‘There was a significant and much welcome upward trend in dealmaking from June 2020 up to the end of last year,’ reflects James Scicluna, co-founder of WH Partners. ‘On the M&A side of things, there’s just been one thing after another.’

Data from the European Commission (EC) would suggest that Malta enjoyed a 2021 characterised by rejuvenation. Having sustained a Covid-induced reduction of 8.3% in 2020, GDP jumped by 9.4% last year, well ahead of the global growth of 5.7% recorded by the World Bank.

In part, this reflects the trends seen in the global market in the latter half of last year, but Malta’s government also deserves credit. The Labour administration, led by prime minister Robert Abela, has taken a proactive approach to combating coronavirus, drawing plaudits internationally. It oversaw an ambitious vaccination regime that meant the country became one of the first to vaccinate 70% of the population, widely held to be the so-called ‘herd immunity’ benchmark. Unsurprisingly, the party retained its majority in the recent general election in March.

Given the economic growth the region has experienced in recent times, it is no surprise that the M&A market has flourished. Malta’s economy is based on welcoming international companies, and this has continued in the aftermath of the pandemic. As a result, the major work for firms on the ground typically involves being instructed as local counsel on cross-border transactions.

Michael Psaila, managing partner of Mamo TCV, says: ‘In line with the global trend there’s been a significant uptick in M&A activity, which has resulted in our corporate and M&A team working flat out on a number of transactions. M&A in financial services has been particularly busy and we have seen a lot of consolidation in that area.’

‘Anything that has exposure to the cost of production and therefore, the cost of energy, is now becoming an issue.’
James Scicluna, WH Partners

However, the outlook for the rest of 2022 is more mixed. EC forecasts expect economic growth to slow to 4.2%, which, though still impressive, emphasises the anomalous nature of the previous year. Inflation is also expected to rise from 0.7% to 4.5%, reflecting Malta’s position as a jurisdiction as vulnerable as any other to changes in the geopolitical landscape.

‘Anything that has exposure to the cost of production and therefore, the cost of energy, is now becoming an issue,’ confirms Scicluna. ‘For some industries, it’s a bloodbath.’

The impact of the war in Ukraine, combined with the removal of Covid support structures, means that the market is bracing itself for more instructions from clients in distress. ‘We expect to see more insolvency and restructuring work,’ predicts Psaila.

A dangerous game

Despite its modest size, Malta has long been able to maintain a presence in the international market. A favourable tax regime and immigration rules have meant that international companies are often enticed to the region as a way to gain access to the EU internal market.

As much as the country’s economic model has brought it prosperity, it has not been an unbridled success. Issues of economic corruption and money laundering have dogged the jurisdiction in recent years. The gambling sector, a thriving part of the economy after Malta became the first EU member state to regulate online betting in 2004, has frequently been at the centre of the storm.

The controversy came to a head in June 2021, when the Financial Action Task Force (FATF) included Malta on a list of countries that would be subject to increased scrutiny in relation to its anti-money laundering procedures. Unofficially known as the grey list, the news was met with widespread concern that the intense monitoring would hamper the conducting of business.

Given the robust economic performance in recent months, it is clear that the development has not hamstrung the market too much, and most remain bullish in their outlook on the market. But that is not to say the impact has not been felt. ‘There are side effects,’ admits Fenech & Fenech managing partner Nicolai Vella Falzon. ‘It’s affecting clients in the sense that at times they are subjected to added levels of diligence, eg, when opening bank accounts or applying to operate in a regulated space.’

Despite the difficulties, there is reason to believe that the tide is beginning to turn. In a review carried out in February 2022, the FATF concluded in an initial assessment that Malta has substantially completed the action plan instigated by the government to address it money laundering issues, but that an onsite assessment was required to confirm. This was carried out in April, with the results yet to be announced. Should the outcome be a positive one, the country could find itself off the grey list in a matter of weeks.

Nevertheless, until a concrete conclusion is reached, uncertainty in the market remains. Reforms to the corporate tax regime are expected in the near future and, given the extent to which Malta’s economy relies on its hospitality to international business, players in the market have reason for concern. Falzon observes: ‘There is a lot of pressure on Malta to improve transparency and anti-money laundering screening in the wake of the grey listing. However, much has been done already and it is expected that Malta will come off the grey list in a relatively short time. Meanwhile, changes to Malta’s corporate tax system have been announced but there is no detail yet so we are waiting for developments to assess whether or how this will impact the financial services industry we operate in.’

Tussling for talent

International law firms have yet to gain a foothold on the island, with the market still dominated by a small number of local firms which do the bulk of the complex, international work in the region. ‘When it comes to the larger transactions, we still tend to meet the same firms on the other side of the table,’ acknowledges Falzon. ‘It’s Camilleri Preziosi, it’s Ganado Advocates, it’s Mamo TCV.’

