Law firms’ versatility helps drive success

Legal creativity is helping financial markets keep pace with global payment needs

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As digital technology offers ever-changing ways for people to manage their financial affairs, the Reserve Bank of Australia has been concerned about whether the banking industry payments platform was able to keep pace with technological progress.

Under pressure, the Australian Payments Clearing Association turned to King & Wood Mallesons for help in creating a platform that would offer Australian businesses and customers a fast, versatile and reliable method of making everyday payments.

To bring different players together, King & Wood Mallesons created a unique and flexible governance structure for the platform, with a constitution and a shareholders’ agreement that allows participants to increase or decrease their involvement over time. In December, the law firm helped secure funding from 12 institutions that are now financing the first round of infrastructure.

In exchange for their financial backing, the institutions will have voting rights, a voice in operations and usage entitlements once the platform is built. But the platform will not be a closed shop; it will be open to other institutions, if they want to create their own overlay for customers to access the system.

“We had to create a structure where everyone has to contribute,” says Scott Farrell, the partner who worked on the project. “But those who contribute more can’t, on their own, change the outcome or prevent others from joining.”

The firm’s involvement in the project, which it calls a “once in a generation” creation of fundamental financial infrastructure, highlights the crucial role of innovation by law firms as Asia modernises its financial markets to keep pace with the needs of growing economies.

Yulchon, a law firm in South Korea, last year helped publicly listed STX Corporation proceed with an unprecedented $155m debt-to-equity swap for publicly held bonds by securing the approval of 2,548 of STX’s 2,565 bondholders.

While large financial institutions routinely use debt-to-equity swaps in restructuring bad loans, this deal involved bonds held by numerous individual bondholders and was carried out as STX was undergoing a voluntary business reorganisation under the supervision of its larger creditors, all leading South Korean financial institutions.

The institutions insisted the public bondholders’ debt-to-equity swap was a precondition for approving STX’s voluntary reorganisation plan. Yulchon lawyers had just two months to organise and conduct a meeting with more than 2,500 bondholders and secure their consent, while preparing to manage potential legal questions about the unusual transaction.

In the end, the swap was approved, setting a precedent that other over-indebted Korean companies hope to follow.

“This is a win-win,” Ki Young Kim, the Yulchon partner who led the effort, says. “Before this transaction, when a company was in distress with a huge amount of creditors that were not financial institutions, they would usually reject a workout. Now, this can be used instead of bankruptcy procedure.”

Dacheng Law Offices, the Chinese firm, was retained by the Shanghai Environment and Energy Exchange to advise on creating trading policies, payment and settlement systems for one of China’s first regional carbon exchanges.

With no national laws or prior national precedents on carbon trading, Frank Qu and Nancy Sun, Dacheng lawyers, designed the entire system from scratch, dealing with tough questions about how to assess the intangible permits and make them tradable.

“There were many different ideas and proposals,” say Mr Qu. “The discussions, the brainstorming, narrowing down the approach — the whole process was very painful.” But the process bore positive results. The system devised is serving as a model for China’s national carbon exchange, likely to launch next year.

Legal innovations are also essential to bring investment into frontier markets such as Vietnam and Myanmar, where the domestic legal system is often out of sync with the realities of international business and where creative structures are necessary to give companies the ability, and confidence, to invest.

For example, Vietnam-based LNT & Partners helped state-owned PetroVietnam avoid a time-consuming and costly retendering process for a hydropower plant after one of the original international investing consortium members behind the winning bid had to drop out as it said it could not help to finance the costly deal.

Vietnam’s rigid laws had previously required a complete retendering in such circumstances. However, LNT provided a legal argument for the consortium member to be reclassified as a subcontractor — the company was still involved, but not as a financier. The new legal framework allows for the inclusion, exclusion and addition of investors throughout the life of the project, a first for Vietnam, which is creating the flexibility needed to draw international investment in an uncertain business climate.

In Myanmar, DFDL helped a consortium of Singapore banks structure a deal to lend up to $85m to Pan Asia Majestic Eagle for the rollout of 1,250 telecom towers as part of a mobile phone network. The deal was possibly the first limited-recourse, cross-border loan financing deal in Myanmar and required careful legal structuring to give the Singaporean banks the comfort of security over Pan Asia Majestic Eagle assets in Myanmar, despite a legal system totally unprepared to enforce security rights.

“Many Myanmar laws are 100 years old or more, but they are still workable as they are based on English laws,” says Nick Towle, a senior legal adviser at DFDL and an English solicitor. “Construction of the security package was possible but making it enforceable was the challenge. The lenders were brave here . . . They wanted to break the ground and pioneer this type of transaction.”

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