Latham and Kirkland among firms benefiting from booming take-private sector, says Elizabeth Broomhall

US law firms with offices in Asia are tapping into China's lucrative take-private market as Chinese companies look to de-list in the US and consider returning to local exchanges.

Latham & Watkins, Kirkland & Ellis and Skadden Arps Slate Meagher & Flom are among a raft of firms focusing their efforts on Chinese companies de-listing from US stock exchanges as the prolonged slump in Hong Kong initial public offering (IPO) work shows no sign of abating – targeting growth where they have an edge over UK counterparts.

Kirkland, which has invested millions in its Asia practice – including the hire of an eight-partner Hong Kong team in 2011 – has been working on five go-private deals involving Chinese companies so far this year, including the proposed $3.5bn (£2.2bn) de-listing of Focus Media from Nasdaq which, if successful, will be the largest Chinese company to exit a US exchange.

Latham, meanwhile, has been involved in three transactions, including the ongoing $176m (£109m) management buyout of ShangPharma, while Skadden has been advising on 10 deals, including the proposed $334m (£207m) de-listing of Yongye International, a crop and animal nutrients manufacturer.

Davis Polk & Wardwell and Shearman & Sterling are also active in the field, with Shearman advising on deals such as the $2.33bn (£1.44bn) management buyout of Chinese internet firm Shanda Interactive.

Firms advising US incorporated companies, who are potentially subject to shareholder litigation, can generate fees of more than $5m (£3.1m) on one deal, say partners in Hong Kong, while those representing buyers – typically chief executives, major shareholders and private equity funds – can earn up to $2m (£1.24m).

"The going-private sector, just due to the sheer number of companies doing this, has attracted the attention of a lot of international law firms, mostly US firms," says David Zhang (pictured), a corporate partner at Kirkland in Hong Kong.

"We are very active in this market and working on a lot of deals. They are complex transactions, drawing on many practice areas, so you need a first-rate US securities lawyer, as well as expertise in private equity, M&A and bank finance."

Take-private transactions

The shift towards take-private transactions first emerged in 2010, in the wake of declining equity market valuations in the US and a spate of fraud allegations against PRC companies, with the increasing regulatory crackdown and damage to investor confidence prompting many companies to de-list to avoid further investigation.

According to a report by Roth Capital Partners, some 37 China take-privates have been announced in the last two years, with 14 of the deals already completed and another 18 still ongoing.

The flow of delistings announced in 2012 alone contrasts sharply with the number of Chinese companies choosing to float in the US, with just one such deal taking place in 2012.

"As for Chinese companies doing US-registered IPOs – that ship has sailed, so we're less focused on that," said Matthew Bersani, the Asia managing partner for Shearman.

"Take-private deals on the other hand are a huge business right now, as many Chinese companies want out of the US market. In fact, up to half our 2012 China M&A revenue relates to this kind of work."

Firms expect transactions to increase as US investors remain sceptical of Chinese companies. They also believe many Chinese companies may choose to re-list in their own markets, as shares in the US continue to trade at depressed levels and a valuation differential emerges between those listed in the US and peers listed in Asia.

"Where there are valuation discrepancies [between Asia and the US], there is a belief among management and shareholders that their companies could be worth a much higher amount on exchanges such as Hong Kong," says Mark Lehmkuhler, a corporate partner at Davis Polk.

"A number of the US-listed companies that have gone private in the past year or two will therefore start to reappear in IPOs in Hong Kong and elsewhere in Asia in the next couple of years, which will boost the regional IPO business," Lehmkuhler adds.

Pressure drop

As Asia increasingly feels the impact of the global economic slowdown, several Hong Kong firms have confirmed that pressure to reduce legal fees has resulted in some state-owned enterprises asking tendering firms to reveal fee quotes in front of their competitors.

The previously booming Hong Kong IPO market has been hit particularly hard, with competition for work resulting in some law firms quoting advisory fees of less than $1m (£620,000) for a float.

In addition to falling IPO activity, recent deal statistics from Mergermarket show that M&A activity in Asia-Pacific totalled $246.3bn (£153bn) in the first three quarters of 2012, down 13.2% on the same period in 2011.

Commenting on the market, Norton Rose corporate partner and head of North Asia Phillip John said: "Especially in the IPO market at the moment there aren't many transactions, and in any market where activity eases off, there is always fee pressure."