Hyper-competition: Korean firms go head to head
In May 2006, the number of Korean lawyers surpassed 10,000 for the first time. This is the result of a State Bar policy that is designed to pass 1,000 law students every year. The total is almost triple that of a decade ago, when policy was changed to increase the number of lawyers in the market. The current population ratio is about one lawyer to every 4,800 people.
This injection of new blood could increase rapidly in the near future if a law school system similar to Japan's is introduced. The government has been considering this move, meaning numbers could conceivably jump to over 2,000 new lawyers a year.
This would add to the already existing harsh competition firms are facing. "The competition is getting severe," says Bae Kim & Lee partner Kyu-Sang Chung. "This is mainly because of the increase in the number of attorneys admitted to the Korean bar." Also, South Korea is soon to open its legal market to foreign lawyers and that, Chung warns, will mean "another push from the supply side of the market".
The pressures of competition are resulting in a changing legal landscape, with all firms facing challenges in bolstering themselves for the coming storm.
The legal contest
The legal market has long been dominated by Kim & Chang, formed in 1972 and now employing over 400 lawyers. The firm boasts an impressive resumé of cross-border deals experience and has easily the highest percentage of foreign clients. The key attraction of the firm is this experience, and the resources it can draw on for deals.
Though it is the strongest full-service firm in the market due to its numbers, rival firms claim competition is threatening Kim & Chang's dominance. Part of the reason may be the trend of multinational clients towards having a panel of local Korean law firms they can parcel out work to, rather than just Kim & Chang.
Kim & Chang foreign legal consultant Luke Shin says that it is possible that clients' panels are expanding, but that Kim & Chang continues to be first choice in the market.
The other three firms from the traditional 'top tier' are Lee & Ko, Bae Kim & Lee, and Shin & Kim. Of these, Lee & Ko has the strongest full-service practice, being rated highly across the board by clients, while Bae Kim & Lee is known particularly for its strong litigation capabilities as well as corporate and commercial work. Shin & Kim is best regarded for its strength in banking as well as corporate and commercial.
One of the biggest trends transforming the legal landscape over the past year has been the growth of younger, up-and-coming firms challenging the top tier.
The likes of Yulchon (formerly Woo Yun Kang Jeong & Han), Barun Law, Horizon Law Group and Sojong & Partners all expanded rapidly last year. Yulchon and Barun Law added over 40 lawyers in 2006 and Horizon 12. These firms are also broadening their scope, with Barun Law and Yulchon both adding patent law capabilities through mergers with smaller patent firms in recent months.
Yulchon in particular is gaining a lot of respect from the top tier as a full-service firm. It garnered some high-profile deals across the full spectrum of practice areas in 2006.
Yoon Yang Kim Shin & Yu, fresh from its merger at the beginning of 2006, has pushed itself well into the top tier in terms of pure numbers and now boasts 181 lawyers, ahead of both Shin & Kim and Bae Kim & Lee.
While Yoon Yang has made inroads in terms of numbers, questions have been raised over how effectively it has bedded down its two mergers since 2003. However, managing partner Hoil Yoon says the firm is managing well. "The merger has been very successful in terms of integration of the two firms. The service capability of both firms has been completely integrated," he says. The firm, always very strong on litigation, is also making inroads in other areas, particularly in the IP and technology sectors.
Barun Law, a firm that has always been strong on the litigation front, has bolstered this further through high-profile hires in the last year, including the former chief justice of the Supreme Court, Jong Young Choi. The firm is also broadening its capabilities and has been successful in sourcing an increased amount of international corporate work. Horizon has been tipped as another talented firm with great potential. Suggestions have been made that its growth could face challenges due to its unusual partnership structure and the departure of rainmaker Kang Kum-Sil. Kang has not returned to the firm since her stint as Minister of Justice and her bid for the job of Seoul mayor. However, Horizon partner Sung-Ho Moon says the firm's partnership structure is viable long-term, rewarding contributions from associates sooner than other firms, and that the firm does not expect to be affected by the departure of Kang.
