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Chinese IPOs in US test American law firms

(China Daily)
Updated: 2007-04-30 09:16

With a growing number of Chinese companies hoping to raise capital through initial public offerings (IPOs) on one of the United States stock markets, US law firms face challenges and intense competition as they try to become part of the nation's booming development.

A watershed came in 2005, when an unprecedented number of Chinese companies went public in the US.

When assisting Chinese companies to list in the US, firms usually fall into two kinds those representing stock issuers or representing Chinese companies that want to issue securities and attorneys that serve as counsel for underwriters such as investment banking houses Goldman Sachs, Merrill Lynch and Morgan Stanley.

The work of advising stock issuers is often more complex than for representing underwriters, resulting in higher fees.

New York-based attorneys or East Coast firms like Simpson Thacher & Bartlett LLP have more opportunity to advise underwriters, while West Coast firms such as Latham & Watkins tend to have more clients that issue stock, say insiders.

Work can include establishing an offshore holding company in the British Virgin Islands or the Cayman Islands, instructing Chinese companies on US regulatory requirements, drafting the prospectuses for Chinese firms and helping to meet US accounting standards.

Once the deal is close to an IPO, US lawyers perform the standard work for compliance with the US Securities and Exchange Commission and then choose a stock exchange, either the New York Stock or Nasdaq Exchange.

"Since the workload is pretty heavy, we usually have a team of at least three for lawyers on a daily basis, plus other lawyers specialized in advising on tax, share options and others," says Chen Leimin, a partner with Simpson Thacher & Bartlett LLP, which recently advised on the IPO for Simcere, a Nanjing-based pharmaceutical firm.

Preparation of the prospectus is probably the most difficult part of all legal services, says Chen.

"It must be in accordance with American securities regulations, so we need regular communication with the management of the company, at least by frequent teleconferences," says Chen.

The ability of Chinese companies to secure legal services for IPOs in the US is influenced by a string of factors, including language skills, ties to the investment banking community and Chinese deal-making experience.

Among the factors, a recommendation from underwriters and a relationship with the company are extremely important, say market insiders.

"Usually law firms seek potential clients through recommendation of underwriters," says Zhang Jiannan, a partner of Kirkpatrick & Lockhart Preston Gates Ellis LLP. Underwriters normally suggest three to four law firms for each deal.

"Underwriters are indisputably the most sophisticated legal service consumers and the employment of a law firm depends on underwriters suggestions if the company has no existing relationship with US law firms," says Chen.

Some law firms first began their domestic practices in the 1990s including Shearman & Sterling LLP, which came to China in 1993, and O'Melveny & Myers LLP, which established both Beijing and Shanghai offices in the late 1990s. They have obvious advantages in connecting with Chinese companies.

But it doesn't necessarily mean offshore law firms have no chance. Practices without a Chinese presence, such as Loeb & Loeb and Philadelphia's Cozen O'Connor, have found room on the field.

Simpson Thacher & Bartlett LLP, a New York-based firm, has advised 16 companies, nearly half of the total US IPOs by Chinese companies, though it didn't have a presence in China until this April.

"We had already done quite a few Chinese projects before we set up an office in China," says Chen. His firm mainly serves as the underwriter's counsel and has advantages in the field of cutting-edge industries.

It was active in IPOs offered on US exchanges by Chinese companies like Suntech Power Holdings Co Ltd, Home Inns & Hotels Management Inc, Focus Media Holding Ltd and Ctrip.com.

Attracted by the burgeoning opportunities, Kirkpatrick & Lockhart Preston Gates Ellis LLP and Simpson Thacher & Bartlett LLP have also brought a business presence to China.

Kirkpatrick & Lockhart opened a representative office in Beijing in 2004. Simpson Thacher just received its operating license this month from the Chinese government and established its first representative office in Beijing.

At present, 29 American law firms have offices in Beijing, while 25 have operations in Shanghai, according to statistics from the Ministry of Justice.

"We decided to set up this office mainly because China's market is growing very fast and many of our US clients are coming to China to develop their businesses," says Chen.

The flood of US law firms has placed heavy price pressures on them and Chinese companies have lowered the price they are willing to pay for legal services.

"Some Chinese companies have given us extremely low bids and we have had to abandon them," sighs Zhang. Chen says he has also declined a number of business opportunities due to low prices.

"We face the price pressure, but legal services done by top law firms are sure to have better quality than those done by less qualified firms and so the price is worth it as it safeguards the interests of clients," says Chen.