Hong Kong ECM: apply Sod’s law

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Clawback columnist Philippe Espinasse says the latest proposals by Hong Kong’s Law Society could spell bad news for international securities lawyers in the city.

Changes are in the offing to restrict the involvement of foreign lawyers in cross-border cases, and increase the proportion of local solicitors within Hong Kong law firms.

This could have major implications for securities lawyers based in the city.

In effect, the Law Society, the professional body for the legal profession in Hong Kong, has proposed that foreign lawyers could only work on cases, and provide legal advice, pertaining to the jurisdiction(s) in which they are registered. The Society has also recommended that the ratio of local to foreign lawyers in Hong Kong law firms be increased to 2:1 (as against 1:1 now).

Unsurprisingly, a number of global law firms have expressed significant concern at these proposed changes.

To understand what’s at stake, it is first necessary to understand how foreign solicitors are currently able to work in Hong Kong.

Foreign lawyers (actually often bona fide Hongkongers who qualified as solicitors overseas) are defined as persons who “offer services as practitioners of foreign law”, and are required to register as such with the Law Society.

They are prohibited from practicing Hong Kong law and from employing or joining into partnership with Hong Kong solicitors. In practice, they are employed as “foreign legal consultants” by Hong Kong solicitors, so long as the number of foreign lawyers in the firm is not greater than the number of Hong Kong solicitors.

By contrast, overseas lawyers are persons who are entitled to practice law in an overseas jurisdiction and who wish to be admitted as solicitors in Hong Kong.

For those admitted to practice in common law jurisdictions (that is Britain, Australia, New Zealand or Canada), this requires them, among other things, to have at least two years of post-admission experience in the practice of law. And just like foreign medical doctors who wish to practice in Hong Kong, they are also required to take a qualification examination, which can be sat once a year, and which includes five different chapters, all of which must be passed (although candidates with five or more years of experience in the practice of law can apply for exemptions).

With respect to securities lawyers, sitting the examination can be a frustrating exercise: among the topics they must study is conveyancing, which likely will bear no relation whatsoever to their daily legal practice.

Understandably, many foreign lawyers (allegedly about 1,500 at the last count, or around 15% of the solicitors based in Hong Kong) chose to remain employed as consultants, rather than opt for the qualification route.

When it comes to Hong Kong ECM, all of the larger IPOs (including Chinese IPOs on the Hong Kong Stock Exchange) will include both a retail and an institutional offering in the city, as well as an international institutional offering.

Within the international institutional offering, two options are in turn available to the lead banks, depending on how US institutions are being targeted.

One option allows the offering to be marketed under Regulation S of the US Securities Act of 1933, as amended, which means that only offshore US institutions can be approached. The second option allows for the offering to be performed pursuant to a private placement under Rule 144A of that same Act, implying that the IPO will also be offered to larger onshore US institutions.

Accordingly, much of the legal advice to be provided in connection with a Hong Kong IPO pertains to international jurisdictions. In addition, many of the legal agreements, such as the international sale and purchase agreement, agreement among managers or inter-syndicate agreement, will usually be drawn up under English or New York law.

In fact, since pretty much all of the IPO issuers in Hong Kong are incorporated overseas (including China’s mainland and Bermuda or the Cayman Islands), many of the Hong Kong aspects of the legal advice to be rendered in a Hong Kong IPO will mostly be confined to the retail (or public) offer.

Restricting work on Hong Kong IPOs to Hong Kong registered lawyers only would therefore likely be a wholly unpractical arrangement.

Since the fees charged for ECM work are far from trivial, how Hong Kong registered lawyers can receive a larger portion of that fee pool probably lies at the crux of the matter.

Ultimately, if the Law Society has its way, the UK magic circle and US white shoe firms might be forced to relocate some of their ECM talent to other regional jurisdictions. And, surprise, surprise, Singapore could be a major beneficiary.

Philippe Espinasse was a capital markets banker for almost 20 years and is now an independent consultant in Hong Kong. He is the author of “IPO: A Global Guide”, “IPO Banks: Pitch, Selection and Mandate”, and of the Hong Kong thrillers “Hard Underwriting” and “The Traveler”. His new book, “Cornerstone Investors: A practice Guide for Asian IPOs” was published in January 2018.

This column was first published by GlobalCapital.