The flags of China, Hong Kong and the Hong Kong Exchange in Exchange Square, Hong Kong. Photo: Shutterstock

This year, as the Hong Kong Stock Exchange is about to take the top spot as the world's largest initial public offerings market following a surge of listings, Chinese law firms are ready to take on their global peers in this most contested practice in Asia's financial capital.

"The Hong Kong IPO market is about to see significant change," said Fu Siqi, a partner at Beijing-based Tian Yuan Law Firm, who oversees the firm's Hong Kong practice. "The Chinese firms will take a larger market share, especially in midsize deals."

Chinese law firms are no stranger to Hong Kong IPO work, nor are they new to Hong Kong. Large domestic firms have been Chinese law counsel on Hong Kong listings for over two decades; many of these firms have had Hong Kong offices for more than a decade. But one crucial area the Chinese firms have not been able to penetrate is the Hong Kong securities law practice—until now.

The Hong Kong law IPO space was traditionally occupied by large English firms—a vestige of the former British colony's heritage. Things shifted in the early 2010s as U.S. firms searched for new growth avenues following the 2008-09 financial crisis. One after another, U.S. firms in Hong Kong launched their local law practices, often by lateral recruitment from their Magic Circle rivals. Since then, global law firms have dominated Hong Kong law IPO work in mid-to-large-sized deals.

This year, the three Chinese law firms most active in Hong Kong IPOs launched their own local law practices: Tian Yuan and Commerce & Finance Law Offices formed an association with local lawyers, while Jingtian & Gongcheng, which previously had a three-year partnership with Mayer Brown, took on locally qualified lawyers of its own. (Commerce & Finance's application is currently pending regulatory approval.)

So far, the three have been keeping busy. In July, Tian Yuan and associate Hong Kong firm William Ji & Co. acted as the issuer's Chinese and Hong Kong counsel, respectively, on a $118 million listing of Shenzhen-based online game developer 7Road Holdings Ltd. The firm has filed four more similar IPOs.

But can these Chinese firms upend the decade-long dominance of the global giants? Some say yes—with help from Chinese investment banks.

The rise of Chinese brokerage houses plays a big part in the expansion of Chinese law firms into the Hong Kong listing space. Global investment banks, such as Goldman Sachs and JPMorgan, traditionally only work with law firms that are on their panels. And their panels for Hong Kong law work usually only include the global firms.

"The foreign banks usually don't recommend Chinese firms for Hong Kong law work," said Tian Yuan's Fu, who joined two years ago from longtime Hong Kong IPO powerhouse Jingtian & Gongcheng to launch the firm's Hong Kong office alongside former Clifford Chance counsel Liu Ning.

But over the past few years, Chinese investment banks have taken on a more prominent role in Hong Kong listings, especially in those of mainland issuers. In 2017, domestic brokerages such as China International Capital Corp., China Merchants Bank Co. Ltd. and CITIC Securities Co. Ltd. were among the top 10 global coordinators by deal value for Hong Kong listings, while global giant Goldman Sachs fell out of the top 10.

Large Chinese banks, too, have law firm panels. But they allow more flexibility in appointing lawyers, said Gao Xiang, a Beijing partner at Jingtian. Both Gao and Fu noted that the Chinese brokerages are more inclined to recognize the reputation of individual lawyers.

In addition, Chinese banks are also more likely to listen to their clients, who often have a limited budget for legal fees, especially for small-to-midsized deals.

The Hong Kong offices of Chinese firms have an advantage, Gao said. "We are less expensive relative to global firms, and we are just as capable."

Global Law Firm Experience

Many of these Chinese firms aiming for a bigger market share have built their Hong Kong IPO practices with lawyers hired from their global counterparts. Tian Yuan's William Ji was a Shearman & Sterling associate before making the move earlier this year; Jingtian's Nicholas Chan was a Sidley Austin partner; Haiwen & Partners' Hong Kong office head Lu Guiping was former counsel at Latham & Watkins, and Han Kun Law Offices recently recruited two former Simpson Thacher & Bartlett lawyers to beef up its Hong Kong law practice.

Firms can also get around the hurdle of bank panels by approaching the deals from the issuer's side. Increasingly, highly valued Chinese startups are holding more sway with investment banks, lawyers said; if these clients insist on using a certain law firm, the banks will more likely yield.

