Want Want China’s Hong Kong IPO and Coca-Cola’s proposed takeover of Huiyuan Juice are typical transactions that law firms in Hong Kong are advising on these days.

In March this year, Want Want China, a Taiwanese company incorporated in the Cayman Islands whose dominant geographical market segment is in the mainland, launched its IPO in Hong Kong. The US$1.4bn listing is the largest food & beverage sector equity offering in Asia to date and the deal’s legal advisors secured a position among the finalists for the Equity Market Deal of the Year at the 2008 ALB Hong Kong Law Awards.

The increasingly close economic ties between Hong Kong and the mainland have made it more challenging for ALB to assign any given deal to just one of its five regional Law Awards events. This is especially the case for China and Hong Kong.

This year, therefore, the majority of the finalists in the Hong Kong Law Awards deal categories have a major mainland component, involving either a significant underlying Chinese business or a large Chinese company.

Experienced corporate lawyers in Hong Kong, particularly those working with international firms, have witnessed the convergence between their Hong Kong and mainland China offices for a number of years. They see it as a natural development and expect to benefit.

“In the past decade, most of the work we have done in Hong Kong’s corporate group has a China element in some way or other, and 90% of our work related to China has an offshore element,” said Herbert Smith corporate partner in Hong Kong, Andrew Tortoishell.

Hong Kong partner with Clifford Chance, Andrew Whan, agreed.

“Some of the transactions involving Chinese companies are becoming more sophisticated and complex, and require greater input from external legal advisors,” said Whan. “We see considerable growth in mainland China-related work, and our Hong Kong office has definitely been a beneficiary of that work.”

Despite the current pall hanging over Hong Kong’s capital markets, Clifford Chance is still acting on 11 Hong Kong IPOs, all of which involve businesses in China.

M&A to drive future growth

The past decade has seen mainland businesses and companies dominating the league tables for Hong Kong IPOs and listings. Corporate groups of international firms in Hong Kong, who have traditionally been busy with IPO work, are expecting mainland-related M&A transactions to become a main driver for future revenue growth.

An interesting phenomenon in today’s Hong Kong legal market is that more strategic investors are investing into or buying stakes in Chinese businesses listed on the Hong Kong exchange.

The most recent example of this new trend is Coca-Cola’s bid for Huiyuan Juice, in which Coca-Cola has proposed to buy the Hong Kong-listed company for US$2.4bn.
“As more Chinese companies are listed in Hong Kong, over time it creates more M&A work for Hong Kong lawyers,” said Tortoishell.

“The underlying assets of these companies are in China, but most of the M&A legal work is done in Hong Kong.” Herbert Smith has represented clients in many M&A transactions involving Hong Kong-listed Chinese companies, such as the Coca-Cola/Huiyuan Juice deal and Gome’s acquisition of China Paradise.

Private equity investment into Hong Kong-listed Chinese businesses is another trend that is still developing but Hong Kong corporate lawyers are expecting it to take off in the near future. “It can be difficult for private equity funds to invest into China directly due to regulatory issues, but it’s easy for them to take over or make big investment into Chinese businesses that are listed in Hong Kong,” said Tortoishell.

Competition from mainland counterparts?

If the amount of mainland business in Hong Kong’s economy continues to grow, will it mean that PRC law firms will be elevated to more important positions and take on more work that has been done by Hong Kong firms in the past?

The lawyers ALB China talked to all agreed that as the legal and regulatory environment in mainland China becomes more sophisticated, the role of PRC legal counsel in cross-border transactions is becoming increasingly important. In the case of Coca-Cola/Huiyuan, Beijing-based Dacheng has been instructed by the acquirer to handle the antitrust filings, which are critical to the success of the deal.

The increasing strength of the PRC counterparts in deals is mostly good news for international law firms in Hong Kong. “We always see China legal issues to be best advised on by PRC firms for their expertise, and the growing need for PRC legal advisors to come into the structuring of a transaction is inevitable. But it doesn’t mean that if PRC firms are stronger and more involved in a deal we will have less share of the profit of the deal,” said Bernita Yu of Slaughter and May.

Given that most of the cross-border deals are structured through offshore vehicles and involve common law jurisdictions, international counsel in Hong Kong will maintain a clear lead in advising on these deals.

“In most high-profile cross-border deals, international expertise and Hong Kong legal advice are required. Many of the Chinese companies involved are listed in Hong Kong and a large volume of Hong Kong regulatory applications need to be done for the deals,” said Yu. “Although some deals are governed by PRC law, they still involve overseas parties and run in international ways, such as documentation, so international and Hong Kong counsel need to be instructed.”

Currently, five leading PRC firms, including King & Wood, Jun He and Grandall, have established offices in Hong Kong and Zhong Lun is planning to expand into Hong Kong in the near future. These Hong Kong offices are now registered as foreign law firms in Hong Kong and can only advise on PRC legal issues. The question is, when these firms become qualified to hire Hong Kong lawyers and advise on Hong Kong law, will it mark the start of a new era in the Hong Kong legal service market?