Until recently, Korean law firms enjoyed an influx of work generated by the Asian financial crisis, and lawyers, a privileged status in a profession to which access has been granted to the few. Lauren Scott reports from Seoul

Douglas Lee fondly recalls the euphoria that surrounded The Republic of Korea's passage to the World Cup semi-finals in July 2002. The streets around the offices of his firm Kim & Chang in downtown Seoul were, he says, awash with happy revellers, a human sea of red supporters' jerseys, people laughing and crying. "It was a very emotional time."

But times change. The excitement has died down, and in its place, a subdued mood has overtaken Korea's capital. Political, economic and social factors have combined to produce an atmosphere of uncertainty and expectation. In February, the prospect of a US-led war with Iraq - now a reality - not to mention increasingly frosty relations with North Korea, loomed large south of the 38th parallel.
Says Yong Suk Yoon of Lee & Ko, another of the 'big four' Korean firms: "We prepare for cold weather this year."

The chill factor is as yet unknown. Korea's immediate future very much rests on the shoulders of new president Roh Moo-hyun, whose election is widely acknowledged as a turning point in the country's history.

Conservatives greeted news of Roh's victory over Grand National Party candidate Lee Hoi-Chang with a degree of disbelief, but perhaps they should not have been surprised. A human rights lawyer, Roh's support base is largely founded in Korea's young, upwardly mobile class, who are increasingly - and successfully - agitating for change in a country steeped in tradition. The Korean press has labelled them the '368' generation - in their 30s, born in the '60s, and witness to the country's transition from dictatorship in the early 80s (under Chun Doo-hwan) to democracy.

Unlike Lee, who detractors claim may have spent more time in office repaying past favours, Roh is regarded as less of a political animal with no significant ties - to the chaebol or otherwise - to influence his agenda. But Roh is still an unknown quantity, and there are concerns over exactly what his agenda will be. Indications that he will continue with Kim Dae Jung's 'sunshine policy' of fostering warmer relations with North Korea, for example, have drawn criticism from the conservatives, who favour continuing close ties with the US.

Says Lee & Ko's Yoon: "Korean people are very much worried about the situation. The majority of people do not agree with the government. They are leaning towards North Korea and we don't like it."

Reform
Also under a cloud is the extent to which Roh will continue to focus on restructuring the economy - maintaining the momentum of the reform process the government began under President Kim in 1998. There is certainly pressure on him to do so. A lot of restructuring work has already been completed, particularly in the banking sector, which the government has been busily privatising. According to its Public Fund Oversight Committee, the government had spent 159 trillion won as at December 2002 on bailing out troubled financial institutions.

After much casting about for a willing buyer, it most recently managed to divest itself of Seoul Bank to Hana Bank for the princely sum of US$1bn, creating Korea's third largest bank in one of 2002's biggest M&A deals. Other banks to have merged include Kookmin Bank and Housing & Commercial Bank, while Cheung Bank is next on the agenda - Shinhan Bank being the preferred bidder. Shinhan's venture with Macquarie Bank to pursue infrastructure mandates in Korea, Shinhan Macquarie Financial Advisory Co., has been "going gangbusters" according to local lawyers, with a hand in every major project.

But Roh may have another agenda. "Mr Roh's basic policy is the distribution of wealth among people compared with high growth in the economy," says Dr Kyung-Han Sohn of IP boutique Aram International Law Offices. Whether this will translate into reduced pressure on the corporate sector to continue with reform remains to be seen.

Says Sang Il Park of Hwang Mok Park: "I personally believe we need more restructuring to make the economy solid."

There is an equally strong sentiment that Roh will maintain pressure on Korea's chaebol, the large, family-run corporations that are not so much a feature of the business landscape as its entire topography.

Most chaebol emerged in the aftermath of the Korean War (around 1953), with Hyundai, Samsung, Daewoo, Lucky Goldstar (LG) and Sunkyong (SK) the dominant players. They have traditionally relied heavily on government subsidies and loans for their survival, in the process amassing huge debts that have led to the need for massive restructuring efforts.

Roh has publicly expressed his commitment to continuing corporate governance reforms aimed at bringing the chaebol, with their complex maze of inter-connected companies, into line. Proposed measures include the introduction of class actions and increased disclosure requirements.

