chan joined Jingtian in 2019 from Mayer Brown and was previously also a partner at Sidley Austin. His perspective served as an important contrast.
Chan told me that his company’s focus on the Chinese market, as well as its existing pipeline of work on listings in Hong Kong and the United States, kept the company busy enough.
“PRC companies only started to break into the Hong Kong market around 2015 and 2016, so it’s still early days,” Chan said. “Maybe when PRC companies get more market share (on Hong Kong listings) and increase the quality of, say, US companies, then we will start to be appointed as lead counsel. is just a matter of time.”
But is it really?
“(Hong Kong issuers and underwriters) don’t even think about our Hong Kong IPO capabilities,” a Chinese partner said. “When you look at the underwriters, who are Chinese, they don’t even think of PRC companies unless it’s a very small job that no one else wants. The proof is in the pudding.”
A Hong Kong-based partner at a Beijing law firm said even for private equity investments, foreign company decision makers tend to treat Chinese lawyers with suspicion. “It’s an internal dynamic,” he says.
While he may be the first point of contact for lawyers within his client’s organization, after going through internal vetting and approval processes, the decision is almost always to appoint a firm first. internationally, regardless of where the investments are located.
I wonder if, as Chan says, time will really change the dynamics, especially when expats leave Hong Kong. So does this mean that the changing of the guard bodes well for Chinese law firms? Or should Chinese companies seriously consider acquiring teams of foreign lawyers to build this bridge?
The lack of US legal capacity in these Chinese companies must explain, at least in part, the absence of a greater role for them in listings or investment work in the United States. But lawyers say that when it comes to US rosters, that work pipeline is still too volatile, which is why investing in a US team would be premature and risky.
There is also the issue of compensation structures. Alignment on this front has always been problematic, to say the least. Just by looking at the latest Global 200 figures, the disparities in revenue per lawyer are evident and the deep cultural differences are also difficult to reconcile.