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The Asian law firms investing in legal technology

In a highly competitive and low-growth market, firms are increasingly turning to technology and innovation to stay ahead of competition while boosting efficiency and profitability. Asia-based firms are no exception. Those in Australia and Singapore, where growth has been harder to achieve, are leading the charge.

Over the past few years, ‘legal hackathon’ and ‘design thinking’ have become the most frequently used buzzwords among the managing partners of Australian firms. In response to demands for greater value from sophisticated clients, Australian firms are the most advanced group in the Asia-Pacific 100 when it comes to innovation and technology.

KWM, for example, uses a variety of AI products and software either to improve efficiency, for work such as due diligence and discovery, or to help build up contracts. It has also developed its own web-based programs and apps to navigate clients through regulatory and compliance requirements, and to assist with graduate recruitment. Its ‘Being a Clerk’ app aims to help new recruits make the most of their KWM experience.

To generate growth in a highly competitive and increasingly sophisticated market, Clayton Utz recently formalised its innovation strategy, appointing a director of innovation and an innovation team made up of 81 professionals. They employ a science-based approach to grow the firm’s business and address clients’ needs.

Meanwhile, Gilbert + Tobin has been training its lawyers to code software with US smart contract firm Taylor Gerring and invested in start-up online legal services provider LegalVision. In addition, its internal legal transformation team launched the Smart Counsel app to provide free legal resources and answers to in-house lawyers. The firm hosts ‘legal hackathons’ with major clients such as Westpac to develop and prototype innovative solutions to a range of common legal requests and operational issues.

Australia’s mid-tier firms, which probably face the strongest squeeze in the market, are also embracing change. Hall & Wilcox is a leader among its peers. Recently, it deepened its commitment to innovation by appointing legal IT professional Peter Campbell as director for client solutions. The move is set to drive forward a ‘Smarter Law’ strategy, with initiatives such as the development of client-facing technology, improved project management methodology, business process improvement and developing the firm’s knowledge management strategy. Teaming up with technology firm Neota Logic, Hall & Wilcox has also launched a web application that makes it faster and easier for workers’ compensation insurance providers to pursue recoveries.

Elsewhere, South-East Asian network Zico Law and Indian firm Cyril are pioneers in adopting AI and technologies to improve the efficiency and delivery of legal services. Malaysia-based Zico Law’s affiliated listed entity, ZICO Holdings, has launched a subsidiary, ShakeUp Online, to provide professional services over the internet and transform the way in which services are delivered and consumed. ShakeUp is collaborating with the UK’s legal document automation system provider, Epoq Legal, through a Licence and Support Agreement. Initially, ShakeUp aims to provide affordable online legal services to small and medium-sized enterprises in the ASEAN region, offering access to high-quality legal documents that are easy to understand and simple to use. The platform also plans to partner with large companies to help improve the quality and cost-efficiency of their in-house support services.

Cyril Amarchand Mangaldas (CAM) has become the first firm in India to improve efficiency, accuracy and the delivery speed of certain legal services using AI. In January 2017, it signed an agreement with Canada-based Kira Systems, a machine-learning software provider. In May, CAM appointed legal operations manager Komal Gupta as its first head of innovation and AI. Previously vice-president of Integreon Managed Solutions, she will develop and drive the firm’s innovation strategy.

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No ‘MARQ’ to Flipkart

The e-commerce transactions have increased phenomenally in India in the last few years, this movement has been spearheaded by Flipkart and Amazon in India. Recently, Flipkart in a bid to increase its influence in electronic goods market launched a new brand ‘MARQ’ however, this trade mark faced legal issues because of its similarity to a prior registered trade mark ‘Marc’ also being used ofr electronic appliances. This case, M/s Marc Enterprises Pvt. Ltd. v. Flipkart India Pvt. Ltd. was filed before the District Court, Patiala House in New Delhi.