Other firms such as WH Partners have developed reputations in less traditional areas such as gaming or fintech. Some of these are beginning to develop more sophisticated corporate offerings as their clients grow into maturity and require more diverse advice.

In a country as small as Malta, a strain on human resources is almost inevitable. An unemployment rate of just 3.1% speaks to the common observation that there simply isn’t the talent available to build out practices as many would like. The difficulty is made more acute by a convention in the market that dictates senior lawyers do not move between the leading firms. In Scicluna’s words: ‘Good associates tend not to move very much and if they do they go in-house.’

Indeed, it is clients that pose a greater threat to firms from a recruitment perspective. As much as domestic firms can emphasise the variety of work and career development potential on offer within a traditional firm, the reality is they simply cannot compete with the salaries being offered by their multinational clients.

‘Recruitment and talent retention is a very serious challenge,’ agrees Falzon. ‘Employment costs are rising rapidly and our top talent is subject to external pressures with competitive offers for employment being thrown at them regularly. As a result we have had to move away from a strict annual review policy to more regular salary reviews in certain cases.

‘We are coming to terms with the fact that the profitability of the business may take a hit, and that is a reality many industries are facing.’
Nicolai Vella Falzon, Fenech & Fenech

‘I believe that the market will stabilise eventually but meanwhile we are coming to terms with the fact that the profitability of the business may take a hit, and that is a reality many industries are facing.’

Given the shortage of talent available to the larger firms, and the vast number of boutique practices, it is perhaps surprising that there has not been more consolidation in the market. Outside of the larger firms, there is a wealth of small practices or independent practitioners. The majority of these advise on local work, but a minority have niche expertise in areas such as insurance, shipping or litigation.

‘Ten years ago, I would have said [consolidation] is inevitable. But today, I see the progress is so slow that I don’t predict that,’ laments Scicluna. ‘In a way, it disappoints me because I hoped that the market would evolve in line with how it has evolved in larger European cities, but it’s been much slower than that.’

To make matters worse, competition is not just coming from corporate clients. All of the Big Four accountancy firms have offices in the country and are increasingly muscling in on work traditionally handled by law firms. Falzon notes: ‘The Big Four accountancy firms have taken up the bulk of tax advisory work. We are one of the few firms that still has a tax department.’

Part of the issue is that the legal profession does not have the legislative framework afforded in many jurisdictions, meaning that the domain of law firms is not protected. Scicluna says: ‘There’s a very noticeable absence of hard law, which applies across the board to our profession. The rules which exist are historic and far off what you’d expect of a modern society and the modern legal profession.’

Fortunately for firms, there have been recent moves to address the issue, as Falzon explains: ‘There was recently a Lawyers Act drawn up, which was intended to regulate the services that can be provided exclusively by warranted lawyers and licensed or registered law firms and that initiative was also driven by a need to address the issue of increasing legal services being offered by other professional services organisations such as the Big Four. The draft Act has since been sidelined but other legal amendments are being proposed to address this issue in part.’

The long-term effectiveness of these efforts is yet to be seen, but the traditional players in the market will feel that they have contended with numerous difficulties in recent years while maintaining an impressive output. Notwithstanding further reversals on the horizon, there is no reason why this resilience should not continue. LB

charles.avery@legalease.co.uk

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Given the challenges created by Covid-19, how is this affecting your firm post-pandemic?

We had already rolled out remote working capability for all our staff before Covid, so we were able to deal with our workload remotely, without huge efforts. It is now unthinkable for us that our staff would not be fully mobile and flexible in their work arrangements. Although we are still big believers in face-to-face teamwork where geographically possible, staff can choose to work from home a few days a week.

During the first few months of the pandemic, we saw a slowdown in transactional activity, with deals being put on hold due to uncertainty. However, we turned this into an opportunity and used these few weeks of relative slowdown to accelerate organisational and other changes which had been in the pipeline. We also prepared for the eventuality of needing to reallocate resources internally, but once the realisation set in among our clients in 2020 that life and business must go on, our workload returned to normal in June/July 2020 and has steadily increased ever since.

What adjustments have you made in the current climate – fees, staffing levels etc?

We continue to have a very full and demanding workload. Our litigation, tax, commercial, and private client practices continue to experience steady growth. Our corporate M&A practice remains very busy, although the M&A market has slightly cooled off when compared to 2021.

We have increased our intake of trainees, and we currently have recruitment drives open across multiple departments. Lateral moves between commercial law firms in Malta are not so common for lawyers at associate level upwards and there is, as can be expected, high demand by industry for good in-house counsel. Often, associates (if they move) move in-house rather than laterally.

We’ve always been open minded and flexible when it comes to fee arrangements. It is imperative that clients feel they are getting good advice and good value.