Finding a trump card
All firms, conscious of rising local competition, are developing strategies to maintain their competitive edge and win clients from other firms.
As is evident among growing smaller firms, bulking up has become an important factor. "Domestically, there is certainly some focus on firm size. A certain size is expected for a certain level of deal, regardless of how industry-specific it might be," Barun Law's Thomas Pinansky says.
Hyo Young Kang from Yulchon agrees. "It is my guess that clients view us differently now. Perhaps there is something perception-wise in being over 100 - the view is you have the sufficient size to be a full-service firm."
The top tier firms are finding that they have to move away from 'vanilla work' toward sophisticated deals and transactions. Bae Kim & Lee's Kyu-Sang Chung gives the example of the ABS market, which was occupied by the big firms until around 2001, but is now open to competition due to the standardisation of contracts and documents.
The bigger firms are also enthusiastically developing practice areas where they can differentiate themselves from other firms. Shin & Kim is concentrating on antitrust, real estate, tax, labour and its Japanese practice group, and is actively recruiting in these areas. Bae Kim & Lee is looking toward legislative consulting as a potential edge, having had recent documented success in assisting a large local telecom operator in blocking a foreign management buyout through a change in legislation. Lee & Ko will spend this year building up its tax capabilities and is aiming to recruit specialists from the National Tax Authority as well as judges with specific tax experience.
Overseas markets, while not necessarily seen as key areas of growth, are becoming increasingly important for firms wishing to differentiate themselves.
At present, there are three firms with offices in China - Bae Kim & Lee, Lee & Ko and Shin & Kim. There are also a number of firms declaring an interest in opening in China in the near future, such as Horizon Law and Yulchon.
Vietnam is also popular among Korean firms since the recent change in its investment laws, with quite a few naming it as the next jurisdiction into which firms are likely to expand.
At this point the largest firm, Kim & Chang, is not looking to expand overseas, as it sees its real value being the advice it can give to foreign clients in Korea.
At the legal helm of Korea Line
One of Korea's key industries has historically been shipping,based around the thriving ports in Pusan in the south and Incheon in the west.
In the midst of the 2005-06 Asian shipping boom, Korea Line Corporation (KLC), Korea's fifth biggest shipping company, has expanded rapidly. The company now operates 140 vessels, including 25 of its own tonnage, and is waiting on delivery of 15more vessels, including two LNG ships. KLC is targeting 15-20%growth annually, with an expected freight carriage of two trillion tonnes by 2010.
KLC was at the centre of one of ALB's shortlisted asset finance deals at the ALB Hong Kong Law Awards last year. It involved the UK lease financing of two bulk carriers, arranged by Macquarie Bank and Standard Chartered.
With the amount of shipping business being done, the natural result is disputes. KLC vice-president of insurance and legal affairs, Kay Song, says by far the most common legal issues KLC deals with are charter disputes.
"Our team's goal is to coordinate with the business team and above all, make preventative arrangements. We must involve ourselves immediately when the matter is likely to cause a dispute, rather than after the dispute."
However, the vast majority of disputes end up reverting to UK law and arbitration. For this reason, many of the firms KLC uses directly are strong in shipping in the UK - DLA Piper, Richards Butler and Holman Fenwick & Willan. For disputes involving salvage and collisions, Holman Fenwick, Ince & Co and Clyde &Co are the first ports of call.
KLC also uses three law firms locally - Kim & Chang and Lee & Ko, both full service firms, plus Choi & Kim, known for its maritime capabilities. But Song says most local firms don't have a maritime section. "Maritime lawyers in Korea are hungry - they don't have a lot of business. It is not so popular these days, so many law firms don't have a particular maritime section."
The company's dispute strategy is to pursue monetary compensation in strong cases, but if there is a chance of losing, it will settle before arbitration to avoid costs.
With 30 years experience in shipping, Song heads a team of seven, recently increased from five. Recruits to the in-house department usually have a legal major, though may not be qualified as practising lawyers. This is because shipping requires specialist skills, and general affairs lawyers with a fresh qualification demand higher salaries and status, and may find the job limiting in scope.
