Capital Markets and the Selection of The Capital Markets Lawyer

01 September 2007

Christoph Wolf, executive director, Morgan Stanley (legal and compliance division)

Market Situation

This is particularly true for Europe, which has recently increased its importance as an issuer’s market. Take the IPO numbers of 2006: Europe saw 651 IPOs with a volume of @66 billion while the US saw 224 with a volume of @36.7 billion and China 137 with a volume of @47.4 billion. Also, in the fourth quarter of 2006 alone, Europe attracted 31 IPOs from non-European issuers with a volume of @4.5 billion, mainly in London. At the same time, the new entry segments, particularly the AIM in London, but also Alternext in Paris and the Entry Standard in Frankfurt have attracted issuers. It will be interesting to see whether quality standards can be ensured in the medium and long term in these new segments.

While London seems particularly in the focus of foreign issuers (eg, from Russia), virtually all continental European markets have seen an increase in activity from already stable levels in 2005.

This development was supported by a considerable rise of the indices of the major European equity markets in 2006, particularly in the second part of the year. At the same time, debt markets were stable. Beneficial macro-economical conditions helped: low interest rates, higher productivity and (relatively) contained inflation.

The US has begun efforts to make its marketplace more attractive. Market participants alerted the rulemaking bodies to the necessity of not overstretching the regulatory burden. Against this backdrop, the SEC has recently relaxed the conditions under which foreign issuers can withdraw from a US listing. There are also discussions about the intricacies of the Sarbanes-Oxley Act, particularly the reach of certain certification requirements.

In that context, it is also worth looking at the developments that occur among stock exchanges. The efforts of the NASDAQ and the NYSE to acquire the London Stock Exchange and Euronext, if successful, would lead to transatlantic stock exchanges. In any event, European stock exchanges have enjoyed keen interest as takeover targets over the last couple of years, but major consolidation within Europe failed. The universe of stock exchanges may also change considerably if Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS manage successfully to set up their new joint trading platform.

While the traditional Asian markets also had a good year in 2006, China (see above) and India have developed national capital markets with a considerable depth. Interesting new markets are also developing in both Eastern Europe and the Middle East.

Private equity is becoming more important not only in M&A but also on the capital markets side. The market share of private equity players has increased considerably over the last years.

2005 and particularly 2006 saw the rise of real estate companies as issuers, by way of securitisations, but also in the form of IPOs. This asset-class has been one of the most dynamic elements in 2006.

Legal and Regulatory Environment

The last couple of years in capital markets have been characterised by a spree of regulatory initiatives. In the EU, the Prospectus Directive and related EU provisions, as well as national implementation measures, have changed many aspects of securities issues. While the goal to unify the EU-wide capital markets seems far from achieved, a development towards European standards is noticeable in many respects and there seems to be more wriggle room for issuers. In parallel, the US saw changes to the Securities Act, relaxing the regulatory regime on prospectuses while sharpening the rules on prospectus liability. If only on the accounting front there was mutual recognition between US GAAP and IFRS, the last major obstacle to open Northern Atlantic capital markets would disappear.

In the EU, after the implementation of the Markets Abuse Directive, the Directive on Markets in Financial Instruments (MiFID) keeps banks and financial services providers busy; it is worth noting that the huge implementation efforts required in that respect are typically lead by in-house teams with limited input from external lawyers. The Transparency Directive has lead to more unification on transparency in capital markets across the EU. There are other initiatives by the EU Commission including one on unifying certain standards for the accounting profession. Overall, while progress has been made in several respects it will be important not to stifle the regained European dynamics with an overdose of regulatory activism.

Following the example of the United States, and later the Netherlands and Australia, real estate investment trusts (REITS) have been introduced recently in France, Japan and South Korea. In 2007, Germany, the United Kingdom and India have followed suit. While it is difficult to justify that the German REIT Act excludes residential real estate as an asset class from REITS, REITS will not fail to attract new investors in those countries and will contribute to the already dynamic growth of the real estate sector in capital markets.

Regulation of hedge funds with a view to more transparency has recently been put on the agenda of the G7. Even if such regulation were to come, we will have to see whether it could indeed increase transparency.

Consequences for the Legal Market Place

The lawyers’ market has been in an unprecedented flux over the last 10 years, particularly in Europe and Asia. There are many US and UK firms who have discovered the attractiveness of being present in these markets.

With the growth of big practices, crossselling has become much more important. In the sphere of capital markets, growing complexity often requires integrated solutions to satisfy entities that want to raise, or use, money in the most efficient manner. To this end, solutions combining various products are often needed, eg, including an equity, a hybrid capital and a derivative component. This constitutes an important challenge for both investment banks and law firms, which must set up teams appropriately and are called upon to spread product knowledge across divisions or sections.

After several relatively big mergers among law firms, a mega-merger across the Atlantic cannot be ruled out anymore and might be the next natural step in a consolidating industry. The recent wave of ‘de-equitisation’ may be a prelude to such a move.

SELECTION OF THE LAWYER

Part of the story of why US and UK firms expand into continental Europe and Asia (other than being able to earn money at competitive levels) is an increased consciousness that local language, cultural and legal skills are required, also at partner level.

In Europe, there is both a trend towards ‘big is beautiful’ as well as ‘small is beautiful’. On the one hand, particularly among big multinational corporations, the importance of institutional ties, with a tendency towards bulge bracket firms, as well as independent local number-one or number-two law firms, increases. On the other hand, smaller corporations lately seem to care even more about personal ties with the law firms they usually work with. In addition, there is a general focus on the partners that clients, particularly investment banks, work with. Sophisticated clients typically even ask for particular teams including certain senior associates. Other than transaction and product experience, industry know-how is an important selection criterion. Needless to mention, demanding clients look for quick service and answers to the point. Even more than before, partner attention (and the relative number of partner hours contained in the final invoice) is of utmost importance. Last but not least, the handling of conflicts of interest by law firms is crucial.

In that context, experienced in-house lawyers familiar both with the respective products and with their respective institutions’ individual standards and requirements play an important role. They should support the quick finding of solutions to arising issues, including the selection of the appropriate outside counsel for the relevant transaction.

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