How can you and your clients mitigate the risks?

There’s never any shortage of risks, is there? Our main risks tend to be:

i. market-related;

ii. AML and regulatory; and

iii. HR.

As to market risk, we are sufficiently diversified practice-area-wise to benefit from the increase in workstreams in certain areas when others experience a slowdown. In parallel, we continue to grow all our various practice areas.

It must be said that M&A is an important revenue driver for us, but our corporate lawyers are strong across all corporate work, so we don’t feel exposed to any slowdown in M&A, because other corporate and corporate finance type work typically makes up for that. For example, this year we’ve seen an increase in private equity investment into game studios particularly, and software developers in various sectors generally, which are set up in and operating out of Malta.

As to AML and regulatory risks, we have in place robust screening processes for prospective clients, and ongoing screening for current clients. This is both required by law, and important for us because it safeguards against potential reputational issues.

I’ve already mentioned that recruitment is probably the biggest challenge we face. We are fortunate to be able to secure high-quality trainees year on year, most of whom stay with us. We are also very fortunate to have made some excellent lateral hires over the past few years. However, I find that it is so much harder to make lateral hires here than it is in other countries where I’ve worked.

Overall, I’d add that technology has helped us mitigate risk all round, that is, in everything from client screening, to interacting with clients and among us, as well as giving us better data to work with.

As to our clients, of course clients in different industries face different industry-specific challenges, but there are a few challenges which all face. Those which are top of mind for me are, in no particular order:

i logistics and strained supply chains;

ii recruitment and Covid-related visa and work-permit issues for immigrant labour; and

iii for the larger enterprises operating in Europe, the new common consolidated corporate tax base which applies to groups with consolidated turnover in excess of €750m.

What practice areas are busy, ie, the biggest areas for your firm, and why?

Our M&A and corporate/commercial, tax, licensing, compliance and regulatory practices remain our busiest, followed closely by our rapidly growing dispute resolution practice. Our private client practice has also grown since the start of the Covid pandemic.

How is your firm positioning for the continued surge in corporate M&A activity within the region?

While the M&A market remains buoyant, we’ve seen a slight slowdown this year.

Tendentially a lot of the M&A we do is in the technology or other IP rich sectors, although we’ve done M&A in the banking sector, and in transport and logistics. We typically act either as lead counsel ourselves, or as local counsel often working with the much larger international firms leading on a deal. I’d say that over 90% of the M&A we’re involved in has very significant cross-border elements.

How much of your work is local versus international?

It’s probably fair to say that the vast majority of our work involves significant cross-border elements, either because it has to do with incoming investment, including sales or acquisitions, or because it is for Maltese business expanding outside Malta, or because it has to do with assisting international clients to resolve disputes in Malta, or because it has to do with cross-border tax matters.

Our work force has a very international outlook. Several of our lawyers are dual-qualified, collectively we speak ten languages, and have worked in ten countries. We have busy Italian, Czech and Polish desks.

Where do you see the Maltese legal business market heading during 2022 and 2023?

I don’t expect to see any tectonic shifts in the market.

The market will, in my view, continue to be dominated by local law firms. I can’t see any of the large international firms entering the market in the very near future. Due to local regulations governing our profession, the big four audit firms have also held back from launching their own law firms in Malta. Maltese law precludes anyone not exercising the profession of advocate (whether in a law firm or alone) from providing legal advice in Malta. Also, persons not entitled to exercise the profession of advocate in Malta cannot lawfully be a partner in a law firm.

I’d like to add that we hope to see a long expected and much talked about bill on the regulation of the legal profession becoming law this year. It won’t necessarily have a significant impact on the market because all leading commercial firms here seek to operate to international standards, but it should crystallise a lot of these standards into law.

James Scicluna is the co-managing partner of WH Partners. He is a Malta advocate and a solicitor of the Senior Courts of England and Wales. James has practised law in the UK and Malta both in private practice and as in-house counsel.

WH Partners, Quantum House, 75 Abate Rigord Street, Ta’ Xbiex XBX1120

T: +356 20925100

E: contact@whpartners.eu

whpartners.eu

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According to the European Commission’s winter forecast, despite a severe economic contraction of around 9% in 2020, Malta’s economy will grow by 4.5% in 2021. A recent proposal by the Commission to end quarantine and testing for vaccinated adults travelling from one EU country to another will be welcome news for the island nation, for which tourism is one of the top five contributors to the economy. The Maltese government’s response to the Covid-19 pandemic has been robust and, at times, has been praised by the World Health Organisation. On 25 May, the minister for health Chris Fearne stated that 70% of the population had been vaccinated, making it the first country in the world to reach the estimated benchmark for herd immunity.