Marc Enterprises claimed that it was using the trade mark ‘Marc’ since 1981 and in respect of electronic goods the mark was being used since 1984. It was submitted that Flipkart had filed for registration of the trade mark ‘MARQ’ on a proposed to be used basis and has admitted to using the mark only from 2017 therefore, it should be injuncted from using the trade mark ‘MARQ’. Flipkart submitted that though Marc Enterprises was aware of Flipkart’s use of the trade mark ‘MARQ’ since 2017, yet no steps had been taken by it at that time to prevent Flipkart’s use of the same.

The Judge heard the parties and ruled that here was phonetic similarity between the marks ‘MARC’ and ‘MARQ’ and since the trade mark ‘MARC’ was being used since 1981 the proprietor thereof had a better title. Therefore, Marc Enterprises was successful in establishing a prima-facie case and an order of injunction was passed against Flipkart. This is a reminder that prior to adopting a trade mark every company must ensure that a prior search is done in the database of the Trade Mark Registry to avoid any possibility of legal conflict in future.

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Law firm Gordon Dadds has eye on London acquisitions

There is little complication with this stock. Gordon Dadds takes law, accountancy and wealth management firms and merges them.

The advantage is that Dadds looks after all the functions the acquired firms may consider non-core — such as marketing, IT, HR, insurance claims and arranging office space.

The other upside — particularly for law firms — is they can break away from the partnership model and function more like a “normal” corporate company.

Adrian Biles, chief executive officer and a lawyer himself, explains: “Partnerships require heavy levels of debt to operate and are notoriously bad at investing in things like technology as this takes away from the pay pot. Lawyers are also not trained to manage and by implementing this model they can concentrate on revenue and profit share, while we do the funding.”

Dadds listed on AIM last August through a £18.8 million reverse take-over by Work Group. Work was a recruitment firm which sold its business to Capita in late 2015 and remained a shell. The deal made Dadds the second listed law firm after Gateley.

It has acquired four law firms since the float, the latest last week when it paid £1.9 million for Cardiff-based Thomas Simon. The UK legal market is big business, clocking up £30 billion in fees last year alone. There are 10,000 registered law firms, with the top 1000 accounting for £6.5 billion in fees.

Dadds has £9.9 million cash on the balance sheet and plenty of firepower left, as acquisitions are paid for in instalments.

For instance, Dadds bought the whole share capital of Thomas Simon for £187,500 on and will pay the rest in 20 quarterly instalments.

Dadds has mostly been acquiring firms from the middle market but has its eyes on landing a major name. “We’d certainly look to snap up a renowned central London law firm. We talk to a lot of firms and complete on 20% of the people we meet.”

The major threat for the company is that there is plenty of competition in the legal space from newcomers, and it is difficult to predict what the future of the industry will look like.

It has been underinvesting for years, and firms such as Keystone Law, which listed in November, have stepped in to fill the gaps.

Keystone has developed an IT platform through which its lawyers can work from remote locations, providing offices when meetings are required.

The firm avoids the costs of maintaining office space, and the lawyers avoid the costs of commuting. It is forecasting market-beating profits.

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94% of SMEs say the Government is ignoring their concerns about Brexit

Just 6 per cent of small and medium-sized businesses say that the Government is listening to their concerns about Brexit.

Of 653 businesses polled by accountancy firm Moore Stephens, 612 said they felt their views on Brexit were being ignored.

Moore Stephens said that this highlights just how much work the Government must do to convince the SME community that the deal to exit the European Union protects the interests of UK businesses.

More than half of owner-managed businesses also said that their single biggest concern for 2018 was how Brexit negotiations will affect them – far ahead of other issues such as skills shortages (41 per cent), cyber attacks (29 per cent) and increased regulation (28 per cent).

When asked about their specific Brexit-related worries, 38 per cent of businesses said that the introduction of trade tariffs was their biggest concern, 30 per cent fear a loss of EU labour, while 23 per cent are concerned about loss of European customers. Only 33 per cent said that they had no concerns around Brexit.

“Whilst banks and other big businesses have the influence to lobby the Government for their own special Brexit clauses, there are concerns that small businesses will be forgotten about,” said Mark Lamb, a partner at Moore Stephens.

