The FINANCIAL — The FINANCIAL interviewed Ted Jonas the Managing Partner of DLA Piper's Tbilisi office, on the company’s development storing Georgia and the world market developments influence on doing business in the country.
DLA Piper regards Georgia to be a great place to invest and one of the largest global legal service providers expects to see its growth continue, with growth affected more by the international credit crisis and market conditions than by domestic or regional instability.
The FIANNCIAL interviewed Ted Jonas the Managing Partner of DLA Piper's Tbilisi office, on the company’s development storing Georgia and the world market developments influence on doing business in the country.
Q. U.S. government will host a meeting of U.S. and Georgian business leaders in Tbilisi. The U.S.-Georgia business summit will take place in conjunction with a U.S. trade mission to Georgia announced by U.S. President Bush. What's your message to be delivered at the summit and what are your expectations?
A: Georgia is a great place to invest and we expect to see its growth continue, with growth affected more by the international credit crisis and market conditions than by domestic or regional instability.
The brief war that broke out with Russia last month was long in coming, even though it surprised everyone when it happened. But the causes had been simmering for several years. Prior to the war, the Georgian economy was hot, and for good reason: under-priced assets, a strategic geographical position, a central transit corridor, a highly trained and intelligent work force, low labor costs. These fundamental drivers of Georgian economic growth remain unaffected by the war, and indeed the war barely interrupted investment into Georgia from currently cash rich economies such as the Emirates and India.
The bigger drag on investment in Georgia from Europe and the US recently has been the collapse of European and American financial institutions and the tightening of credit. Georgia remains as attractive for investments today as it was before the war, perhaps even more so. First, because now assets are even more under-priced. And second, because both Georgia and Russia learned a valuable lesson — that their differences cannot be resolved by war, which only hurt both of them. These differences have to be resolved peacefully. Accordingly, I think that after the war, the region is actually more stable than it was. Our expectations of the summit are that it will generate more US investment in Georgia, emphasizing as it does the considerable US government, EU and multilateral lending agency resources being put into supporting, financing and guaranteeing investment in Georgia
Q. Why should Americans invest in Georgia?
A: Underpriced assets, strategic location, highly trained and intelligent workforce, cheap labor costs. And, not least important — Georgia is an important ally of the United States and it is obvious the US government is committed to supporting Georgia and US investors in Georgia.
Q. Which sectors do you see most attractive for the US investors and why?
A: Warehousing, transportation and logistics services and facilities that capitalize on the country's strategic location as a bridge between Europe, Central Asia and the Middle East. Americans are good at this business. Also, agribusiness, for which there is plenty of good land and experienced labor. High tech outsourcing, for which there is highly educated and inexpensive labor. Assembly of manufactured goods, for which there is, again, inexpensive land for factory sites, and inexpensive and highly trained labor. And the central geographical position of the country makes it efficient for the import of components and the export of finished goods to surrounding markets. Of course it would be even better if the Russian market were open to Georgian exports, but there are enough other markets in the region, with collectively huge population, that Georgia can be competitive without the Russian market.
Q. How important and attractive is your sector of business? Do you experience lack of competitors?
A: DLA Piper is the only international law firm in Georgia. It entered the market in July 2005 by acquiring the assets, and most of the lawyers and clients, of the old EY Law firm. That gave it a ready-made base. It is tougher for other international law firms to enter the market either by starting a firm from scratch, or by acquiring a local firm which does not have the "international" character that the old EY Law firm had.
But in 2007, before the collapse of the US and European financial markets, at least one large international firm took a serious look at opening shop in Georgia. However, it is hard for these international firms to come into Georgia with their high cost structures and adapt to the very low hourly billing rates that characterize this market. Our billing rates, which are generally equal with other Georgian law firms, are 50% less than major law firm rates in Moscow, and even 35% lower than Kiev. That's what is keeping other international law firms out of here for now. But because we were long established here as a local firm, we have long lived with these conditions and adapted to them. Indeed, our business grew out of these conditions.
Q. "There are only about five or six law firms in Georgia who have lawyers with these skills, and I think it is pretty well accepted that we have the largest number of them concentrated into one firm," you said. How difficult is for a new law office to establish itself in the market and how tight is the local market compared to the other country's DLA Piper is represented in?
A: It's hard for other international law firms to get established in Georgia for the economic-market reasons I just mentioned. Also, it's hard to find good, English speaking, Western trained experienced lawyers in Georgia. There are more and more smart, English speaking Western trained young lawyers, but without practical experience.
Q. DLA Piper has tripled in size and revenue since 2005. "An increase in the number of clients is not the best way to measure the company's growth. The best way to measure it is by the revenue of the company, which has tripled in two and half years," you told the FINANCIAL in April. How much has the number of your clients and the company's annual revenue increased since the very first day of DLA opening in Georgia?