In June 2020, the Maltese government set out measures to alleviate the financial pressures brought on by the pandemic; these attempted to increase investment, incentivise domestic consumption and reduce the costs of operating a business. For workers, this meant the extension of the Covid-19 wage supplement with a particular focus on those who are dependent on the tourism industry for work. For businesses, a range of cost-cutting measures were introduced, including rent and electricity subsidies, refunds of trading licences, refunds on port charges and grants, among others. Employers were also offered cash to facilitate the costs of setting up workers to work remotely and a quarantine leave grant was offered for each worker who had to undertake mandatory quarantine. Also, at the start of the pandemic, €900m was provided in bank guarantees for businesses who required loans for operational matters, which was provided by the National Development and Social Fund, and a number of EU funds.

For its part, the legal industry in Malta appears to have responded well to the crisis. Ganado Advocates’ Matthew Bianchi says: ‘Most of the practice areas retained the same pre-Covid business levels, largely thanks to the firm’s ongoing investment in new technologies as well as the quick adaptation of lawyers and other professionals to the new way of working.’

Punching above weight

Malta has a strong economy in part due to its geographical location – situated in the Mediterranean between Europe, North Africa and the Middle East – and also its open and developed market economy; multilingual society; and low corporate tax rates. Key business sectors include shipping, tourism, financial services (banking and gaming in particular), real estate, pharmaceuticals and electronics. According to Bianchi, there has been a growing focus by law firms on financial services regulatory and compliance matters. ‘We have also encountered an upward trend in legal tech, as well as [environmental, social, and governance] ESG matters,’ he says.

Although the Maltese economy emerged from the global financial crisis in fairly good shape, many fear that the pandemic will be a much more difficult beast to contend with. Mamo TCV Advocates’ managing partner Michael Psaila’s suggests: ‘While the Maltese economy was not significantly affected by the 2008 crisis, the effects that this pandemic has had, and will continue to have, on a number of significant contributors to our GDP are likely to be greater.’ While the robustness of the Maltese legal market and the versatility of its lawyers suggests that most legal practices should be able to weather the storm, the same cannot be said for businesses generally. As the world begins to open up and government support schemes come to an end, there is the expectation of a marked increase in restructuring and insolvency work for legal professionals. According to Psaila: ‘While certain practice areas may take a hit others, such as our insolvency practice and our litigation practice, are expected to see an increase in work.’

Although a small jurisdiction with a population of around 500,000, Malta punches above its weight in the corporate sphere, with a number of international businesses resident. Its size allows companies to set up easily and gain access to the EU’s internal market through the exercise of the treaty freedoms of establishment and cross-border provision of services. In practice, this means that a lot of M&A deals have cross-border elements. Local law firms handle the gamut of corporate and commercial activities, many of which are tax driven, including cross-border and domestic M&A, reorganisations, capitalisations, liquidations and the establishment of Maltese holding structures; and the setting up of Maltese subsidiaries for multinationals. Local firms that dominate this area include Camilleri Preziosi, Fenech & Fenech Advocates, Ganado Advocates and Mamo TCV Advocates. Large international firms have yet to open shop in Malta, however Psaila states: ‘They continue to make significant inroads into the market through the strong relationships they have built with a number of Maltese firms and practitioners.’

The country’s legal system fuses civil law and common law, with the civil code originally being based on the French Napoleonic Code. However, its modern system is mainly influenced by the common law tradition, due to its history as a former British colony. As such, administrative law, shipping, finance and corporate law are similar to English law, and courts often refer to English jurisprudence. In the disputes and litigation arena, the main areas of activity include civil and family, commercial, maritime and financial services. While Covid forced Maltese courts to shut down for several months, they are now open again, but with a huge backlog. As in some other jurisdictions, courts began to utilise virtual sittings and allowed online cross-examinations. The government is now looking to legislate the use of technology in courts, which should speed up court proceedings and reduce costs.

As a small and open economy, Malta is easily affected by foreign demand shock, this is usually experienced most in the services sector. Although it is facing the current crisis from a strong financial position and has strengthened capital buffers since the financial crash, loss of income for borrowers and market uncertainty could affect banks’ asset quality in the future. As the crisis continues, an uptick in non-performing loans in a range of sectors is likely. Historically, Maltese banks have outperformed their European counterparts when it comes to profitability but profits have dropped due to sustained low interest rates, an increase in regulatory costs, administrative expenses and investment in technology. This increase in costs has been compounded by the pandemic and uncertainty around how long it will last and, according to the Central Bank of Malta, may lead to a credit crunch.

Bianchi is more positive: ‘We do not anticipate a major downturn – we expect the year ahead to be consistent with the previous one. We may not see an increase in work due to an inevitable international slowdown, but do not expect any major hits either’. Domestic legal firms often act in tandem with large international firms to assist global financial institutions with their Maltese law requirements. The main areas of focus include corporate finance, asset management, capital markets work, and asset and project finance. Camilleri Preziosi and Ganado Advocates have the strongest banking and finance practices in Malta.