Han Kun, for one, built its capital markets practice mostly on its startup client base—companies the firm has advised since their seed rounds. The firm's Hong Kong associate firm Miao & Co. has expanded to a dozen lawyers over the past two years. As the team grew bigger, the firm moved into a new office at The Landmark in Central last month—bucking a recent trend of law firms moving away from the city's prime financial district.

But there's a catch. In the 7Road deal, Fu said Tian Yuan was able to deliver seamless efficiency between its Hong Kong law and Chinese law teams, closing the deal in less than three months. But neither firm was able to provide U.S. law advice—an important piece for a global offering. Wilson Sonsini Goodrich & Rosati served as U.S. counsel on the underwriters' side.

There is no shortage of U.S.-qualified lawyers at Chinese firms, but without a U.S. office, most domestic firms are unable to give U.S. law legal opinions.

"The U.S. law piece will still be restrictive to our Hong Kong IPO practice, especially with larger deals," said Jingtian's Gao, noting that the firm is not considering a U.S. office in the near future.

Having a U.S. office also does not mean that a firm's U.S. law opinion will be accepted. "Legal opinions issued by established U.S. firms carry weight because they have been tested by a long history of securities litigation," said Weiheng Chen, Wilson Sonsini's China practice head.

Chen added that for large global offerings, the underwriters still tend to prefer U.S. law advice coming from major American firms. "The Chinese firms have not accumulated enough track records or knowledge bandwidth in that area," he said.

At least one Chinese firm has tried to tap into the U.S. securities law market. In 2014, King & Wood Mallesons (KWM) recruited former Davis Polk & Wardwell lawyer Christine Chen to add a U.S. securities law capability. The following year, the firm dubbed its Hong Kong securities practice a one-stop shop, acting as Hong Kong, Chinese and U.S. counsel on several Chinese commercial banks IPOs, including a $1.1 billion 2017 listing of Guangzhou Rural Commercial Bank.

But that was the last such deal for KWM, as Chen left the firm. In an interview with The Asian Lawyer in September, King & Wood Mallesons China chairman Zhang Yi, who previously oversaw the Hong Kong office, cited equity capital markets as one of the weaker practices in the office and said the firm is still catching up with peer firms.

Chen recently joined fellow Chinese firm Fangda Partners in Hong Kong, while King & Wood Mallesons relocated U.S. securities law partner Liu Jia from Beijing to Hong Kong. Liu spent eight years with Cleary Gottlieb Steen & Hamilton in Hong Kong before joining the Chinese firm in 2016.

Jingtian's Gao and Tian Yuan's Fu said both firms' Hong Kong law practice will now focus on mid-to-small-sized deals. "We are not chasing the big deals," said Fu, who noted that firms like Clifford Chance, Davis Polk & Wardwell, and Freshfields Bruckhaus Deringer will still get the top 5 percent, crown jewels of all deals.

"We are not aiming for those deals," he said. "We are targeting deals raising around $25-100 million."

Jingtian is taking a one-step-at-a-time approach, and the Hong Kong team is first focusing on getting clients and building up a deal list, Gao said. "Once we've worked on enough deals, we might be able to attract better people, and that might lead to us getting even better deals," he said.

Wilson Sonsini's Chen agreed that the Chinese firms' investment will pay off and their market share in the Hong Kong IPO space will increase. "But I don't think they will dominate the market," he said. "There's going to be a market of co-existence with the U.S. firms, the British firms and the Chinese firms—each doing what they are best at on different segments of deals."

Shrinking Deals?

Earlier this year, the Hong Kong Stock Exchange implemented a series of rule changes and made it easier for early-stage companies to list. Although the regulatory easing prompted more deals, growing tension in U.S.-China relations and global market uncertainties have actually resulted in high volatility in Hong Kong's stock market this year.

Even the larger deals are getting smaller. In May, the listings of Chinese smartphone maker Xiaomi Corp. and state-owned telecom giant China Tower Corp. Ltd. were both expected to be valued at over $10 billion. Both priced at the lower end, neither deal lived up to expectations: China Tower, whose IPO was the largest in two years, raised $6.9 billion, while Xiaomi only raised $4.7 billion. The Hang Seng Index, the market benchmark, dropped to below 26,000 in mid-October, wiping out the growth of an entire year.

Tian Yuan's Fu acknowledged that the market may be slower next year. But he was nonetheless upbeat about the firm's Hong Kong IPO practice. "We have enough deals in the pipeline," he said, adding that there's also compliance work for listed clients.

"The market will have ups and downs, but Chinese companies will come list in Hong Kong," Fu said. "The Hong Kong IPO practice will always be there."



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