Brexit has rocked Europe to its
foundations, but it will present opportunities for law firms if
they can spot them – meanwhile, though clients from China are
potentially a rich source of work, they can be tough negotiators
when it comes to fees
Exactly how the international business of Spanish and Portuguese
law firms will be impacted by Brexit is, as yet, unclear. As
clients muddle through amid the uncertainty, law firms are expected
to receive a wave of advisory work as businesses explore their
options and consider whether their UK headquarters would be better
located elsewhere in Europe. However, any surge in advisory work
will likely be overshadowed by a significant drop in transactional
matters – some estimates say that, in the event of the UK
undergoing a slow, protracted separation from the EU, the deficit
in global M&A activity could be as much as $1.6 trillion.
Beyond the tumult of Europe, lawyers talk of the
"staggering" potential of the Chinese market. With
foreign direct investment from the country reaching new heights,
law firms are refining their strategies for cashing in on the
potential for major instructions from the Far East. Singapore is
also highlighted as a major centre for dispute resolution and
arbitration work, but the US market remains one that many European
firms still struggle to penetrate. From a Portuguese perspective,
Lusophone Africa remains the bedrock of many law firm's
international business, though they also identify Latin America,
Francophone Africa, and, perhaps a little surprisingly, Iran as
potential hotspots.
Companies to leave UK?
"Brexit could be a big
opportunity," according to Hogan Lovells partner José
Luis Huerta. "Many thought Brexit was not possible and
overlooked reports, but now some Asian and Latin American
companies, for example, are seriously considering relocating [from
the UK]." However, Baker & McKenzie partner Enrique
Valera, says it is "too early to describe the result of the UK
referendum as a big international opportunity". He adds:
"There is a question about whether it [the result of the
referendum] will be followed through – the application [to
leave the EU] may have to be ratified by parliament." Valera
says it is too soon to tell whether Brexit will be a "huge fee
driver".
Some senior partners at law firms in the UK said that Brexit
wouldn't happen, according to Allen & Overy partner Antonio
Vázquez-Guillén. He adds that it remains to be seen
whether the UK government will act on the result of the referendum.
"We've had many client enquiries and our regulatory
finance people are very busy," says
Vázquez-Guillén. He continues: "It is unclear
whether material adverse change [MAC] clauses in contracts have
been triggered, it depends on the context of the transaction."
Vázquez-Guillén believes that, if companies in the UK
decide to move their headquarters into Europe, among the cities
that could benefit are Frankfurt, Paris, Amsterdam and Madrid.
"UK has got instability, but Spain has got stability," he
says. One partner remarks that his firm recently conducted studies
for a number of US companies to help them make a decision on where
to base their European headquarters. "They [the companies]
decided to go to the UK, but that decision may now be revised [due
to Brexit]," the partner adds.
Deal slowdown
The result of the referendum in the UK will result in a
"slowing down" in the making of decisions on UK-related
deals, says Ashurst partner Eduardo Gracia. "In some cases,
bidders have decided they are not going to file their bid by the
deadline [because of Brexit] – some companies are now
wondering 'should we keep bidding for UK assets?'" One
partner argues that investment funds that were about to submit a
bid for a UK company before the referendum may now be
reconsidering, and this may present an opportunity for Spain. The
partner adds: "Investment funds have money to spend and Spain
will see probable political stability. The Brexit issue triggers
the Northern Ireland and Scotland issue – [investors will
think] 'what business investment can I make there with
certainty?'" There is a view that, with funds looking for
returns on investment, the result of the Spanish election (in which
the ruling PP increased its number of seats, though it failed to
win a majority) was good for the country in terms of increasing its
chances of attracting investment. "This is a great opportunity
for Spain," says one partner. "We [Spain] can sell
stability and predictability – Spain is a cheap jurisdiction,
while Madrid is a great hub," he adds.
Spain would have a better opportunity to benefit from uncertainty
in the UK if it had a stronger government, argues Gracia. "It
would be better if Spain was less bureaucratic, Anglo-Saxon
investors would fear this [bureaucracy in Spain]," he says.
Gracia also says that while income tax has recently been reduced in
Spain, regional government in the country can set inheritance tax
as high as 80 per cent. "We [Spain] could replace the UK, but
bureaucracy could push us out of the game," Gracia says.
The big banks are all in Spain, but the country's public sector
lacks the international standards needed to "really understand
what investors need", says Vázquez-Guillén.
"It's also difficult when the government changes the rules
– we are playing within a global market, we have fantastic
law firms – all the big players are in Madrid, what is needed
is an agreement to provide a stable regime for all
investors."
' Joke'
ministries
One partner argues that Spain should be asking international
businesses what the country could do to make it attractive to
investors. As another partner at an international firm in Madrid
puts it: "We have government ministries that are a joke, we
don't have a serious financial court, we should be moving
quickly, we should create an arbitration hub."