A: We aren't a public company and we don't release our financial data to anyone but the tax authorities!
Q. DLA exceeded the budget in 2007 by more than any other office in DLA Piper world-wide. What's your explanation to this success?
A: It was two things. Foremost, it was the stunning growth in the Georgian economy, and in particular foreign investment driven growth, which created a big demand for high quality English language legal services in the local market. Secondly, we were good at capitalizing on that opportunity by recruiting great lawyers and doing our best, every day, to serve our clients.
Q. What were the difficulties you faced during and after the Russo-Georgian war?
A: Nothing compared to what the citizens of Gori and Tskhinvali and central Kartli experienced. But it was stressful and hard to focus on work. We had two of our lawyers called up to the reserves and we were worried about them. We were depressed and devastated by the loss of life, of people's homes and property, by the creation of new refugees. We were worried for our own safety while the Russians continued to threaten the country well beyond the conflict zones, including Tbilisi. But then things settled down after a couple of weeks, and business started to return to normal, as did our collective psychology and sense of well-being, for lack of a better term.
Q. Do you think that since the conflict in Georgia investment climate goes down?
A: The foreign perception of the investment climate was adversely affected, but the reality that this is a good place to invest has not changed. Georgia had finally succeeded, after the turmoil of the 1990s, and the corruption and stagnation of the late Shevardnadze years, in establishing an image of stability. And that was damaged. But the bigger drag on US and European investment was, before the war, and now after it, the financial crisis. The fact that the investment climate in Georgia is actually not worse is evidenced by the continued investment into the country by currently cash rich companies and governments, particularly from the Emirates and India. They can see that nothing has fundamentally changed for the worse, and indeed, with progress in the resolution of these simmering regional disputes, and the huge resulting US, EU and multilateral financial support, the investment climate is actually better.
Q. The company's well known corporate clients include BP, EBRD, IFC, TBC Bank, Bank of Georgia, Silk Road Group, JSC Madneuli, Ferrerro, GRDC, the Government of Georgia, and numerous international real estate investors. All these businesses suffered during the war a lot. What was the impact of the situation at client companies on your business?
A: Our business from multilateral lending agencies such as the IFC and EBRD and their counter-parts on transactions in which they participate has increased. And opportunities are being created by the increased commitment of US government agencies such as OPIC and MCC. Private international banking and capital markets deals are non-existent, but for us that work is being replaced by the increased multilateral and sovereign finance and investment work that I have mentioned, and also the continued and increasing investment of Middle Eastern and Indian clients. Also, BP isn't going anywhere, nor is the Georgian government, and the kind of work we do for them has not diminished.
Q. Are Russian companies among them? (if so, please name them)
A: We're not seeing any new Russian clients these days! But we continue to get work from Russian-owned companies in Georgia that have been our clients for some years.
Q. Did you determine new challenges for post war situation? What kind of services are more demanded in your business?
A: During and immediately after the war a few deals were suspended or cancelled. So we had a spike in work that involved advice on force majeure, on contract clauses that allowed delaying or suspending performance, re-negotiatio of the prices of assets in uncompleted deals.
Q. Taking into account the specific characteristic of our region, there’s a certain possibility of conflict raise toward Russian companies, which might be caused by doing businesses in Georgia’s breakaway regions. What could your company offer the clients? (What’s your solution to the Megaphone South Osettian issues?)
A: I can't comment on any particular case, but the general situation is clear. South Ossetia and Abkhazia are within the internationally-recognized boundaries of Georgia, so it's obvious that no company can legally do business there in defiance of Georgian law. If companies are doing business in those regions without complying with the laws of the internationally recognized sovereign, which is Georgia, then they are operating illegally.
Q. Russian banking and communication sector are expanding in Abkhazia, which is a matter of big trouble both for Georgian government and private businesses. Considering DLA Piper’s long-rooted international experience, what would your offer to the conflict sides be?
A. We have not been approached by any parties on those matters. The Georgian government has so far gotten excellent public international law advice regarding its disputes with Russia, most recently in its victory in winning an injunction in the International Criminal Court.
Q. How often do you refuse getting in charge of some particular case solutions and what’s the company’s general rule in such cases?
A. We are guided first and foremost by professional rules of ethics. In our case, we have to comply not only with Georgian rules, but also to some extent with British rules because of our connection to a British-based legal partnership, and, most strict of all, US rules, if I as a US lawyer am working on the matter or if one of the parties is a US company. Those rules are established by the lawyer licensing authorities of the US and the UK — State bar associations and the Law Society, respectively — and the Law on Advocates in Georgia. Most fundamentally, we cannot take on any client, or a new matter for an existing client, that would cause a legal conflict of interest with another existing client of our firm.