“Business owners are hugely concerned about what Brexit might mean for them. The Government must take their needs seriously when negotiating the exit deal.

“Brexit could potentially impact on an enormous number of issues affecting owner-managed businesses in the UK, from import and export costs, to access to labour, and grants and subsidies. Businesses have been given very little clarity so far on what effect Brexit might have on any of these issues.

“Businesses thrive on certainty – it allows them to invest, scale up, take on more orders and expand their workforces. If the Government does not give them clear indications of what they can expect once the UK has left the European Union, it will be very difficult for many of them to invest in their growth.”

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New patent court in doubt as German challenge looms

Intellectual property (IP) professionals say that plans to create a unified court for patent litigation in the EU could be jeopardised if a crucial court challenge in Germany is not heard swiftly.

Germany’s federal constitutional court, the Bundesverfassungsgericht (BverfG), said last week that it will decide on a challenge to the proposed Unified Patent Court (UPC) this year. However, the BverfG has not provided a firm time frame for hearing the case. The news puts the UPC project in doubt, as German and UK ratification is required before the agreement can be formally implemented.

The BverfG challenge, filed by Düsseldorf IP attorney Ingve Stjerna, questions the constitutionality of the German legislation enabling the UPC’s ratification.

Luke McDonagh, senior lecturer in IP and constitutional law at City, University of London, said that with Brexit looming, it is crucial for the court to make its decision.

‘If a positive ruling comes early there is a chance the UPC could be fully ratified and it might even start hearing cases before March 2019,’ he said. ‘By contrast, if a positive decision does not happen until late in 2018, it makes the timescale very tight. And if ratification does not happen before Brexit, it makes UK membership less likely, and may even throw the UPC’s future into balance.’

He added: ‘A decision that Germany cannot ratify would kill the UPC as Germany is the largest patent litigation territory in Europe.’

Luke Maunder, associate at City IP specialists Bristows, said there has been a ‘frustrating’ lack of information about when the court will make a decision and whether it will come in time for the UPC to come into being before Brexit.

‘That is highly relevant as UPC start-up post-Brexit would add a further layer of complication, especially if the much-talked-about Brexit transitional period does not materialise,’ he added.

The UPC, which will hear disputes related to unitary patents, will be open only to EU member states. One of the court’s major divisions is set to be housed in Aldgate Tower (pictured) in the City of London. It will, on occasion, have to refer certain matters to the European Court of Justice.

The UK is currently undergoing the final stages of ratification, a process requiring the rubber stamp of foreign secretary Boris Johnson.

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Making sense of Chinese outbound M&A

The past year saw Chinese companies spend $227 billion on acquiring foreign companies—six times what foreign companies spent acquiring Chinese firms. These “outbound” M&A volumes have grown at 33 percent per year for the past five years though regulatory controls on foreign exchange have slowed growth in 2017. Chinese companies were among the ten largest deals worldwide in 2016 (for example, the current ChemChina/Syngenta acquisition, which is going through the regulatory-approval process) and were involved in some of the most controversial transactions of the year, such as Anbang Insurance’s high-profile battle for Starwood Hotels & Resorts, which added $0.4 billion to the price that Marriott eventually paid.

Despite all the media attention, a number of myths around Chinese outbound acquisitions persist. Let’s discuss them one by one.

First myth—the ‘wave of money’

China, the theory runs, is awash with cheap capital, and that is now fueling a global shopping spree. It has almost $3 trillion in foreign reserves, the world’s second-largest sovereign-wealth fund, and four of the world’s largest banks by assets—all of which are extremely well capitalized. Chinese companies therefore have almost unlimited firepower for overseas acquisitions, and that makes them willing to pay unrealistically high prices for high-profile megadeals.

It’s important to put this supposed wave of money into context. The total amount of China outbound acquisitions has grown dramatically, from $49 billion in 2010 to $227 billion in 2016. However, the absolute level is still very low. For example, in 2015, Chinese companies spent around 0.9 percent of GDP on outbound acquisitions; EU companies spent 2 percent, and US companies spent 1.3 percent. We are still relatively early in a long growth trend.