But for Song, the job holds many interesting legal challenges, and with the business growing so fast, it is likely to continue to hold his interest for some time.
KLC'S VITAL STATISTICS
Size: Korea's fifth biggest shipping company
No. of vessels: 140; waiting on 15 more
Estimated freight tonnage by 2010: Two trillion tonnes
Annual growth: 15-20%
Antitrust grows in booming domestic market
With local firms on the lookout for blossoming practices where they can snare an edge over competitors, antitrust and competition law is the hottest topic on everyone's lips. Early this year, Shin & Kim demonstrated its aggressive growth strategy in the antitrust arena with the high-profile lateral hire of former Fair Trade Commission (FTC) general counsel and competition policy bureau director-general Young Chul Yim as well as three competition-focused associates from Barun Law.
"Antitrust activity is very hot at the moment, with investigations increasing by many antitrust agencies throughout the world," says Shin & Kim managing partner Doo-Sik Kim. "This is a good trend for lawyers, as this area of law involves very complicated legal issues that require legal advice and representation."
Shin & Kim is currently involved in advising technology company Qualcomm with respect to an FTC investigation into alleged anticompetitive practices in the provision of CDMA technology. Yoon Yang Kim Shin & Yu is also involved in the case.
A number of other large cases have caused headlines in Korea over the last two years. In one, involving Korea Telecom (now KT) and other fixed-line telecom companies in Korea, the FTC handed down a decision imposing over US$100m in administrative fines due to alleged cartel behavior. Yoon Yang was enlisted to advise on this case.
Microsoft also came under fire last year when the government handed down a decision prohibiting bundling practices in the distribution of its operating software. The decision was appealed by Microsoft and the case is still underway.
Other cases Yoon Yang has worked on include those against SK Corporation and SK Telecom, Otis Elevators and Intel Corporation - under scrutiny in the US and Japan - all for alleged anticompetitive behaviour.
"In the past, the FTC concentrated on control of conglomerates, but because they are now losing their grip on this control, they are turning their focus to unfair trade practices, such as initiating investigations into alleged illegal cartels," Kim says.
Yoon Yang Kim Shin & Yu managing partner Hoil Yoon says the government has strengthened enforcement in many areas. "They include cartel behaviour, merger control and review, unfair business practices in general and, more recently, abuse of dominance by market-dominant companies."
The seeds of the current antitrust legal boom were sown during the growth of the Korean economy. From the early 1960s until the 1990s, economic growth was led primarily by the government, and competition was not promoted as a tool for economic development. However, as the economy grew, pressure for deregulation increased and a desire for greater efficiency led to more attention being given to the issue of competition.
The government enacted a fair trade law in 1981 but this went largely unenforced until the 1990s, when the pace of restitution began to increase rapidly. Awareness of competition law and trade practices among Korean corporates is therefore perhaps less well-developed than in other jurisdictions.
Korean firms brace for market opening
The likelihood of the Korean legal market opening its doors to international law firms has become a somewhat bitter joke among international firms over the past 10 years. Periodic rumours of impending market change have led to nothing and constant lobbying has fallen on the deaf ears of the status quo defending government and Korean Bar Association.
South Korea's latest step towards opening has, not surprisingly, been met with scepticism by proponents of change. The draft bill, published by the Ministry of Justice and now out for consultation, allows for a limited opening of the local market. The proposal would finally let foreign firms establish offices on Korean soil, saving many lawyers the travel time between Hong Kong or Tokyo and Seoul, and effectively legitimising the work they have been doing in the market for years. However, it includes restrictions on just about everything else, such as hiring local Korean-qualified lawyers, practising local law, or entering into joint ventures or fee-sharing arrangements. The proposal is that this limited opening would be the first step towards the liberalisation of the market, to be phased in over a period of 18 years, following the tested Japanese model.
Though the arrangements are limited, and favour local firms who want time to adjust, there is a feeling that this time there is real momentum toward the practical realisation of an open market.
