The past year or so has been a turbulent time for Thailand both politically and economically, but as ALB reports, law firms are continuing to thrive on the state of uncertainty and change, which is driving a continued thirst for legal advice
Law firms in Thailand are doing extremely well - that is, considering they are managing to keep business ticking over in a market that has seen political and economic uncertainty become the status quo. The past 18 months have been marred by a military coup and ousting of the country's dominant prime minister, a slowing economy, rising inflation and interest rates, a continued and marked decline in consumer confidence, a divisive vote for a new constitution, and, at the time of publication, another election.
Though these ructions have not been lost on law firms, and paint a dire picture of the market, lawyers are not all doom and gloom - quite the opposite in fact. As is perhaps the Thai way, lawyers are looking on the bright side, and are finding there is plenty of work to keep them paying the bills, even if their profit margins are being squeezed. A raft of legislation (and impending legislation) is one source, with by far the most hotly debated issue effecting foreign investors being the proposed Foreign Business Act (FBA).
Thailand on hold
When the Thai military junta deposed Thaksin Shinawatra in a bloodless military coup in September 2006, it was the beginning of a period of instability for the jurisdiction that would have repercussions for a legal market feeding off new business in Thailand.
"In the area of foreign investment, you find a quite dramatic impact," said Siam Premier representative and Allens Arther Robinson resident partner Marcus Clarke. "A lot of people are still very interested in Thailand, but they are thinking it might be a bit hard at the moment, so they look at it later. It's gone to the back of people's in-trays I suspect."
With vast opportunity in competing markets across Asia, such as China and India, and Vietnam a bit closer to home, a market so plagued by uncertainty is being regarded as risky. For example, some manufacturers are now favoring Vietnam as their base.
Siam City Law Offices partner Picharn Sukparangsee agrees. "The political uncertainty in Thailand has had a significant impact on foreign investment. Investors are not certain about the policies of the caretaking government, and are waiting for the general election."
A foreign investor confidence survey orchestrated by the Thailand Board of Investment released in October showed that of 2,500 firms surveyed, the majority mentioned the effects of political instability as a factor effecting confidence. Twenty-six per cent said political instability had a considerable effect and 25 per cent said it had a moderate effect on investment decisions.
Consumers have been the hardest hit by Thailand's domestic problems. "I think it has had a negative effect on consumer confidence, and that has come through in the economic figures," Clarke said. "People in the street are not buying, they are not making major spending commitments, because they are worried about the political situation, the economic situation and themselves," he said. The rise in oil prices has also hit consumers hard. A large importer of oil, and a nation where petrol prices aren't subsidised, it has had a huge impact on buying power. Domestic businesses have subsequently put expansion plans or major decision making on hold for the moment, hurting legal practices.
However, there are still foreign clients still investing in Thailand. According to Clarke, clients "seasoned about the country with an appreciation for where it has been" are still investing, and he said these clients "will no doubt reap the rewards".
Handling the pressure
The slow down in activity is putting pressure on firms, who are seeing their margins squeezed. This is coming from both a drop in legal fees and rising legal salaries.
"There has been no increase in fees," Sukparangsee said. "Quite on the contrary, there has been a reduction in fees offered to clients, to attract more transactions from clients."
Clarke says this pressure on fees has come at a domestic level, rather than among foreign investors. "There is still the mentality here that, ' I have got to have a lawyer, but I'm not really sure what they are for, and they cost money, so I'll get the cheapest one', but foreign investors just want to know they are getting good legal advice," he said.
As is the case in most Asian legal jurisdictions, the battle for talent in Thailand is raging, causing an added financial pressure from associates demanding adequate remuneration. The market is seeing a lot more skilled lawyers coming through, but demand is high.
"They have got the pick of bunch, with an auction for talent going on among law firms," Clarke said. "That is the real area of competition among firms, for good people more so than clients, because firms know if you have the good people, you get the good clients."
The most heated scrap is occurring over lawyers with five or more years experience and with foreign education, who have established themselves and have credibility.
Natee International Law Office senior partner Natee Thongdee said for his firm the competition for talent is making it hard to find new skilled staff. "It's difficult to seek Thai lawyers with good English skills, especially writing, as at times even if they have two, three or four years experience they still need editing," Thongdee said.
Foreign or local?
Aside from the push and pull over talent, competition for legal work has become more intense as foreign investment has dropped. At present, there are a large concentration of capable foreign firms in Thailand dominating client representation on cross-border deals.