Cleaning up

Malta has seen an influx of businesses looking to relocate to the island due to its corporate tax structures and firms wanting to set up an EU base due to the implications of Brexit. It also attracts high levels of private wealth due to low tax rates and its ‘golden passport’ scheme, which allows citizenship through investment. Where money flows, corruption is never far behind and this year 11 people face trial over the murder of Maltese journalist Daphne Caruana Galizia, who was researching links between government figures and offshore shell companies when she was killed by a car bomb in October 2017. The fallout from her assassination led to the resignation of prime minister Joseph Muscat and implicated corruption at the heart of government. Her murder, which has brought underlying problems to the surface and made international news, has put the country at a crossroads.

The 2020 Corruption Perceptions Index – published annually by Berlin-based Transparency International – ranks Malta as 52 out of 180 countries with its lowest score to date – well below the western European average. According to Transparency International: ‘The weak rule of law and the commodification of corrupt practices as a cornerstone of the economy’ are holding Malta back. In 2004, the island became the first EU member state to regulate online betting, allowing it to generate extra tax revenue. As well as attracting large and legitimate betting companies, the new gambling regulations caught the attention of international criminal enterprises. In one case, it is alleged that a Malta Gaming Authority (MGA)-licenced company laundered tens of millions of dollars for the Cosa Nostra mafia group. In January this year, former Malta Gaming Authority chief executive Heathcliff Farrugia was charged with corruption.

All this aside, although the challenges brought about by Covid are proving substantially more difficult than those of the financial crash, the perception among the legal industry is that Malta should weather the storm better than most countries. With a strong economy and lucrative business opportunities, the island is likely to remain a key business and finance hub and Psaila sums up the sentiment: ‘As we come out of the pandemic and face the resulting uncertainties and challenges, we feel that we are very well placed to maintain [our] position as a leading Maltese law firm.’

This is echoed by Bianchi, who is equally buoyant: ‘Given the dynamics of the local market we still expect growth and, possibly, consolidation and mergers among smaller outfits.’ LB

Legal 500 EMEA 2021: Malta rankings

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Although Malta has shown resilience during the global downturn, it has not been bypassed completely. M&A volume has reduced and the island’s banking sector is more cautious than ever about credit exposure. Nonetheless, Malta’s own slowdown has been relatively painless when compared to other European jurisdictions. The island is fiscally conservative and its level of state debt is fairly low, with most of it held locally. Consumer debt is also low.

Not that Malta survives in splendid isolation. Far from it: the Maltese government realised some time ago that the island needed closer collaboration with its European neighbours. In the 1990s, there was a marked shift on the part of the government to present the island as a credible onshore financial centre in the Mediterranean in anticipation of becoming a properly integrated EU member. Following this initiative, the island’s legal framework was significantly upgraded and brought in line with international standards, including measures to combat money laundering activities.

The introduction of tailor-made laws, such as the 1994 Investment Services Act and the Banking Act, as well as the more recent 2006 Securitisation Act, have encouraged the incorporation of companies in Malta and the structuring of deals through the island, such as Lufthansa Malta Blues’ successful €234.4m note issue in March 2012. In addition the island boasts tax-friendly legislation, which was bolstered by the government’s 2011 introduction of rules that aimed to stimulate the financial services industry and encourage the re-domiciliation to the island of executive individuals from the financial services industry.

Last year also saw the Malta International Ship Register take over from Greece as the largest ship registry in Europe and Malta has become increasingly popular for its superyacht registry. Furthermore, with recently introduced legislation, the island’s aviation sector is steadily developing. Add this all up and Malta appears to have a winning formula, not only to weather the European crisis but also to establish itself long-term as an alternative financial centre to some of the more established territories.

But all this effort to be more attractive to international investors could come at a price to the jurisdiction’s legal market. If Malta continues to grow, its law firms might be compelled to hunt out local mergers to stay competitive, or even find themselves confronting an eventual invasion by international legal practices.

Good investment

Despite the government’s initial efforts in the 1990s to present Malta as a credible international financial centre, the island lacked the track record to attract high-quality work. Andrew Zammit, managing partner at Zammit & Associates, does not believe that Malta ever suffered from a negative perception in the international sphere, but concedes that the island took several years to be recognised within the financial services industry and show that it fully understood this sector.

‘Taking note of foreign jurisdictions’ legal systems, the government worked closely with the private sector to draft laws that offer investors the opportunity to structure their investments on a tailor-made basis and give clients what they want,’ says Jean-Pie Gauci-Maistre, managing partner at GM & Associates.