The momentum is being generated by current FTA negotiations with the US and planned discussions for an FTA with the EU. In fact, these discussions might result in a faster opening than planned, if pressure is applied in regards to the legal sector.
As to the timing of the opening, it is suggested the bill will go to the Korean National Assembly in the first half of 2007, with the first offices likely to open korean firms brace for market opening in 2008. However, no local lawyer will put a firm bet on this timetable, with too many variables involved. These include the FTA negotiations as well as upcoming local elections that could see liberalisation either made a higher priority by the government, or delayed yet again.
However, after such a long period of talk and little in the way of action, all local firms are preparing themselves for the reality of an imminent opening. "The look of the proposals has changed," Barun Law partner Thomas Pinansky says. "We now have really substantive proposals being circulated. I think law firms are reacting to that, and are strategically positioning themselves for a future where there will be at least some international involvement in the Korean market."
The moves are none too popular among domestic firms which have been reaping the benefits of dominating the legal services market in the world's 11th largest economy. While most firms say the opening will provide opportunities for them, one managing partner of a top tier firm, who is genuinely looking forward to the market opening, refused to be quoted, owing to the unpopularity of this view in local legal circles.
Predictions of the effects of market liberalisation range from a rash of international mergers if the market opens quickly, to the successful bulking up of Korean local competitors during a prolonged opening, similar to what occurred in Japan between 1987 and 2005. However, the consensus is that competition will be harsh.
There is disagreement over which local firms are likely to suffer the biggest blows from liberalisation. Many say hardest hit will be long-dominant firm Kim & Chang, which boasts the highest percentage of foreign clients and a large number of foreign licensed attorneys. However, foreign legal consultant for Kim & Chang, Luke Shin disagrees. "If and when the market opens up, it will have positive and negative effects, and certainly competition will increase. But we see that as an opportunity. The focus will still be on the law firms which produce the best quality and are the most responsive to clients."
The rest of the top tier will also feel the heat, as the internationals over time provide an increasing offering with the added attraction of extensive global networks. "The view is there will be a negative effect on the big law firms in Korea, and I agree with such a view," Bae Kim & Lee attorney Kyu-Sang Chung says. "Even if three or four big Western law firms come to Korea, eventually such firms will target competent A-class lawyers. That will mean Korean law firms may lose their star players and the competitiveness of the Korean law firm will be lower than now." On an individual level, this will of course mean that the foreign legal consultants of local firms, qualified in US or English law, will have growing opportunities to further their careers.
Feedback from top tier firms is that younger, growing firms such as Horizon Law Group, Yulchon and Barun Law, which have all increased their numbers rapidly in recent years and are competing with the bigger locals for high-end cross-border work such as M&A deals, may face the toughest squeeze when the internationals come in.
"Our view is that the top four or five have more to worry about than our firm," Horizon Law's Sung-Ho Moon says. Moon says the firm has a loyal client base that will not be in a position to move to foreign firms, stemming back to its initial technology-based clients. Yulchon's senior foreign legal counsel, Hyo Young Kang, says the firm is hoping that as a result of more international presence in Korea, legal activities will actually increase.
Size will be the biggest weapon for these firms. "The firms that could be classified as major firms in Korea are all trying to increase in size," Barun Law partner Jae Choi says. "If foreign firms come in, at first their presence will not be big, so Korean firms have to increase their size and scope of practice," Choi says.
In the end, it may be that foreign entrants, who have so long awaited the chance for greater involvement, will not have as easy a time as expected. "If 10 foreign firms come to Korea, I think only one or two could survive to be added to the top competitor group," Lee & Ko partner Jae Hoon Kim says. "For the others, it will not be easy."
For now, it will be up to local firms to adjust to the new proposed regulatory environment and continue to push for growth in readiness for increased competition. "It's going to happen - it's a fact of life that we need to deal with," Yulchon's Hyo Young Kang says.
There is no doubt clients will be the big winners from the opening, as firms will be forced to improve their service quality and maintain cost-efficiency to compete. "There are things we can learn from international firms, but not everything will change over to the international way -some things simply need to be done the Korean way," Kang says.