"We foresee big competition among law firms in Thailand, which I think has been the case for the past couple of years," Sukparangsee said. "We suppose from next year there will be more foreign investment, and more competition for business transactions in Thailand." Sukparangsee said this will not only come from the pool of foreign firms, but also from medium-sized locals such as Siam City Law Office that have a corporate focus.
In fact, the past few years have seen a number of local splinter firms open for business, after breaking off either as individuals or groups from the major foreign players. These have included LawPlus, led by former managing partner of Herbert Smith (Bangkok) Kowit Somwaiya, The Legists and Nopadol & Khaisri Law Office from the ranks of White & Case, and others started by former Linklaters and Allen & Overy partners.
"Around 2000 there was a movement of Thai lawyers from local to foreign firms, but the last four to five years the trend has been the opposite," Sukparangsee said. "There has been an increase in local law firms set up by senior Thai lawyers that have separated from foreign law firms." These lawyers are able to offer Thailand-focused advice.
But they face stiff competition from the international law firms, which have become in effect "franchises" that employ mainly local lawyers and few foreigners.
"You have seen on paper superficially a dominance of foreign firms in the market. All the big names now are foreign sounding names," AAR's Clarke said. "Though there is a seeming dominance of foreign names, the people doing the work are Thais. There has been quite a massive departure of foreign lawyers from the jurisdiction - there are not as many running around as in the past," he said. Firms such as Linklaters, Baker & McKenzie and White & Case, though foreign, run overwhelmingly Thai operations.
Thailand legal business
Though the economy might be suffering, law firms are seeing an amount of legal work emerge out of the situation. "On the one side there are no big investments from foreign companies in Thailand, but because of that atmosphere, there have been a number of M&A transactions," Sukparangsee said. "Because of the slowdown in the economy, and declining revenues of Thai companies, they would like to sell their assets to foreign investors." The firm has been involved in a number of these, such as the sale of a medium-sized drug company to a US multinational looking for a manufacturing base. TMB Bank also recently became the largest of Thailand's seven Thai banks that have foreign strategic shareholders when it sold a $US674m stake to ING.
Property investment has been a busy practice both among domestic and foreign clients. Siam Premier is currently involved in the initial stages of a major US$800 property development, and is acting for foreign interests in the establishment of property-focused funds in Thailand. Clarke says the main problem in the sector is that exchange control rules brought in a year ago have effectively shut off foreign investment in REIT vehicles, which have been taking off elsewhere in Asia. There is currently a reform committee set up to look at the problem, in an effort to improve the REIT option.
For the first time in a long time there is also more power plants being built in Thailand. Prior to the 1997 financial crisis, there was a large amount of investment in the energy sector and a rapid increase in the number of power plants built, and this capacity has finally been soaked up, allowing new development to begin again.
Clarke said opportunities in the near future include development of the mining sector, which remains a vastly untapped resource for the developing economy, and a measured take-off in the REIT market. Consolidation in the insurance sector is also expected as new capital adequacy tests put pressure on smaller domestic player to beef up through seeking foreign partners, and a number of infrastructure projects are on the drawing board, including subways and railways, that require foreign financing.
The Foreign Business Act
So what really is a foreigner (or alien) anyway? This question has caused a lot of foreign clients headaches over the past year in Thailand, as the Foreign Business Act, slated for introduction early next year, tightensrules regulating foreign businesses in Thailand.
Changes to the Foreign Business Act would see foreign firms being prevented from controlling more than 49% of the voting rights of a Thai business. Different regulations currently apply to different industries but while many businesses already have a 49% ceiling on foreign ownership, in practice foreigners often have overriding control, because the local subsidiary owners are merely nominees with little or no voting rights. By tightening up laws to consider voting rights as one of the key criteria for foreign ownership, many firms may be forced to alter shareholding structures and sell shares to Thai investors to stay within the law. In fact, some have already been rushing to restructure their business, though Clarke calls this "premature", as there is still doubt as to whether and in what way the FBA will finally be introduced. Regardless, law firms expect to give continued advice on the new Act as it develops.
A vague future
Though the picture might be clearer at the time of publication, Thai's are expecting a period of uncertainty to ensue from the election to be held in December. Fears are that without Thaksin-style control, the parliamentary power may fall back into the hands of bickering coalition governments, likely to slow down legislative progress. In fact, there is a lot of pressure on the current care-taking government to churn through necessary changes to the law, including the FBA, insurance legislation and regulations on financial institutions, before an elected government is formed. However, foreign investors are likely to gain confidence when the political outlook becomes clearer - a situation for which cross-border-focused law firms are eagerly awaiting.