The big-ticket deals that make the headlines are also not representative of the majority of transactions. These are mostly middle-market deals: the median deal size over the past three years was only $30 million. And for the most part, the valuations paid were not significantly above normal market levels. However, a Chinese company may have a legitimately different perception of valuation from their European or US peer. Nonstate firms listed in Shanghai had an average price-to-earnings ratio in 2016 of 60 times. If a Chinese acquirer is able to raise equity capital at this valuation, this will naturally make prices paid for overseas assets look much less irrational.

Moreover, the source of the funding is often not even Chinese. Many of the deals with very high leverage were financed enthusiastically by Western banks. The financing of many of the largest deals in recent years was done by foreign-led syndicates of banks. Of course, the Chinese acquirers accepted high levels of leverage for some of these deals, such as in ChemChina’s acquisition of Syngenta, where $33 billion of the $47 billion purchase price was financed by debt. But from a Chinese firm’s perspective, this is not a significant leap of faith. The Chinese economy has for many years relied heavily on bank debt more than on public-equity markets, and most Chinese companies are more comfortable with high levels of leverage than their Western counterparts. Moreover, high-leverage megadeals led by financial sponsors are hardly unusual in Western markets.

Second myth—the invisible hand of the Party

There is a persistent suspicion that somewhere in Beijing resides a collective brain that directs Chinese companies’ actions—and that the recent outbound acquisitions have been directed by this pervasive government planning.

The government does like making plans: the extent to which it drives corporate decisions, however, is greatly overstated. The central government sets an overall policy framework, and managers of state-owned firms are rewarded in career progression for advancing it, but they are acutely aware that they are responsible for their own decisions. With very few exceptions, acquisitions are identified and pursued by management teams for commercial reasons.

Being aligned with policy can, however, bring help in executing the deal. Approvals arrive faster, loans are more readily available, and at times the government will quietly tell other Chinese bidders to drop out of auctions so that only one is contesting a deal. In some sectors—notably semiconductors, in recent years—there is active pressure on companies to find acquisitions. The deals they pursue may align with industrial policy, but mainly because policy reflects the interests of the firms in the first place, and the larger state-owned enterprises (SOEs) participate in shaping major policy instruments such as the five-year plans. But the responsibility for sourcing and executing deals remains firmly with the companies, and they are also responsible for their failures.

The role of government—or lack thereof—can also be seen in how companies use the government-linked investment funds. There is a very substantial amount of capital available to investment funds controlled by central government, such as the Africa Fund, China Investment Corporation (CIC), and the Silk Road Fund. If there really were an invisible hand directing acquisitions, the government would be using these to coinvest with corporates. In practice, this rarely happens. The Silk Road fund, for example, has only invested in one company to date, compared with dozens of project-financing deals.

The only government-linked fund that has done numerous investments into foreign companies is CIC. However, these deals are portfolio investments, done purely in pursuit of CIC’s commercial remit to make returns and not in pursuit of any policy objective; moreover, a significant portion of CIC’s portfolio is deployed into fixed-income securities and funds.

Third myth—it’s all capital flight

Between 2005 and 2014, the renminbi had only strengthened against the dollar, and a generation of managers came to take that as given. From 2014 onward, however, the renminbi has progressively weakened, and growth continues to slow. Many managers found themselves looking for ways to move capital offshore, and acquisitions provided a quick way to do that in large quantities. Are the acquisitions of prestige assets—hotels and property in major cities, often at relatively high prices—simply companies getting money out of China into “safe” assets?

Capital flight is unquestionably happening through multiple channels, of which overseas acquisition is only one: through 2016, the government worked hard to close these loopholes, which in the first quarter resulted in a significant drop-off in deal volumes. The question is whether it was a major driver of the growth in outbound M&A. Between 2015 and 2016, outbound deal volumes grew by 125 percent: this was clearly an acceleration compared with the growth rates in the preceding five years, ranging from 7 to 41 percent growth. Some of the deals done—real-estate deals in particular—made little apparent sense for the acquirers beyond simple financial diversification. Yet the growth in outbound M&A had started long before 2014: the capital flight of the past few years has contributed, but it was never the primary driver.