There is also a view that major Spanish law firms should "work
harder to convince government" of the need to bring more
"legal business" to Spain, as one partner puts it. He
continues: "The UK government has a plan to increase legal
business, but do we [Spain] have a plan?" It is in this
context, that Frankfurt and Luxembourg are identified by some
market observers as the places that have the most to gain as a
result of Brexit.
It is understood that some major global firms with operations in
London are now asking themselves whether they have
"over-capacity" in the UK. One partner at the Madrid
office of a 'Magic Circle' firm says: "Given the value
of the pound following Brexit, it may be more profitable for a
global firm to move 500 London lawyers to Frankfurt or Luxembourg
– you also have to ask whether it makes sense for US firms to
open offices in the UK." Another partner remarks that banks
and hedge funds could "trickle from London".
Chinese potential
Away from the Brexit-related turmoil and uncertainty, the Chinese
market has "staggering potential", according to Valera.
He adds: "We [Baker & McKenzie] have established a Chinese
practice in all major centres – the Chinese are looking at
anything and everything and there are a lot of opportunities for
cross-border work." Valera highlights data showing that
China's outward foreign direct investment (FDI) in Europe and
North America amounted to a record $40 billion in 2015.
However, despite the opportunities offered by Chinese outbound
investment, there are doubts about how profitable such work will be
for law firms. "It will take time to make money [from Chinese
investors]," says one Madrid-based partner at a global firm.
"The Chinese are really tight on the way they negotiate
fees." Meanwhile, Singapore also offers considerable
potential, according to Vázquez-Guillén.
"Singapore is a dispute resolution/arbitration hub – we
see a great market there," he adds.
There seems to be a broad consensus among law firm partners in
Spain that the US market is a difficult one to crack. One partner
remarks that the US market is dominated by Manhattan-based firms
and that US firms from outside New York are often left trailing
behind them. Another partner comments: "Collaboration and
interaction is required and you need a strategic view [when running
a law firm], but US firms generally seem to be more focused on
getting revenues in quickly, they have a much more short-term
view." Meanwhile, there is a view that Anglo-Saxon firms could
potentially make more inroads into the Latin American market.
"Anglo-Saxon firms are missing business in Latin
America," one partner says.
Indeed, Javier Villasante, partner at Cuatrecasas, Gonçalves
Pereira, highlights Latin America as one of the most active markets
due to its "openness to development". He adds that China,
Africa, and the Middle East are also in the spotlight due to
expected developments in a range of sectors including
infrastructure, TMT, real estate, retail, energy (including oil and
gas) and tourism.
Add value or
die
There will still be a considerable number of opportunities for law
firms to advise on cross-border M&A despite current global
uncertainties, such as the slowdown in the Chinese economy,
depressed commodity prices, falling stock markets and Eurozone
instability, according to Álvaro Sainz, senior partner at
Herbert Smith Freehills. He adds: "The short to medium-term
outlook for M&A as a priority focus for capital allocation by
corporates remains extremely robust and optimistic."
Meanwhile, the key challenges law firms face at a global level
include the increasing commoditisation of the work they do and
significant pressure on fees. "Clients are becoming more
knowledgeable and they know how to ask for more," remarks one
partner. Another partner in the Madrid-office of a 'Magic
Circle' firm says bluntly: "You need to add value or
you're dead. You need to re-evaluate your equity system and you
need to cut costs." In addition, lawyers also note that, in
general, there is a significant increase in the number of in-house
lawyers. "There are more in-house lawyers, they come from our
profession and they know exactly what to ask for – clients
don't want junior lawyers learning on the job," says one
partner.
Cheap debt driving
activity
From the perspective of law firms in Portugal, Linklaters partner
Pedro Siza Vieira says, in a reversal of the situation in previous
years, there are currently greater opportunities in more mature
markets, rather than in emerging markets. "Cheap debt is the
driver of activity – the Asian economy is struggling, but
there are opportunities in Latin America and Central America,
especially Mexico and Peru," he adds. "We're very
busy in Africa, there is a lot of activity, though the pipeline is
not as strong [as in previous years]." In addition, Siza
Vieira says Chinese outbound investment has reduced
significantly.
Nuno Pena, founding partner at CMS Rui Pena & Arnaut, says that
the levels of interaction within the CMS network have increased.
"The interaction is reaching a new level," he adds.
"We have developed joint teams – we're very active
in the aviation sector in Western Europe on a Portuguese-oriented
project." Pena says that the collapse of Banco Espírito
Santo means that a lot of Portuguese lawyers are experienced in
bank resolution matters and that this expertise is "sought by
colleagues in other jurisdictions".
Though Africa is still a significant source of work for Portuguese
firms, Pena says it can be sometimes difficult to "take money
out due to the current transfer restrictions in some
countries". In addition, there is also a lot of outward
investment from Brazil and this represents an opportunity to win
business on the "private client side", according to
Pena.
