Crises is outside the law

09 10 2009

“The lack of surplus funds experienced by most companies led to an increase of contractual delinquencies, which resulted in the growing number of court claims in connection with debt enforcement, contract termination and voiding of transactions. Our litigation practice stays busy while our international trade and international arbitration practices are steadily getting more and more work. The crisis of defaulted payments is fraught with serious consequences such as bankruptcy. We have anticipated that the demand for legal services in this regard may grow due to inquiries coming both from the debtor side and the creditor side”, - stated Mr. Makarov, Vasil Kisil & Partners’ Managing Partner in his analysis of Ukrainian legal market for LIGAbusinessInform news agency. 

One way or other, the global financial crisis has taken its toll on the economic operations of any organization and any industry whatsoever. The law market is no exception. The market operators say that, from the end of last year, the market started drastically shrinking after five years of uninterrupted growth and has contracted by as much 35 to 40%. Thus, as of January 2009, we could speak about over 1,500 legal entities providing legal services in Ukraine, but in fact there are only 600 law firms being active on the market. Legal market leaders make no secret that, for example, cash inflows from general legal support provided to clients outsourcing) dropped significantly. The crisis, however, urged the clients to seek other types of legal services. Therefore, the demand is growing for services such as minimization of hostile takeover risks, tax optimization, raising finance, repayment of receivables, etc. A new Law on Joint-Stock Companies has come into effect, which has also added work to be done by lawyers. Besides, the crisis fostered market entry by new operators – so called boutique law firms.

According to Tatyana Sabitova, Business Development Director at Vasil Kisil & Partners Law Firm, a lot of large law firms have sizeably reduced their staff (15 to 25%) and cut down their advertising and international conference budgets. “The legal services market is a part of business, which will surely decline if the business declines. The crisis disrupted numerous mutual relations with suppliers, purchasers, lending institutions, and employees and dramatically reduced the income of both large companies and average citizens. The year 2009 is characterized by large-scale delays in settlements for already completed works, while the volume of current orders in the first half of 2009 decreased more than twofold compared to the past year. It should be noted that the partners of our firm intentionally decided not to distribute the 2008 partner profit and re-investing into staff retention, thus no redundancies have been made at our firm, but is definitely an exception nowadays… " - she says.

Crisis Trends

One of the so-called crisis trends shows up in the reduced outsourcing of legal services, which is caused by the general decline in revenues of the companies using the services of law firms. The truth is that services such as comprehensive legal support to companies, which is provided by outsourced lawyers and, even more so, by reputable law firms, is usually more expensive than in-house lawyers. At the same time, a question arises whether the in-house corporate lawyers are competent enough. By the way, it is no secret that the staff of the whole legal departments is also drastically reduced by some companies. The former and the latter have their impact on the allied market operations.

The Director of LIGA:ZAKON (the producer of the legal information systems carrying the same name), Dmytro Glazunov, says that the crisis situation generates both negative and positive impacts on the law product market. “Economic factors objectively cause the reduction in the number of actively operating law firms. This is our toll. On the other hand, there are more and more companies willing to provide legal support of their business on their own. In this case, they apply to us for legal information systems. In other words, the number of our subscribers increases. Speaking about the staff reduction at various companies in connection with the decline in corporate revenues, the lawyers that were cut back are again active consumers of our products as they need to support their professional level because, sooner or later, they will either be employed by some company, or will become independent business units," - he said.

Speaking about law firm practices that go through a definite decline, then, first of all, companies whose operations were focused on mono services in a certain law practice (construction, real estate, banking or M&A) have had a really hard time. “I cannot say much about client base development in these spheres either today or in the nearest future,” - says Oleg Makarov, Managing Partner of Vasil Kisil & Partners Law Firm. According to him, a lot of M&A market operators froze their investment projects when the crisis began and cut to zero their budgets waiting for better time. "It seems to me that, in the short run, a lot of take-overs can be expected, which will be caused by the seller’s attempts to get rid of bad and unprofitable assets amidst financial instability of the market, rather than by the intention of the purchasers to gain control over assets. Speaking about the lawyers and entire law firms involved solely in the merger & acquisition transactions, only those will survive who will be able to differentiate the line of services and their client base," - he adds.

New Opportunities
A difficult year 2009 gave rise to a trend towards redirection of law firms to other practices. Today, the demand is growing for services such as minimization of hostile takeover risks, tax optimization, retention of clients’ valuable assets, restructuring, raising finance, and repayment of receivables. The intellectual property practice continues to be in demand as its services such as trademark registration, patenting of inventions, trade secret protection, etc. raise the investment attractiveness of the business.

The lack of free cash flow in many companies triggered more frequent breaches of contractual obligations and, consequently, juridical recourse with claims seeking the recovery of debts, dissolution of agreements, and invalidation of deals. The workload of our litigation practice continues to be high and the demand for legal services in the international trade and international arbitration domain is steadily growing. A payment default crisis is fraught with bankruptcies of companies. We anticipated the growing demand for legal services in this sphere from both the debtors and the lenders,” - says Mr. Makarov adding that the forecasts of market analysts have largely proved to be true now in relation to the growth of the clients' demand for conflict resolution services between companies.

One of the important events of 2009 was the adoption of the new Law on Joint-Stock Companies. Since it became effective in March of 2009, it imposed an obligation on all the joint-stock companies to undergo reorganization from CJSC and OJSC into private and public JSC. A number of companies a priori cannot implement the process on their own and, thus, use the services of experts.

The demand for tax lawyers is also growing. Organizations are trying to optimize tax payments. Besides, due to the increasing number of defaults in payments and, consequently, the lack of working capital, even the taxpayers avoiding risky tax schemes can face difficulties in the fulfillment of their obligations related to payment of taxes and duties within the time required by law.

New Operators

There also has been a trend of new boutique law firms appearing which mainly descend from large law business. The matter concerns the spin-off of narrowly specialized experts from large companies and formation of the so-called law boutiques by them. Thus, several serious operators entered the market this year which were spun off from the top five market participants. In particular, in May, the market witnessed the entry of En Garde, the company mainly specializing in the litigation and corporate practices, which descended from Asters Law Firm, one of the top market operators. In August, Mykola Stetsenko, a leading M&A specialist, left the international law firm Baker & McKenzie to set up Avellum Partners Law Firm. Oleksandra Pavlenko, the cofounder of Pavlenko and Poberezhnyuk Law Group mainly specializing in the litigation and ADR practices, was a leading specialist of Magisters Law Firm in the recent past.

The Crisis Is Not Forever
Autumn has brought some revival of the market. “Judging from how busy our meeting rooms have been in October one can say that we currently feel at least some movement, if not an active recovery” – adds Tatyana Sabitova.