Law firm foresees accelerated market convergence

The change in the environment for doing deals in Asia over the past few months has been well documented. Given the diverse issues that arise across jurisdictions and products and the various macro and other factors that have impacted the markets, it is difficult to form a comprehensive view of developments that applies across the region. From a lawyer's viewpoint, however, there are some themes we have seen and we believe will continue to see.

Convergence of practices in capital markets
There has been much talk of convergence of markets and market practices over the years. Recently, there have been developments in the markets and regulatory changes that have accelerated real convergence of market practices.

Competition among stock exchanges and ôfinancial centresö has led to regulatory changes that have assisted in this convergence. We have seen significant progress in the acceptance by the US Securities and Exchange Commission of the use of IFRS financial statements for non-US issuers in registration statements. And in countries like Korea and India, IPO regulations and practices have been adjusted to further accommodate the requirements of foreign investors.

We have also seen more ôglobalö investors invest in a range of securities far from their backyards. In Asia, we have seen the emergence of hedge funds and other pools of capital participate in private placements of various types of securities.

This has resulted in many issuers having to digest the terms of securities which reflect a significant jump in sophistication and complexity. The introduction of derivative products to capital markets transactions has added to this phenomenon as companies address the volatility in the market.

The evolving role of governments in transactions
Asia has always been a region where the governments have played a significant role in many economies and markets. This role is evolving, however.

On the one hand governments or government affiliates have become more active participants in transactions as is evident by the number of pension funds and sovereign wealth funds involved in M&A transactions. Such participation has impacted the way parties consider issues such as conflicts, governance and sovereign immunity. It is yet to be seen whether the activities of such funds will be limited to the roles they have played to date or whether they will become more active participants.

On the other hand governments have become more sensitive to monitoring the investment activities of foreign players in their markets. We have seen formal and informal actions by various governments that can be seen as ôprotectionistö û all of which have been justified on the basis of national security, the protection of national assets or the enforcement of existing tax laws.

Convergence and extraterritorial regulation/enforcement
While regulators in Asia have worked to create an environment that is attractive to foreign investment, they have also stepped up both regulation and enforcement in other areas. Such regulation and enforcement is in many cases being carried out to levels previously seen only in the United States and Europe.

More Asian regulators are implementing or enhancing competition/anti-trust regulation, which will have extraterritorial applications. Companies have had to take extra care in ensuring full compliance in jurisdictions across the region. We have also seen an increasing focus on investigations relating to insider trading and market manipulation across the region, and in particular in Australia, Korea, Hong Kong and Japan. Such focus has resulted in a level of enforcement which has not been previously seen in Asia. Similarly, anti-corruption legislation and its enforcement appears to be have risen in prominence among regulators.

Deal documentation matters
Volatility and other changes in the market environment have made the execution of new transactions and the performance by parties of transactions entered into in the past more difficult. In such an environment, proper deal documentation has become even more important to ensure that all risks are allocated as intended. In many instances, this has led to the introduction of more innovative and complex structures which further requires a clear understanding of the commercial intent and accurate drafting.

In addition, as parties dust off executed documentation to enforce commitments and rights, many provisions that were believed to be ôstandardö and ôboiler plateö are being tested and reviewed. Parties may also find that existing documentation may have ôgapsö that were not contemplated at the time, and which need to be filled, or that the intent of the parties was not documented as clearly as remembered. In certain cases this will mean that legal advice will be sought to try to resolve or manage potential disputes. This creates challenges for all parties depending on the current circumstances as they try to enter into amended arrangements that better reflect the new realities, or face a potential dispute.

Skill sets need to be tailored to meet client needs
The current environment is a challenging one for all professionals. For companies seeking to enter into or complete transactions in the face of volatility and additional risks, there is a greater demand for thorough and clear advice from professional advisors. For advisors, this means thinking ôout of the boxö and coming up with innovative products and solutions that are tailored to meet the needs of companies in a timely fashion before the market environment changes significantly. In order to meet such needs, traditional skill sets, product knowledge and practices may not be sufficient and those advisors who can best coordinate experts to work across practices and products throughout the region will inevitably be the ones to create the best solutions and the greatest opportunities for their clients.

Sanghoon Lee is a partner at Linklaters (Hong Kong).

If you would like further information on any of the issues raised in this article, please contact either of the following:

Sanghoon Lee
Partner
Tel: +852 2842 4813
email: [email protected]

Andrew Malcolm
Partner (Head of Capital Markets û Asia)
Tel: +852 2842 4803
email: [email protected]