Malta has since developed into a very transparent jurisdiction. ‘Its money laundering standards are extremely high,’ explains Frank Chetcuti Dimech, a partner at CDF Advocates. ‘There are no bearer accounts here, the register of companies is online, and all companies are audited by registered auditors, no matter how small the company, unlike in the UK.’

Almost 20 years after the government’s initial push, Zammit tells LB how satisfying it is to see how far the island has come, how Zammit & Associates as a law firm has exceeded clients’ expectations, and how willing clients are to recommend the firm to their business partners and contacts.

Lufthansa Malta Blues (the issuer), a Maltese finance subsidiary of German-based international airline Lufthansa, recently benefited from the island’s growing profile as a financial services hub. In March 2012 it successfully priced the issue of E234m notes, due 2017, exchangeable into shares of common stock of JetBlue Airways Corporation at the option of the noteholders and guaranteed by Lufthansa.

The issuer was established as a securitisation vehicle under Malta’s recent Securitisation Act with a golden partnership interest held by Lufthansa Malta Blues Foundation. This is a Maltese-purpose foundation administered by Ganado Trustees and Fiduciaries Limited – an advisory arm of law firm Ganado & Associates – which is authorised by the island’s regulator, the Malta Financial Services Authority (MFSA), to act as an authorised trustee and to receive property under trusts.

Alongside partners Max Ganado and Stephen Attard, Ganado’s Richard Ambery, an English partner who joined from Irish firm Arthur Cox in 2010, advised Morgan Stanley, Goldman Sachs International and UBS Investment Bank (the arrangers) on Maltese law. Ward Greenberg, a Frankfurt-based partner at Cleary Gottlieb Steen & Hamilton, led the advice to the arrangers on US and German law. Camilleri Preziosi, led by partner Louis de Gabriele, advised Lufthansa on Maltese law; while Freshfields Bruckhaus Deringer, led by Frankfurt-based Andreas König, acted for Lufthansa on US and German law.

Ambery says that his team was well prepared for the Lufthansa deal because it had already developed and carried out the legal structuring work by way of a Maltese securitisation vehicle in February 2011. Ambery led a team from Ganado that advised on establishing a Maltese issuer for the $2bn asset-backed commercial paper programme of a global commodities trading company. The client, as is the case with many Maltese deals, cannot be named because of restrictions imposed by Malta’s Chamber of Advocates. ‘Much of the work on that matter informed us on this year’s Lufthansa deal,’ says Ambery.

In attracting securitisation mandates of Lufthansa’s calibre, Malta was greatly assisted by its Securitisation Act, which provides for a large variety of corporate and non-corporate forms under which a Maltese securitisation vehicle can be set up. It is perceived as flexible and efficient, as well as accommodating to various business and legal considerations in cross-border transactions. Particular characteristics that appeal include its special statutory regime for issues such as bankruptcy remoteness, creditor protection and debtor notification in securitisation transactions. These features remove some of the uncertainties that hamper structured financings in other jurisdictions.

Securitisation deals were given a further boost by the introduction of the Securitisation Transactions (Deductions) Rules, 2011, which confirm that the principle of tax neutrality applies to Maltese securitisation vehicles.

‘The new tax rules for structured finance deals took some time to put together but the regime has a great deal to offer,’ says Ambery. For example, the vehicle is able to opt to deduct profits if they are brought into account by the originator and the originator’s profits are only taxable if it is resident in Malta.

Serious jurisdiction

Beyond securitisation, Camilleri Preziosi’s de Gabriele believes that Malta has, overall, succeeded in establishing a flexible environment for both corporate and non-corporate entities. This perception spreads worldwide.

Crucially, Malta benefits from a responsive regulator, the MFSA, that understands the needs of business entities looking to structure deals through the island. ‘Our regulator is extremely efficient and takes due diligence and reporting requirements very seriously,’ says GM’s Gauci-Maistre. ‘If you don’t play by the rules, you will be subject to sanctions. This is a very serious jurisdiction.’

In addition to double taxation treaties with over 65 countries, Malta has a full imputation tax system with only one level of corporation tax. It is favourable to shareholders because the company is taxed on behalf of the shareholder, who then receives a credit for the tax already paid.

Consequently, several law firms in Malta have pulled in mandates from advisers and companies wishing to incorporate a company in Malta, particularly in the drafting of incorporation documents and shareholder agreements. At Chetcuti Cauchi Advocates, its tax practice group, which specialises in mixed Malta-Cyprus company structures, has experienced a significant increase in the number of requests it receives on the structuring of businesses through tax-efficient structures. Cauchi’s partner Priscilla Mifsud-Parker says that the latest developments include the re-domiciling of companies from other jurisdictions, especially from the Netherlands, Cyprus and Portugal, but also the relocation of the management and effective control of companies to Malta.