Our advocacy of one client cannot be compromised by our duty of loyalty to another client, and vice versa. So, for example, if we represent a Georgian real estate development company in purchasing property and setting up companies to develop it, we cannot then represent another company that wants to buy or lease the same property from the first client. Our duty to protect the interests of the first client is inconsistent with the attorney's duty to be a zealous advocate for the second client. We also sometimes decline cases, especially — dispute and litigation work — where there is not strictly speaking a legal conflict of interest. A potential (or current) client may ask us to act for it in suing one of our other current clients on something that is completely unrelated to the work that we did for that client. Under Georgian and UK rules, it's not a conflict of interest and we are free to take the case (although under US rules it is considered a conflict unless both clients "waive" any claim of conflict). But we usually won't take such a case because you don't want to represent someone in suing one of your current clients, even if it doesn't violate any technical rule of ethics. It's bad for the relationship, to say the least, and the most important thing for our business is to protect our relationships with good clients.
Q. What is the advantage of working with DLA pipers? How important is legal services for the U.S. companies willing to invest in Georgia? Please speak about their initial needs, risks and things they must know in advance.
A. Good legal advice is essential for any incoming investor into any country. We have clients from all over the world — different European countries, former Soviet Union countries such as Kazakhstan, Ukraine and Russia, Arab countries, Israel, Turkey — and all of them want legal advice before they invest. What they need to know depends on what type of investment or financing they are interested to do. They want to know if their partner or investment target has good title to its assets, especially land and buildings. Whether companies are duly formed and in good standing. They need to know about tax, labor and environmental regulations. What they need to know is as varied as the business they want to engage in. And of course they want us to draft transactional documents, court papers, company charters and help them in negotiations. It used to be that US and British companies and investors placed a noticeably higher emphasis on legal advice than other nationalities but I don't think this is true anymore. Now everyone has to worry about compliance with domestic laws that have extra-territorial effect, about the bad publicity that comes from breaking local laws, etc. It's yet another impact of globalization.
Q. Please speak about Georgian Law that protects investors' rights and their investments in Georgia.
A: Georgian law is fully protective of rights of property and contract. There are few protections for foreign investors specifically, because the protections for investors generally are as good as any foreign investor needs. Also, there is an equity issue that domestic investors should have equal rights with foreign investors; neither should be either favored or discriminated against.
The general legal regime in Georgia offers some of the biggest benefits that foreign investors seek, aside from guaranteed protection of property and contract rights: free repatriation of profits and assets, freely convertible currency, no local content requirements, no significant nationality-based restrictions on ownership of assets or conduct of any particular type of business. Georgia has one of the most liberal, ownership- and free enterprise-friendly legal systems of any country in the world. What's even more important, the government is totally committed to encouraging investment in Georgia, and particularly foreign investment. Frankly, it is an economic necessity, and that makes the government very hospitable.
Q. What are the advantages of hourly billing payment both for your company and for the clients?
A. First of all, hourly billing is transparent. We account in detail for every task performed and the time spent on it to the tenth of the hour; who performed it and what is his or her hourly billing rate. So the client can see on the invoice in detail what we did, who did it, how long it took, and can question us on any aspect of the work or the time it took to perform it. It is economical, in the sense, that the client pays only for the work actually performed (as opposed to a fixed fee, where the amount the client pays may bear no relationship to the amount of work actually done). For us, the company, hourly billing coincides with our "means of production," which is purely human labor: so what we bill to clients, being time- and personnel-based, coincides exactly with what we can and do produce.
Usually clients accept hourly billing because they see that it is better for them than a fixed fee arrangement, but they do want us to cap our total billing, so the client is protected against the costs going above a certain level, and we agree to this in most of the work we do.
Q. DLA Piper started in Georgia in July 2005. It is based on the law practice that was originally established as Georgian Consulting Group (GCG Law) by Kote Rizhinashvili in 1994. GCG Law was absorbed into EY Law when Rizhinashvili went to MOSCOW in 2001 to become the Managing Partner of EY Law for the CIS. Then DLA Piper acquired the majority of the business and attorneys of EY Law in the CIS — MOSCOW, St. Petersburg, Kiev and Tbilisi – in July 2005. What's the continuation of continuity between the old GCG Law, EY Law and DLA Piper in Georgia today like?
A. I feel like it is the same law practice I joined as GCG in 1996, just bigger and more advanced. The changes in name and ownership have not changed its identity, culture and work ethic. The leadership — Nick Gvinadze, Constantine Rizhinashvili, me — is the same. Two of our most senior attorneys, Otar Kipshidze and Zura Kiliptari, have been with the firm since 2000, and some of the younger attorneys and staff have also been here that long. So we have continuity, and that is nice, but we have also grown, a lot.
