Law firms use guile to expand in Asean

Over the past five decades, East Asia’s growth has been aided by a range of factors — key among them reductions in trade barriers and strengthening of the rule of law. Through what the World Bank called “the East Asian miracle” between 1965 and 1990 and beyond, many of the region’s economies succeeded in attracting foreign investment, reduced tariffs and took other measures to boost capital flows.

But while most areas of business have opened up, one notable exception is legal services. Lawyers facilitating cross-border deals have not been subject to the same level of local deregulation as their clients.

This has not stopped many lawyers prospering. Alan Hodgart, a London-based professional services consultant, predicts Asia-Pacific will become the world’s second largest regional legal market behind North America by 2018 — increasing from $109bn revenues in 2012 to $215bn. This runs alongside the World Bank’s prediction that GDP growth in East Asia will continue at more than 6 per cent a year to 2018.

There will be much demand for lawyers to preside over international deals, mergers and arbitration — but they will have to innovate around regional strictures.

One of the chief problems for overseas law firms is gaining a presence in multiple, lucrative markets. The status of lawyers as “officers of the court” is a factor in this, says Tony Grundy, senior counsel at Japanese law firm Mori Hamada & Matsumoto. “Upholding the legal standards of a jurisdiction is part of national sovereignty, and the idea of all those firms being foreign-controlled makes people a bit nervous,” he says.

Despite long histories of legal services protectionism in the EU and Japan, those regions are now largely liberalised. By contrast, most countries in Asia Pacific still bar foreign lawyers from practising local law. In mainland China, foreign lawyers are not permitted to work with Chinese law, and local lawyers cannot work for international firms. Foreign firms face discriminatory tax treatment and limitations on opening offices. They are also restricted in their meetings with Chinese government agencies.

Among the 10 members of the Association of Southeast Asian Nations, various degrees of protectionism persist despite the recent creation of the Asean Economic Community, which seeks to promote the freer flow of goods, services, capital and labour. Particularly stringent regulations are imposed in Indonesia, Malaysia and the Philippines. While Myanmar, Laos and Cambodia have unregulated legal markets, this is not expected to last for long.

“I think it is likely we will see more restrictions, with the local bar associations in these frontier countries feeling that the foreigners coming in are eating their lunch,” says Mr Grundy.

One way around this protectionism is the creation of strategic partnerships between international and local firms. To gain access to the Chinese market, Mayer Brown JSM partnered with Jingtian & Gongcheng by basing their association in the relatively liberalised enclave of Hong Kong. The firms will operate as separate entities but with joint legal teams and shared office space.

According to Elaine Lo, Asia chair and senior partner at Mayer Brown JSM, the association is more than a “best friends” arrangement. But it stops short of a merger, which is considered impractical because of the firms’ management structures, profit pools and the different business models between western and Chinese firms.

Such partnerships are relatively rare in China, in part because of regulatory hurdles, but also thanks to the strategic interests of elite Chinese law firms. “Some of the leading firms will work with a range of US and UK firms,” says Tony Williams at London-based legal management consultancy Jomati, “so they won’t necessarily want to go exclusive because they don’t want to rule out working with everybody else.”

Consequently, elite Chinese firms are likely to enter into partnerships with only the very largest international suitors that will be able to connect them to a global pool of clients. Baker & McKenzie and FenXun last year formed the first joint operation between an international and Chinese firm based on the mainland. This was made possible by the Shanghai free-trade zone initiative of 2013.

Upholding standards is part of national sovereignty; the idea of firms being foreign-controlled makes people nervous

Across the Asean bloc, strategic partnerships are being formed. To help its Japanese clients trying to expand into Indonesia, Mori Hamada & Matsumoto has seconded its lawyers to Jakartan firm Akset to create what it calls a “virtual desk”. In accordance with Indonesian bar rules, MHM’s lawyers may provide “assistance” to clients there, as an assurance of quality, but responsibility for the Indonesian legal advice rests with the local host.