The chaebol were roundly condemned for having invited the crisis that forced Korea to seek financial succour from the International Monetary Fund (IMF) after the won lost more than half its value during the Asia-wide currency meltdown in 1997. As a condition of the loan to it of around US$58bn under the Financial Assistance Plan struck with the IMF, the government was required to undertake an aggressive restructuring programme, first of its banking, and then its corporate, sectors.

The chaebol were required to reduce their debt to equity ratios by 200% by the end of 1999 - no mean feat, given the levels to which their indebtedness had soared, both a product of over-enthusiastic lending and the web-like structures the chaebol had constructed around them.

These structures, which saw companies within a chaebol group propping each other up through inter-company loans and loan guarantees - and collapsing like dominoes when one failed - are now largely being untangled. Fair trade laws have been overhauled to limit a company's ability to subsidise another in a group.

Dr Woong-Soon Song, a partner of Shin & Kim and a former general counsel of the Samsung Group, believes most chaebol are managed well and says the government exaggerates their problems. "We have to differentiate between good and bad chaebol now," he says. But he is amused by talk of "restructuring" the debt-laden conglomerates. "Can you restructure a chaebol?" he asks.

The chaebol still pose a headache for the government, as the 'Cash to North' scandal highlights. Hyundai Merchant Marine, one of the three main companies within the Hyundai Group, was exposed as having misapplied a 400 billion won loan from the Korean Development Bank (KDB) - including secretly funnelling 223 billion won to North Korea. One hundred billion won was sent the way of the ailing Hyundai Engineering & Construction, once the group's flagship company. To make good on its debt to KDB, Hyundai was forced to sell its car carrier division to Wallenius Lines & Wilhelmsen, for US$1.3bn.

The government's attention to corporate governance reforms may provide some level of comfort to foreign investors, who have concerns about the chaebol's willingness to undertake necessary management and labour reforms. Korea will certainly be concerned to ensure that past FDI levels are maintained, with signs they are already dropping off. There is talk of existing foreign investors withdrawing, converting their real estate investments into cash and taking it out of the country.

Says Lee & Ko's Yoon: "All Korean business enterprises have stopped thinking about foreign investment. They will wait and see what line the government will take."

But Jay K Lee of Kim Shin & Yu, established in 1968 by a team of foreign, US-educated attorneys, does not share this view. "I haven't seen any indication at all that foreigners are divesting."

The Korea Times meanwhile reported in January that foreign institutional investors and major financial institutions were ramping up investment in real estate investment trusts (REITs), which are exempt from corporate tax where they invest in corporations undergoing restructuring.

Changing fortunes
Regardless of the true position, recent events spell changing fortunes for Korea's legal market. As Sang Il Park puts it: "Not much investment requires less service from law firms."

Since the heady days of 1998, work in several sectors has dropped off. A lot of the big M&A deals and sales of distressed assets that the financial crisis generated have gone.

Kim & Chang's Lee agrees the deal flow is "not what it used to be".

The firm is Korea's largest and one of the so-called 'big four', with around 250 lawyers. He says there were signs of a slowdown around April last year - but the full impact is only now being felt. "When I talk to our bankers, it's 2004 they're looking at. If investment bankers aren't busy, that means we're not busy."

The firm's past major deals include advising General Motors on its US$1bn acquisition of (bankrupt) Daewoo Motor Company (Bae Kim & Lee advised Daewoo).

"The smaller firms never had that much work anyway," says Lee. "We still enjoy the luxury of the brand name and we get what's out there.

We're doing okay, but it means belt tightening and lowering expectations."

The firm is mostly active in the areas of M&A, capital markets and asset-backed securitisations. Lee says: "We still have the same type of work, just not as much of it."

As is the experience worldwide, the global economic downturn has hit the domestic capital markets hard. Seoul's stockmarket was particularly shaky in the lead-up to the December 2002 presidential election and, in February, the KOPSI fell to its lowest level in 15 months.

But market volatility has led to a corresponding rise in the trading of derivatives - the underlying value of bonds, equities and currencies - with an estimated US$4.2bn traded off-board by domestic companies in 2002 - three times more than in the previous year.

