THE H-SHARE LOSERS
Lawyers missed out on the first batch of H-share listings, underestimating
LAW firms advising China enterprises seeking listings in Hong Kong will be in a better position to profit from the second batch of mainland flotations after their experience in dealing with the first H-share group.
Many law firms believe they were underpaid for their work on the initial flotations - in comparison to accountants and merchant banks, whose fees are levied at fixed rates - because they underestimated the costs involved.
For all firms involved in mainland flotations, the costs and workload are greater than for companies in Hong Kong, but it is the lawyers who felt the pinch because strong competition for business meant their charges had to be kept low.
Merchant banks receive standard rates of 2.5 per cent commission on all new flotations, and mainland companies are no exception.
The bigger the size of the flotation, the more the merchant banks earn, although the risks they bear are greater.
However, lawyers underestimated their costs in the first of the nine state-owned enterprises to list in Hong Kong.
Some even claimed that they had made no profit from the first-batch of new listings, but hoped to quote the Hong Kong market rate for legal services in the second batch.
Due to the limited number of lawyers experienced in dealing with China's laws, firms working on the flotations are forced to pay for the services of these experts.
These high wage demands, along with other expenses such as increasing rents , will result in law firms with experience of mainland flotations being unwilling to quote fees for the second batch as low as for the first batch, according to Edward Cheung Wing-yui, a partner of Woo Kwan Lee & Lo.
Woo Kwan Lee & Lo were involved in four out of the ''nine'' flotations in the first batch, either advising the companies or the underwriters.
Legal advisers assisting in China flotations fall into two categories: those advising the companies floating and those acting for the merchant banks.
Firms advising the companies in the first batch faced many unforeseen problems during the restructuring process from state-owned firm to limited company.
The role of the advisers to the merchant banks is to review the legal documents relating to the prospectus for the listing.
The costs and duration of advising the companies are far greater than those for advising merchant banks. But the returns are not the same.
One of the major problems faced by the law firms when dealing with mainland clients is the perception in China that the service provided by lawyers can be done by anyone.
Awareness of the role played by lawyers is low, which can be attributed to China's lack of a well-established legal system.
''The work done by lawyers is substantial but it is not visible, '' said Leung Cheuk-yan, a partner at Baker& Mckenzie.
One consequence of increased legal fees could be that companies may be unwilling to pay the relatively higher fees of some professional law firms because they are used to being charged standard rates by accountants and merchant banks.
Unlike accountancy firms, where all the ''big six'' in Hong Kong had a share in the first batch of H-share listings, law firms faced more cut-throat competition.
If fees vary greatly for the second batch, enterprises may opt for the firms charging the least rather than those best equipped to smooth the flotation process.
According to Chao Tien-yo, a partner in Slaughter & May, the costs of assisting Chinese enterprises can be several times higher than for performing the same service for an average Hong Kong listing.
Many unforeseen circumstances can arise in the process of assisting these firms since the legalities of transforming state-owned enterprises into a listed organisation are very complicated.
The lawyers had to be aware of the laws applicable to Hong Kong and China when arranging listings for these companies and making their legal structure acceptable to Hong Kong's regulatory bodies and investors, Mr Chao said.
''A company involved in a simple business nature and operating in an easily-accessible location will be more attractive to law firms, resulting in greater competition,'' Mr Chao said.
''Transportation is one consideration since time-consuming travel delays the speed of work and increases the costs.'' Based on the experience of the six H-shares listed so far, firms who have experience from the first batch should be in a better position to compete the second time around.
Looking at the second batch, Mr Leung anticipated more effort would be required on the part of the legal advisers because of the greater scale of the organisations.
''Aviation and power plants will require more time to undergo restructuring; they will have to understand their new relationship with the state after the flotation of what is essentially a national industry,'' Mr Leung said. ''Working this out is not easy.'' Power plants may not be so attractive to law firms because of the company structure.
For example, the law firm will have to deal with the organisation at a provincial level and with the Beijing authorities.
A company such as Huaneng International Joint Stock Co, one of the firms in the second batch, incorporates five power plants in five different cities.
Similar difficulties exist with the Guangzhou-Shenzhen Railway.
''No one will care about the land use rights along the railway line until it's about to become a listed company,'' Mr Cheung said.