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July 16, 2010 5:44 PM

Letter from Asia: Should U.S. Firms Build Local Practices in Hong Kong?

Posted by Anthony Lin

The Agricultural Bank of China's initial public offering, expected to become the world's largest, debuted today, landing squarely in the middle of a debate over whether leading Wall Street law firms should build local practice capability in Hong Kong.

The IPO on the Hong Kong and Shanghai exchanges would seem an obvious rallying cry for those arguing that top American capital markets firms will miss out on deals without their own Hong Kong lawyers--except that the lead lawyers on the AgBank deal are from New York's Davis Polk & Wardwell, which only practices U.S. law.

The starring role for the firm, whose team was led by Beijing partner Show-Mao Chen, was possible because, on the biggest deals involving Chinese state-owned companies, of which AgBank is one, institutional investors in the U.S. and elsewhere expect compliance with Securities and Exchange Commission disclosure requirements, even though that's obviously not a requirement of regulators in Shanghai or Hong Kong.

"That is most of the prospectus," acknowledges Antony Dapiran, the Beijing managing partner for Freshfields Bruckhaus Deringer, which served as Hong Kong counsel on the IPO. "You really need a U.S. firm for that, and they obviously have a great team."

Dapiran says the legal lineup on the deal is a replay of sorts, with many of the individuals involved assuming the same roles they played in the 2005 IPO of the China Construction Bank and the 2006 IPO of Industrial and Commercial Bank of China, which raised $21.9 billion and is currently the world's largest. "Even the bankers are the same," he notes, "though some of them have moved to different banks." Chen declined to comment.

Such deals demonstrate how firms practicing only U.S. law can continue to win major assignments in the region. But many lawyers think those days are numbered. New York Stock Exchange IPOs used to be de rigeur for China's biggest companies, but most now stay closer to home in Hong Kong and Shanghai. And while Chinese issuers may still want separate U.S. lawyers on the biggest deals, many believe they will increasingly turn to one-stop-shop firms.

Magic Circle firms like Freshfields and Clifford Chance could fill dual roles. Partly to forestall that happening, top U.S. firms like Skadden, Arps, Slate, Meagher & Flom, Latham & Watkins, and Shearman & Sterling have launched Hong Kong law practices (local practice in mainland China remains off-limits). Firms like Davis Polk, Simpson Thacher & Bartlett, and Sullivan & Cromwell are thinking about this but aren't quite there yet.

Such firms, many of which are lockstep, are hesitant because the Hong Kong practice generally commands lower rates than U.S. law work, and the enormous competition to get on the biggest deals can lead to deep discounts. Indeed, this report by Bloomberg that AgBank is demanding a 36 percent cut in fees paid to the underwriters will no doubt play into law firms' thinking, too.

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