Q. Could you please specify the cases when DLA Piper has acted as Georgian counsel for the only Georgian companies that have done the only international equity and debt offerings on Western stock exchanges?
A. We acted as Georgian counsel for Bank of Georgia on its London Stock Exchange IPO and on the issuance and London Stock Exchange listing of its Eurobond offering.
Q. What about the real estate privatizations and private sector sale-purchases, smaller corporate M&A deals, and infrastructure privatizations you've provided law services for?
A. Those are simply too numerous to list all of them. But for example we have acted for Silk Road Group in several real estate privatizations, and also Ferrero, the Italian confectionary company, in land privatizations and leasings. We have acted for three major European retail space developers as well as European, Baltic and Israeli private equity groups in other land privatizations. We acted for one of the bidders in the Tbilisi Water privatization, another bidder in currently postponed Georgian railway privatization, and one of the major contestants in the Poti Port and Free Trade Zone tender. There are a couple of other transportation infrastructure purchases we have worked on recently that are confidential. M&A deals we have worked on include acting for EBRD in its acquisition of a minority stake in Bank Republic, and we have done several others which are confidential.
Q. You're mainly accented on corporate clients, in what cases do you get in charge of getting in charge of physical persons?
A. When the physical person is undertaking the kind of business activity or litigation that is usually done by a company. We don't do personal legal work, such as family law, criminal cases, inheritance, etc. It's not our expertise and it's not efficient for either us or the client.
Q. DLA Piper was considering opening offices in Batumi, Poti, do you still stick to the idea since the Russo-Georgian war? What about expansion in Eastern Georgia?
A. The kind of legal work we do does not require us to have regional offices. Georgia is small enough that 90% of the work for major clients can be done out of Tbilisi. For court hearings and company registrations outside Tbilisi, even in the furthest locations of Western Georgia, we can send our people there. The same can be said even for Spain, France or the Netherlands. Major international law firms have offices in the capital city only of each country, not in the regional towns. You send your people to the regions when you need to, or if justified you can sub-contract with a local lawyer.
Q. According to LegalWeek, the impact of the credit crunch finally hit the Russian legal market last week, with local leaders of international law firms admitting that they have begun to feel the effects of the turbulence in the global financial markets. Constantine Lusignan-Rizhinashvili, Russia and CIS head at DLA Piper, which has just moved into a new office space in Moscow, said: "We will be bracing ourselves for a hard time. Firms big in capital markets and debt financing will suffer quite a bit. Corporate practices have been more or less stable, but I do anticipate a slowdown in acquisitory activity." Could DLA Russian office developments affect your business in Georgia?
A. No. The Georgian market is completely independent of the Russian market. But the same international credit crunch and financial crisis that is affecting the Russian legal market is affecting the Georgian legal market (and every other legal market in the world).
Q. In September DLA Piper has elected its first Russia-based international board member to fill the void left by Nordic chief Henning Øglænd, who stood down halfway through his term. Russia and CIS managing partner Constantine Lusignan-Rizhinashvili won the election, seeing off competition from London partner Matthew Saunders, Abu Dhabi managing partner Stephen Webb and Hamburg partner Klaus von Gierke. Do you have any kinds of business partnership with Abu Dhabi in Georgia or elsewhere?
A. Constantine's election to the international board of DLA Piper was a great thing, both for the diversification of the firm's leadership from its Anglo-American base, and for Constantine. He has great vision and understanding, and the firm will benefit from having him on its board.
As for Emirates based clients, we have acted for at least two that I can think of, but again these are confidential matters. In addition, we currently act for one of the multilateral lending agencies in financing a real estate development project owned by an Emirates-based company.
Q. "The majority of real estate execs — 60 percent — say the current credit crisis is the event with the single-greatest impact on the commercial real estate industry during the past 20 years, according to a national survey conducted by law firm DLA Piper," says the Business Review. Do you conduct any local survey in Georgia?
A. No. We don't need to do a survey to see that the international credit crisis has had a major effect on the local commercial real estate market!
Q. What's DLA Piper strategic development plan like for the next 5 years?
A. Globally, DLA Piper seeks to become the leading law firm for business world wide, and it is well on its way. This month the Financial Times ranked us number 3 on its list of the top 50 innovative law firms in the world. This is a huge accomplishment for a law firm that was created less than 4 years ago by the merger of UK-based DLA, and the US-based firms Piper Rudnick and Gray Cary. Here in Georgia, we have an excellent cross-section of commercial transactional and litigation capacity, and our strategic plan is to keep growing and getting better.
Interviewed by Kate Tabatadze