As the world's largest international law firms face the prospect of large-scale retrenchments, SA's legal fraternity has come off relatively unscathed by the economic downturn. In fact, local law firms are hiring, at a time when their international counterparts have been forced to thin their ranks.

"Up until last year we were struggling to find qualified and experienced lawyers," says Edward Nathan Sonnenberg (ENS) CEO Piet Faber. "Now the lawyers who have been working overseas are looking to return home in their droves."

Large American and English firms rapidly expanded their practices during the boom, but now they have to lay off lawyers in the face of diminishing profits.

Bowman Gilfillan chairman Jonathan Schlosberg says it's a chance for SA law firms to rehire some of the good people they have lost over the past five years. "Last year if a top-rate lawyer applied, we would hire them immediately, now we have so many applications that we're able to take our time and evaluate candidates carefully."

Firms are likely to feel some pressure on fees as clients look to cut costs and some international firms have called in capital from partners. However, Schlosberg doesn't see Bowman Gilfillan cutting lawyers' earnings or calling in capital. "About five years ago we shifted from being a lawyer-managed firm to having a professional manager from the commerce industry as our CEO. That helped us to implement a professional management system that has enabled us to refine our financial management, including cash and costs."

Even as mergers & acquisition (M&A) work is likely to fall off dramatically - and there has been a precipitous drop in structured finance deals - local firms are likely to experience an uptick in litigation, bankruptcies and business restructuring work. Labour law departments are also likely to be busier as the deteriorating conditions affect companies looking to retrench workers to cut costs.

"In difficult economic times, companies look to protect their rights more aggressively as they become less preoccupied with expansion," says Deneys Reitz chairman Michael Hart.

Werksmans chairman Des Williams says those firms that are reasonably diversified will be better placed to weather the storm.

That's been the rationale behind the spate of mergers between major law firms. Many of the large players completed mergers during 2007, helping them to build critical mass. During 2008, the Werksmans merger with Cape-based firm Jan S de Villiers created another top tier firm, while Cliffe Dekker merged with Hofmeyr Herbstein & Gihwala to become Cliffe Dekker Hofmeyr.

Legal firms across the globe have been hard hit by the drop in M&A activity over the past year. During 2008 a large number of deals that had been previously announced were not carried through. Dealogic noted that a record 1 362 M&A deals - amounting to US$923bn - were withdrawn.

Despite hopes that the local market would remain less affected by the global slowdown, M&A transactions were down 39% in 2008, in value terms, compared with 2007, according to the Ernst & Young M&A survey. Though 650 deals worth R312m were completed in SA during 2008, a number of significant ones fell through.

According to the survey even the value of black economic empowerment deals fell during 2008. Traditionally a driver of M&A deals in this country, empowerment deals retreated back to 2005 and 2006 levels, mainly as a result of difficulties in raising finance.

Despite this, there were mega transactions that generated fees for the bigger law firms.

According to the E&Y survey, Werksmans cleaned up the league tables, advising on seven of the Top 10 mega deals. These included the unbundling of 90% of Remgro's holding in British American Tobacco (BAT); the unwinding of MTN's Alpine Trust; Vodafone's acquisition from Telkom of a further 15% stake in the Vodacom Group; and the exchange by Liberty Group shareholders of their holdings for shares in Liberty Holdings.

ENS advised on 42 deals worth R143bn, while Cliffe Dekker Hofmeyr managed to rise up the rankings from seventh place in 2007 to third place last year advising on 38 deals worth R90bn. Webber Wentzel slid from top of the rankings to fourth place, advising on 27 deals worth R81bn. Deneys Reitz advised on 15 deals worth R37bn, securing its place in the top five rankings.

Webber Wentzel senior partner David Lancaster says after a record year in 2007, in which the firm advised on the top four mega deals, last year M&A activity began to drop off. "The focus has now shifted," he says. "We're likely to see more business and debt restructuring deals, especially of empowerment transactions."

Hart says a recovery in M&A activity will depend on whether people can access the funding required to take advantage of good opportunities. "Much depends on whether private equity is able to re-enter the lending stream."

With lines of credit drying up and project finance work on hold, international legal firms are looking to emerging markets, especially Africa, for new opportunities. GDP growth in Africa is forecast to decline in 2009. But at 3,3%, it will still outpace global economic growth, which is expected to grow at between 0,5% and 1,2%.

Deneys Reitz's Hart says his firm's Africa legal team was kept busy with projects all over sub-Saharan Africa, including Mauritius, as SA financial institutions have headed north. "There is funding that was committed a while back that is still working its way through the pipeline."

Africa, though, was not immune to the downturn in M&A activity. Though a number of deals were completed, there was a slowdown in M&A activity across the continent.

SA firms are well placed to expand into Africa. "Large SA law firms can provide additional services that local law firms in African countries are not yet able to provide," says Schlosberg. "And they can do it at more cost-effective rates than American and British firms."

Up until now international firms have dominated the African market, and have been able to name their price for providing legal advice to clients operating in Africa.

Most African legal disputes are being heard in the ICC court of arbitration in Paris or London, when many of these cases could be heard locally. But Williams says based on cost-effectiveness and a technically competent arbitration service, SA should be the first choice for African disputants.

However, arbitration in SA became a politically sensitive issue after Cape high court judge president John Hlophe alleged racism in parts of the judiciary and specifically in arbitration proceedings. "This appears to have halted the long-awaited overhaul of SA's Arbitration Act and the adoption of the Model Law, which provides for a regime in which interference by courts in the arbitration process is minimised and is aligned with modern commercial practices," says Williams.

However, he says a recent constitutional court judgment should de-politicise arbitration. He says it is essential that SA arbitration legislation be brought into line with legislation in other developed countries to stimulate the development of SA as an international and regional arbitration centre.

Locally, firms will be kept busy in the coming year helping clients to comply with new amendments to the Companies Act.

Schlosberg says the new act helps modernise SA's corporate law and will streamline the regulations around transactions. "It will facilitate M&A transactions, but it won't necessarily result in more deals being done."