Michael Psaila, a partner at Simon Tortell & Associates, has also seen company structures formerly registered in other jurisdictions relocating to Malta, but not just for tax planning reasons. ‘They are also coming because of the island’s EU membership and the strong reputation the jurisdiction has built,’ he says. Psaila’s firm has also recently advised in various loans, acquisitions and restructurings involving such companies.

With easy access to European investors, Malta’s ever-developing funds sector is beginning to welcome funds that would normally have gone to traditional domiciles such as Ireland or Luxembourg. Ganado’s Ambery hears from investment bankers all the time that clients wish to diversify their holdings in terms of issuer jurisdiction, listing, regulator and so on, and not concentrate them in one or two jurisdictions. ‘Malta is benefiting from this move away from concentration,’ he says.

James Muscat Azzopardi, a partner at Muscat Azzopardi & Associates, believes Dublin’s reputation has been somewhat tarnished because of the banking crisis. Consequently, his firm is also receiving work that used to go to Ireland. ‘In addition, costs are levied at one-third of the costs of Luxembourg,’ he says. A lower cost base is always seen as an advantage, agrees Clinton Calleja, a partner at Guido de Marco & Associates. ‘This is increasingly more so in the current turbulent market climate,’ he says.

A regulatory framework that is widely respected, accessible decision makers and the certainty of Maltese structures have also assisted Malta’s burgeoning funds industry. And Malta’s existing infrastructure, which supports the industry in terms of human resources and IT and technical capabilities, is an important reason why investment funds come to Malta. The local workforce is also English-speaking.

‘Malta is now considered to be an established funds domicile and for good reason,’ says Mifsud-Parker. ‘ It boasts a sophisticated support infrastructure and has successfully played host to a wide variety of investment strategies. Malta provides clients with the soundness of an established jurisdiction at a highly competitive cost base.’

As with company structures, being in the EU acts as an important seal of quality for fund products. ‘Malta as an EU country adheres to a wide set of rules and regulations at European level,’ says Calleja. ‘Membership in itself automates the perception that Malta is not an offshore financial centre (OFC), thus providing an element of stability and security.’

Consequently, those choosing to move away from OFCs are comfortable moving to Malta.

There is little dissent over the significance of EU membership. ‘A customer or investor dealing with a Maltese-licensed provider knows that he is dealing with a business that is regulated to a very high standard and it can bring a lot of credibility,’ says Mifsud-Parker. This belief remains unchanged in spite of the eurozone crisis. ‘We can safely say that the EU was and remains crucial to Malta’s growth,’ she adds.

In terms of originating work, Azzopardi says that instructions are coming to his firm from all over Europe, but also from as far afield as Canada and South Africa. Meanwhile Zammit & Associates’ Zammit has seen new investment fund work emerging, primarily from financial centres such as Switzerland and London. As for the nature of the funds, Guido de Marco’s Calleja says that Malta’s funds industry has experienced ongoing registrations of both retail and professional funds and recent engagements for Chetcuti Cauchi include advising on establishing funds for start-up managers and acting on the setting up of a renewable energy fund.

After a particularly busy 2011, Ganado’s Ambery expected investment funds work to slow down a little. Yet he confirms that instructions have actually increased by more than 20% when compared to last year. He is seeing more instances of Undertakings for Collective Investment in Transferable Securities (UCITS) of a decent size in addition to the firm’s staple diet of hedge fund professional investor funds. He estimates that Ganado & Associates has acted for over 60% of the collective investment schemes licensed by the MFSA.
However, some commentators add a caveat. CDF’s Chetcuti Dimech agrees that the international awareness of Malta’s offering as a financial centre has increased greatly; that the island can afford to be flexible by adapting its regulatory regime to the needs of start-up operations in financial services; and that it is picking up more funds work from Luxembourg. Yet he also says that most of the funds are around the €20m range and are the types of funds that Luxembourg is likely to turn away. ‘Here, start-ups with investments of just a few million euros come through, but there have been only a few €100m-plus funds in Malta in the last ten years,’ he says.

Up sticks

The efforts of Malta’s authorities to place the island on the world stage do not stop with funds. The government also aims to attract highly qualified people holding eligible offices within the financial services sector to Malta. ‘There is a general understanding within the jurisdiction that every effort needs to be made to attract top talent to the country so as to sustain the excellent growth that the financial sector has achieved,’ says Mifsud-Parker.

In January 2011 the government introduced the Highly Qualified Persons (HQP) Rules, which stipulated that foreigners in certain executive positions in financial services – and with high qualification levels – would pay personal income tax at a rate of only 15%, provided they have an income of at least €75,000 a year (capped at €5m). They must also prove to the MFSA’s satisfaction that they are in receipt of stable and regular resources that are sufficient to maintain themselves and their families without relying on Malta’s social assistance system.