Fourth myth—crazy gamblers

For many sellers, having Chinese buyers participate in an auction can be a frustrating experience. Their decision making often appears opaque and irrational, with limited visibility into their funding, priorities, or intention to actually complete a transaction.

What appears to be irrationality, however, is often decision processes that aren’t fully transparent to the sellers. A Chinese buyer, particularly a state-owned company, has to work with a complex set of stakeholders both inside and outside the company, and the person communicating with the seller may not be able or willing to explain these considerations.

Among many Chinese buyers there is also a suspicion that the standard M&A sales process does not play to their strengths. It is designed to place buyers in competition on equal footing and limit their access to the target company; this is exactly the opposite of the one-on-one negotiation and closer relationship building with the counterpart that they would prefer. Moreover, many management teams remain unfamiliar with the process itself and do not understand how to navigate it. This is changing fast, particularly among the private companies that have business-development staff with international experience and among the more sophisticated SOEs with experienced deal teams, but there is still far to go.

This impression often masks a genuine desire, even need, for some of these transactions. For Chinese companies that are approaching the limits of growth in their domestic markets, access to technology, brand, and distribution networks abroad can be critical to their growth plans. Hence sellers often receive extremely mixed messages that can be challenging to decode; they frequently write these off as cultural differences, when in fact they reflect the unique circumstances of these buyers.

Fifth myth—integration isn’t important to these buyers

In many deals, there is relatively little discussion of what will happen postdeal apart from securing the management team—and often the acquired managers are pleasantly surprised by the degree of autonomy they enjoy after the deal. This has led to the perception that Chinese companies aren’t particularly interested in integrating their acquisitions into the parent companies to the same degree that a US or European acquirer would want to.

It’s certainly true that Chinese companies are more likely to take a “hands off” approach to managing acquisitions postdeal than would most Western companies. However, this is largely because in the past, they lacked the capabilities to integrate: they simply didn’t have enough managerial bench strength that could function in the acquisition’s region. It’s not that they didn’t want to integrate: they doubted their ability to do so. The lack of focus on integration is one of the reasons that over the past ten years, the track record of success by Chinese acquirers has been extremely mixed.

Consequently, the integration models used look quite different. In most Western countries, there’s a fairly well-understood approach to postmerger integration—speed is critical; companies eliminate overlaps and pursue synergies aggressively. Many Chinese integrations chose to prioritize stability first, keeping the company separate and looking at one or two major areas of synergy, such as R&D sharing or localization of product manufacturing in China to reduce cost.

As the track record shows, the approach to integration made a significant difference in the success of these deals. Those companies that had an organized and systematic approach to integration, on average, showed much better results than those that kept the asset at arms’ length, managing through the board and treating it essentially as a financial investment.

There is, in most cases, a solid logic behind these acquisitions, be it acquiring capabilities, building a footprint outside China, or buying brands or technology. However, without a plan, potential synergies are simply numbers on paper. Increasingly, Chinese companies are recognizing this and developing more concrete integration plans earlier in the deal process. The bottleneck for most is building the resources to execute those plans—developing a cadre of managers with experience both operating abroad and in integrating acquisitions that they can deploy. This is easier said than done. Often deep functional experience is required—engineers and technical staff to support technology transfer or procurement, marketing teams to support cross-selling, IT staff to support platform consolidation—and the teams need to be able to function in the acquisition’s language and working environment as well as the acquirer’s. There are not, for instance, many Italian-speaking Chinese aerospace engineers available on the job market.

We are still at the beginning of a long growth trend, and the persistent myths surrounding these deals reflect this. Chinese companies will in time be an important part of global cross-border M&A, and that means levels of activity substantially higher than what we have seen to date. This will require some adaptation on both sides. However, Chinese companies need the brands, channels, technology, and relationships that these transactions can bring; and the investee companies benefit from access to the rapid innovation, scale, and cost advantages of the China market. In the long run, everyone gains from China’s participation in the global deal market.