And this is set to continue. According to Hwang Mok Park's Park, his firm is receiving an "increasing number of enquiries" in the area.

Another boom area has been securitisation, which continues to serve as a versatile tool for repackaging and selling Korea's bad debts to investors. There has been much transactional work in this area. The Korea Asset Management Corporation (KAMCO) - set up to buy, restructure and sell the banking sector's non-performing loans (NPLs) - has largely achieved its aim and attention has now turned to the corporate sector, where the nature and scope of securitisations is growing in sophistication.

But law firms are still feeling the pinch. Korea's legal profession has traditionally been an elite domain. The Korean Bar Association oversees the admission of lawyers to the profession, and historically, it has been difficult to qualify. That said, more and more are being admitted each year: an anticipated 1,000 will gain passage in 2003, compared with 300 in 1996.

Firms have undergone a rapid period of growth since 1998, when work generated by the Asian financial crisis led to increased demand for legal services. Lee & Ko, for example, has grown from under 40 lawyers in 1998 to around 150, and the past three years have also seen Bae Kim & Lee double in size to around 40 partners and more than 100 foreign and local attorneys.

M&A transactions generated by the crisis - and the due diligence work that they required - were a main driver, causing firms to hire big teams to handle the load.

However, they may have expanded too quickly. Partners in more than one firm speak of a prominent local firm having to take out loans to pay associates' salaries, and of another experiencing cashflow problems.

Says Young-Il Choi of Bae Kim & Lee: "It's a time of soul-searching for the lawyers and law firms."

He describes the downsizing of Korean firms as "culturally... kind of a shock" and speaks of a new mindset emerging in the country's young lawyers. "Becoming a lawyer is no longer a guaranteed 'millionaire' opportunity," he says. "You have to fight like anyone else to survive. It is taking some of them by surprise."

One lawyer who isn't surprised at this turn of events is Brendon Carr, who spearheads the practice of Aurora Law Offices in Seoul. A small, tightly run operation, Aurora's practice focuses on three areas: marine insurance, commercial litigation and labour law.

Carr is a US attorney whose outspokenness and unconventional approach to legal practice (the firm has a special fund set aside to reimburse 'dissatisfied' clients - none as yet), has led some to label him a 'renegade'. Korean Bar restrictions mean he must technically advise as a consultant, although he enjoys a degree of autonomy he says has not been available to him in other firms.

Carr was "lawyer number 37" at former employer Lee & Ko in 1998, and claims the rapid expansion of Korean firms has left many of their younger lawyers, unused to the Western practice of lateral moves, feeling under-valued and disenchanted. "The discovery of the pyramid has been an epiphany," he says. "The chickens are coming home to roost. The firm that can't sustain its young lawyers has no future. If you eat your young, your clan dies out."

He refers to the market as a "rent... not a services" one, and says the three 'sins' of over-billing, lack of responsiveness, and an un-commercial approach to giving advice, are common. Time-sheet padding is also encouraged in practices in which bonus structures are based on the number of hours billed.

"Fifty per cent of [their] bills do not get paid - they think that is normal," says Carr. "There is no correlation between collecting [on bills] and bonuses." He says Aurora "made a lot of money" last year, and its rates (around US$170 to US$290 an hour) compare favourably with the local firms, where partners' hourly rates are as high as US$650.

Seung-Ho Choe of Kim & Company says firms expanded because they "weren't prepared for the amount of work" the IMF crisis would generate. "Post-IMF, [the level of] work didn't decrease. It just went back to where it was."

Former Lee & Ko banking and finance head Soo Chang Kim set up Kim & Company as a boutique finance practice with a team of predominantly US-educated lawyers with foreign firm experience. The firm handles work for most of the major Korean banks, including Kookmin Bank and Korean Development Bank.

Choe says cultural issues are more of a concern for firms still very tradition-based. He refers to sumbae as an inhibiting feature of Korean - and perhaps Asian - culture. The term, meaning to show deference to those who have gone before you, serves to inhibit an aggressive approach to deal negotiations. "That concept plays a big role. As foreign attorneys... we can go in with our gloves off and they don't care."