Merger and acquisition (M&A) activity in 2006 led to more growth in volume than value over 2005, but private equity deals catapulted some fresh faces up the league tables for legal advisers.
The Ernst & Young (E&Y) Mergers & Acquisitions Review for 2006, which ranks legal advisers on the value of transactions they advised on, recorded a total of 729 deals during the year with a combined value of R284bn, compared with 430 deals worth R269,1bn the previous year.
Though black economic empowerment (BEE) remained a key contributor to M&A activity, the real drivers were cross-border deal flow, local consolidation and a flurry of private equity deals, which increased demand for legal expertise across sectors and practice areas.
Bowman Gilfillan was one of the biggest gainers, advising on 25 transactions worth R69,7bn and moving from 13th to first place in the E&Y ranking.
Last year's winner Webber Wentzel Bowens (WWB) came second, advising on 29 deals worth R52bn, followed by Edward Nathan with 35 deals worth R46,75bn, and Werksmans' 40 transactions - the highest number - worth R35,4bn.
"We've always had a large base of international clientele, but until now most M&A activity has taken place off the radar screen," says Bowman Gilfillan chairman Jonathan Schlosberg. "This year, we saw significant activity by our clients involving JSE-listed companies."
The firm advised Dubai-listed mobile phone company Investcom on its R33,5bn sale to the MTN Group - the largest transaction in value terms of 2006 - as well as other transactions such as Associated British Foods' acquisition of a 51% stake in Illovo Sugar; Goldman Sachs and Citi-group on the acquisition of Norilsk Nickel's 20% stake in Gold Fields; and Barrick Gold on the sale of its stake in South Deep.
But it was large-scale private equity deals that changed the M&A landscape. On the look-out for opportunities in the local market, private equity houses undertook a string of private equity deals - with legal expertise to help them.
WWB advised Edcon on Bain Capital's R25bn buyout, the largest private equity deal of the year, as well as Alexander Forbes on the Actis-led consortium's buy-out of the insurance giant.
Boutique firms such as Read Hope Phillips and Jan S De Villiers benefited handsomely from the increased private equity activity, playing a lead role in advising on some of last year's mega deals.
"It shows that smaller firms are able to offer competitive pricing, senior level attention and quick turnaround on big deals," says Read Hope Phillips director Shaun Read.
Read Hope Phillips advised Brait on its R14bn private equity buyout of Shoprite Holdings as well as the R6,1bn buyout of Consol. "A growing number of private equity houses are realising that smaller, niche firms can more than match the performance of the big-name firms," says Read.
Private equity is expected to continue to play an important role in M&A in the coming year, but WWB's David Lancaster says there is increased potential for SA firms to advise on more traditional corporate finance deals in Africa, not only as SA companies move into the continent but as governments undertake extensive infrastructural development and public-private partnerships.
There has been good growth across practice areas for most law firms. In addition to practice areas such as M&A, competition and employment law, which have been growing steadily, forensics has shown significant growth.
"With pressure on auditors not to offer advisory or consultancy services to their auditing clients, law firms are increasingly advising clients in the area of white-collar crime," says Schlosberg. "Many of these cases end up in court, so it makes sense for firms with legal expertise to become involved in forensics."
Over the past year, the Corporate Laws Amendment Bill was introduced and another wave of changes is expected to the Companies Act. Cliffe Dekker says the bill, passed by parliament in October 2006, addresses critical questions, such as the promotion of broad-based black economic empowerment (BEE) and the alignment of the Companies Act with the provisions of the Auditing Profession Act, which came into force on April 1 2006. The bill is expected to come into full operation later this year.
"Companies are looking for legal experts to smooth the way in an increasingly regulated market," says Read.
From a commercial perspective, the most significant amendments aim at regulating the financial reporting standards applicable to companies and facilitating shareholder diversification and broad-based BEE by changing the provisions relating to financial assistance to shareholders for the purchase or subscription of its own shares. It also aims to protect minority shareholders in the event of takeovers and introduces various technical amendments relating to the increased use of electronic communications.
The Companies Bill 2007 is not expected to become law before 2008. Once finalised, this new draft Companies Bill 2007 is intended to replace the existing Companies Act of 1973 in its entirety.
Meanwhile, under pressure from government, the legal profession renewed its efforts to transform at all levels. The draft legal services charter (LSC), driven by the department of justice, was released in June 2006. It not only criticises the profession for lagging behind other sectors in its transformation efforts, but its ambitious targets will force the legal profession to work together if it is to meet the provisions.
Provisions relating to access to justice, transformation of the legal profession, and the economic empowerment of historically disadvantaged individuals remain the biggest challenges, says LSC steering committee member McCaps Motimele.
The draft charter requires the organised legal profession to broaden participation and ownership of firms, partnerships and associations to ensure at least 35% black representation. Of that, at least 50% must be women, and at least 4% people living with disability. These targets must be achieved within the next five years.
These black ownership targets must be accompanied by a similar level of transformation of management control. Thus firms have to recruit onto their executive boards black directors to reach a target of at least 40% within five years. Fifty percent of this target for black representation on executive boards and similar governing structures should be earmarked for women and 4% for people living with disability.
"The draft charter seems to have caught the profession off guard, says Black Lawyers' Association president Henry Msimang. "Whether the profession will be able to speak with one voice remains to be seen," he says.
Some firms have, however, made headway. "BEE has been a big focus for us over the past few years," says WWB's Lancaster.
"Already 33% of our staff at a professional level are black and we have a strong pipeline of talent."
The challenge for most firms is that the general skills shortage could hamper their growth. Not only do firms face intense competition from other law firms in retaining talent, but industries such as banking continue to employ articled candidate attorneys. Over the past year, there has also been increased interest from foreign law firms in the local talent pool.
"Foreign law firms are now aggressively recruiting young legal professionals in the SA market, some directly from universities," says Lancaster. "SA firms have to compete not only on the basis of remuneration, but also on the opportunities and experience they can offer graduates."
Some firms, such as WWB, have undertaken recruiting programmes in London, encouraging experienced lawyers to return to SA. Most firms have improved their recruitment and training significantly over the past few years, but greater investment to develop a pipeline of talent to meet demand is needed from the industry.
"The areas of reserved work for practi-tioners is under continuous threat. Amendments to the Attorneys Act, currently under discussion and yet to be made public, will have far-reaching consequences for us," says Law Society of SA CEO Raj Daya.
The charter also outlines the possibility of introducing a programme of community service, in-service training or internship before graduates can enter the legal profession. Though this will assist in affording access to legal services for the rural and other marginalised communities, it could affect graduates choosing to study law.
Government argues that access to legal work is a problem throughout the legal services. It contends that black practitioners are forced to close down their firms because they are unable to get access to legal work.
The draft charter says the office of the state attorney, government departments, state-owned enterprises and other big corporations are partly to blame by not providing adequate support consistently to black practitioners.
Government says it will re-examine briefing patterns and intervene if necessary. Cabinet has already made a policy decision to address disparities in legal briefings.
Meanwhile, firms are gearing up to meet other charter targets, spending more on pro bono work. Bowman Gilfillan, for example, says it aims to provide an average of 50 hours of pro bono work per practitioner per year.
For the year ending December 2006 the firm dispensed free legal services to the value of R6,5m to needy organisations.