Law firms work hard to ‘engineer’ deals

Last year was one to remember in terms of Chinese financial liberalisation. Hong Kong and Shanghai linked their stock exchanges, while Chinese state-owned conglomerate Citic — which covers everything from construction to financial services — reorganised itself in a huge deal that became a benchmark for future modernisations of government-backed businesses.

The deals themselves grabbed all the headlines but none would have been possible without teams from international law firms in Hong Kong and China carrying out the crucial legal and regulatory engineering.

UK-headquartered Linklaters scored a notable first last year with its work on the Hong Kong-Shanghai Stock Connect. This enables Hong Kong and Shanghai investors to invest in each other’s markets, subject to a daily quota.

It was created partly in response to an inefficiency where, because of the tightly controlled Chinese currency, domestic companies listed their shares both at home and in Hong Kong, with international investors able to buy them only in the separately governed territory. The same companies’ shares have often traded at different valuations, with the Chinese market dominated by retail investors and Hong Kong’s enjoying a much broader clientele.

Linklaters’ Hong Kong-based capital markets partner Chin Chong Liew says that no one had “built a bridge” between exchanges in this way before. Stock Connect was an entirely fresh concept and Linklaters had no blueprints from previous deals to work from.

“Stock Connect is not a transaction,” Mr Liew says. “It is an institution, it is a piece of social economic infrastructure.” A lot of legal “engineering” went into it, he adds.

Linklaters ensured that the Shanghai and Hong Kong clearing houses were linked in a way that avoided contagion in case either ran into difficulty. The lawyers also created a contractual framework to support the trading link. This was no mean feat considering Hong Kong and China have entirely different securities law regimes.

An equally game-changing transaction for corporate China was the restructuring of Citic, which was one of the first capitalist enterprises to be created under Deng Xiaoping’s economic reforms of the late 1970s and early 1980s.

This unique deal, which involved Hong Kong-listed resources and property group Citic Pacific buying $36.5bn of assets from its government-owned parent, presented a host of challenges to the lawyers at Freshfields, headed by Beijing partner Richard Wang.

The transaction was hailed as a significant step towards the opening up of more of China’s state-owned enterprises to foreign investors and placing their operations under the spotlight of public equity markets.

But no deal of this nature, at this size, had ever happened before in Hong Kong, explains Mr Wang, whose team advised Citic Pacific.

Freshfields’ main achievement was convincing regulator and stock market operator Hong Kong Exchanges and Clearing that the deal was not a reverse takeover.

The Chinese territory treats such transactions with as much scrutiny as initial public offerings, which can require up to 18 months’ approval time, Mr Wang says.

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Freshfields managed to get the deal done much more quickly, however, by convincing the HKEx to treat the transaction as an asset injection. The deal prompted the Hong Kong regulator to issue a guidance letter on how it would treat extreme, very substantial acquisitions in the future.

The arrangement also, therefore, provided a blueprint for other government-backed Chinese businesses to list their assets in Hong Kong to attract international investors.

Standard Chartered’s sale of its Hong Kong-focused consumer finance business PrimeCredit, meanwhile, highlighted how the colonial stalwarts of the territory’s business scene now increasingly find themselves working alongside homegrown, Chinese competition.

A Slaughter and May team, led by Hong Kong partner David Watkins, acted for Standard Chartered in selling PrimeCredit to a consortium. The deal represented a change of business focus for China Travel, which operates travel services, and involved the company, based in mainland China, purchasing Standard Chartered’s business with two international partners, Pepper, an Australian lender, and US-based York Capital Management Global Advisors.

“Each year, we see Chinese companies going increasingly global, and using Hong Kong as a springboard to test out new business models that they may intend to take abroad,” says Slaughters’ Mr Watkins. “From this perspective, Hong Kong and mainland China really are fantastic places to be as a law firm.”