While many international firms are targeting specific countries, two regional firms — Singapore’s Rajah & Tann and Malaysia-based Zico Law — are establishing a pan-Asean presence.

Rajah & Tann, which was founded in the 1950s, began its expansion across Asean in 2010 and now has more than 500 lawyers working in the region. But rather than posting its lawyers into foreign jurisdictions, the firm has established its network through a series of partnerships with local independent firms.

Most of Rajah & Tann’s eight member firms remain legally independent entities, but they bear the Rajah & Tann brand in jurisdictions that allow it, such as Myanmar, Cambodia and Vietnam. As managing partner Lee Eng Beng says: “We wanted to become a Southeast Asia law firm in identity and in composition.”

From a head office perspective, the ambition is to tap the potential of the neighbouring markets where revenue growth has far outstripped that generated by the company’s Singapore operation, the company says. For local partners in less developed jurisdictions, joining Rajah & Tann secures access to an Asean-wide network through which their clients can access markets in Myanmar, Laos, Cambodia and Vietnam.

Ahmad Fikri Assegaf, managing partner of Jakarta-based Assegaf Hamzah & Partners that joined the Rajah & Tann network in 2014, recently told The Lawyer magazine that more regional economic integration had created big opportunities for Indonesian businesses, particularly “second-tier corporates” that until now had been more focused on the domestic market.

Rajah & Tann has set up an online portal to serve the regional expansion plans of such smaller companies better. The portal offers cheap, accessible advice on how to navigate the legal and business practices across the Asean region.

Innovative, untried business structures are another method being adopted for pan-Asean expansion. In recent years, regulatory changes in Australia and the UK have permitted non-lawyers to own law firms under such structures, which also allow them to publicly list and trade. But in Asean countries, incorporating as an ABS is still prohibited.

In part because of these limitations, lawyers have traditionally formed partnerships, where all the partners have a voice in the firm’s decision-making process and profits are paid out in full at the end of every year. But a limitation to this business model is that, with no way to raise capital, law firms tend not to invest in their own expansion. There is also a tendency among lawyers to think of themselves differently than they would other business or service providers.

Challenging this orthodoxy is Zico Law. Like Rajah & Tann, it has developed an Asean-wide network of partner law firms to service international clients. But unlike Rajah & Tann, Zico has developed a corporate structure that in 2014 allowed it to raise $14.4m for its own expansion through the listing of its parent company, Zico Holdings.

The parent company provides services — including IT, accountancy, training and secretarial services — to the separate law firms in the Zico Law network and does not function as a law firm, thus allowing it to list and trade. “The corporate support helps the law firm to grow and at the same time the law firm continues to practise law,” says Zico Holdings chair Chew Seng Kok. “I had to resign from my position as regional management partner and become the non-executive chairman of the network. So, I provide direction but I cannot practise as a lawyer.”

The arrangement is innovative not only because Zico has managed to simulate how an ABS works to enable its expansion, but also because, globally, it is one of the first law firms to expand horizontally into the broader professional services market.

The move comes at a time of growing pressure on traditional law firms as accounting firms — particularly the Big Four — have begun offering cheaper legal services. PwC’s legal arm is the world’s tenth biggest practice, and all four networks’ legal divisions are in the top 40. Since 2013, EY Legal has expanded from 23 countries to 69 and has merged with Chinese law firm Chen & Co.

Additionally, the greater use of technology to provide legal services — from online dispute mediation to open-access legal documents — is eating into the profit margins of traditional law firms that still charge heavily for minor tasks.

“It’s no longer possible to ignore the pressure of having to cater to the service market in the way that the accountants have done,” Mr Chew says. “The accountants can [perform many legal tasks] for 30 or 40 per cent cheaper using IT.” But because of Zico Law’s new model, leading what Mr Chew calls “the trend” in the region, he does not see them as a threat.