Excess of liquidity
There are significant opportunities for Portuguese law firms to
advise international investors on inbound investment, particularly
in the real estate and finance sectors, says ABBC partner Nuno
Azevedo Neves. "There is an excess of liquidity in the
international market, investors are looking for good opportunities
and there will be transactions – there are also a lot of
opportunities in other Portuguese-speaking countries," he
adds.
Miranda managing partner Diogo Xavier da Cunha says that, aside
from consolidating growth in Lusophone Africa, the firm has been
developing business in Francophone Africa, specifically in
countries such as Cameroon, the Democratic Republic of the Congo,
Congo Brazzaville and Gabon. However, he says that it is not easy
to win business in such markets where there is "competition
from French firms". Xavier da Cunha adds that, despite the
fact that the natural resources sector is "suffering" and
some international investors have decided to stop investing in
Africa, he believes it is a continent with a lot of potential in
the future.
High-net-worth individuals, particularly based in France and
Brazil, are making a significant number of small investments in
Spain and Portugal, says SRS Advogados partner Gonçalo
Anastácio. He adds that, due to recent EU regulation, there
are also significant opportunities to advise foreign investors on
issues relating to data protection and private enforcement of
competition law.
Iranian demand
PLMJ partner Hugo Rosa Ferreira says that his firm has adopted a
strategy of expanding its reach to other jurisdictions in order to
raise awareness of its network. "We have opened a UK
representative office, we also have a Swiss desk and a Nordic desk
– we want to be more visible in a global sense," he
says. "We have also expanded our reach to Brazil, we have a
partner there twice a month, there is a lot of inbound work from
there." Meanwhile, Pena highlights the opening of CMS's
office in the Iranian capital of Tehran earlier this year:
"There is a lot of demand from Portuguese clients [for advice
in Iran], which was unexpected."
Portuguese-speaking countries in Africa provide the most feasible
international opportunities for Portuguese law firms, according to
Vieira de Almeida partner Manuel Protásio. "There is a
real need to move liquidity into those countries and capital
markets are starting to be developed there."
The Portuguese economy is still under pressure so clients are
looking for new markets, says Inês Albuquerque e Castro,
associate at FCB Sociedade de Advogados. "Law firms must
accommodate the new needs of clients and be able to provide a
multijurisdictional service," she adds. To this end, the firm
set up offices in Angola and Mozambique in association with local
firms, though Albuquerque e Castro says that such partnerships are
"not always easy and it's important to choose the right
partner".
Huge Brexit
risk
With regard to the issue of Brexit, Siza Vieira says that once the
"template for the UK cutting off relations with the EU"
is finalised, there will be opportunities for law firms to advise
clients on relocating. However, he adds that the immediate impact
will be adverse for business. "There will be a freeze on
investment decisions," he adds. Another partner at a Lisbon
firm comments: "There is huge risk here [associated with
Brexit] and uncertainty creates a market for lawyers."
However, there is a view that any gain made by law firms by winning
Brexit-related advisory work will be overshadowed by the loss of
transactional work.
Another hypothesis put forward by one partner is that Brexit could
mean that UK firms would not have access to the European market and
vice versa. He adds: "Would a UK court decision be enforceable
in a European jurisdiction? Maybe not anymore." In addition,
one partner remarks that, depending on the final terms of Brexit,
Chinese and US banks with their European headquarters in London may
not be able to provide services in Europe. The partner continues:
"London as a financial centre is dependent on the single
market; banks in the UK not given access to the single market will
refocus their operations on Paris and Frankfurt." He adds that
Europe should take the opportunity to "push for greater
integration, for example by implementing a single employment
insurance, for example". The uncertainty surrounding Brexit is
the most damaging aspect, according to MLGTS partner Tiago
Félix da Costa. "The biggest problem is not knowing
what the future holds," he says. However, Félix da
Costa adds that, despite the uncertainty, firms need to continue
with their international expansion. "Stopping growth abroad is
not an option," he says.
A number of leading Portuguese firms say that 2015 was their
"best year ever", but Rosa Ferreira says that law firms
need to prepare for the future. He adds that his law firm took the
decision to expand internationally when the Portuguese economy
began struggling due to the crisis. He adds: "Large law firms
in Portugal are close to their peak in terms of how they can
grow." As one partner puts it: "I don't believe in
indefinite growth, law firms now need to be prepared for doing
business in mature markets."
The biggest challenge facing Portuguese law firms in the coming
years will be profitability, claims one partner at a Lisbon law
firm. He adds: "Clifford Chance, for example, used to be the
largest law firm in the world, but it's changed its focus from
scale to profitability – that change will come to Portugal.
The mid-market will be in a difficult situation: specialisation
will be key and clients will want solutions to specific problems
and specific issues."
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