This benefit can be availed of for five consecutive years for nationals of EU countries, Switzerland, Norway, Liechtenstein and Iceland; and four consecutive years for other nationals. After this individuals will be taxed at the standard progressive rates of tax up to 35%.

Many expect to see more managers relocating to Malta, but not just for tax-related reasons. ‘This is just a small part of a larger picture,’ says Mifsud-Parker. ‘There are various other attractions: geographical location; quality of life; and ease of access to the regulator. These are all important factors.’

Guido de Marco’s Calleja also believes that there are other considerations besides taxation that are usually evaluated by an individual manager when considering whether to relocate to Malta. ‘With multiple daily flights to Europe’s major airports, good healthcare facilities and schooling, Malta is an attractive proposition for relocating,’ he says. ‘Once the complete package is evaluated, the tax incentives are most definitely a plus.’

Some Maltese lawyers report that the effect of the HQP rules have already begun to gather momentum, especially among smaller operators. But not everybody is expecting a rush of high-flying financial services executives to up sticks and relocate to Malta’s sunny shores. ‘It may depend on the type of manager but despite the tax advantages I am not convinced that there will be a wave of investment fund managers relocating to Malta,’ says Azzopardi. ‘The funds themselves are coming but the managers tend to stay where the money is. If their clients are in Zürich then they will be in Zürich.’

Other forms of migration to Malta have also benefited the island’s shipping sector and its lawyers.

Because Malta’s credibility has continuously improved over the years, increasing numbers of stakeholders have been looking to set up shop in Malta, believes GM’s Gauci-Maistre.

Shipping-related work has grown as a result of the instability created by the EU and specifically, the Greek crisis. ‘Malta has come to be viewed as a stable environment within which to carry out business, the importance of which heightened during the economic unrest,’ says Gauci-Maistre. In 2011, the Malta International Ship Register became the largest ship registry in Europe, overtaking Greece.

‘Malta has always been a strong maritime jurisdiction but the ship register has gone from strength to strength,’ says Calleja. ‘Surpassing Greece puts Malta in an even better position to continue its success in this industry.’

At a political level, the government has long been committed to strengthening the maritime industry in Malta. ‘The investment made by the government in actively enforcing international safety and environmental standards, and in publicising the Maltese flag to the international shipping sector continues to pay off,’ says Zammit. Coupled with strong legal and infrastructure support, such investments augur well for Malta to retain its position as the largest ship register in Europe and the seventh largest ship register in the world.

As with the relocation of funds and companies, being in the EU – as well as being a white-listed jurisdiction since 2009, as recognised by the OECD for implementing internationally agreed tax standards – has added confidence to the island. ‘With the whole registration structure being EU-approved, shipowners and investors know that Malta is no fly-by-night jurisdiction, where the ships run the risk of registering and de-registering within short timeframes to the detriment of registered mortgagees and other financiers,’ says Gauci-Maistre.

Nonetheless, taxation again plays a part in understanding Malta’s appeal. Shipowners know that in Malta there is a tonnage tax regime in place and that no further company taxation should be due on income derived from maritime services. With the shipping industry in crisis globally, clients are naturally relieved when faced with fixed and reasonable costs.

Particularly favourable tax treatment has also led to Malta enjoying a surge of private and superyacht registrations. In November 2005, the Maltese VAT Department introduced reduced rates of VAT on leasing arrangements for private leisure yachts, and those entered into between a Maltese yacht-owning company as lessor and lessee. This effectively reduces the VAT in Malta on such leasing transactions to as little as 5.4%.

Ganado’s Ambery has already noticed a number of Russian oligarchs coming to Malta for superyacht registrations, while GM’s Gauci-Maistre says that they are coming from all across the globe. ‘Clients are emerging that, traditionally, were more conservative when it came to flagging out their vessels,’ he says.

Taking off

Malta’s aircraft registration market is likewise developing well. In late 2010, the sector was boosted by the introduction of the Aircraft Registration Act. Tailor-made to the industry, it was designed to regulate the registration of aircraft and aircraft mortgages in Malta.

‘The Aircraft Act was the result of a national effort that aimed to exploit and harness the aviation sector’s booming development,’ says Cauchi’s Mifsud-Parker.

The legislation effectively took the island’s shipping legislation and improved it. Lessons were learnt regarding the infrastructure required, the level of protection needed by financiers under the law and the procedures and timeframes demanded. With the introduction of the Aircraft Act, it is now possible to take advantage of all the benefits emerging from Malta’s aviation industry, particularly the recognition of fractional ownership, as well as joint ownership and the regulation of trust agreements in relation to aircraft.

A mortgage can now be executed and registered in favour of a security trustee, who is recognised as the mortgagee and entitled to exercise rights over that mortgage. Given that multiple financiers are often involved – due to the costs involved in aircraft financing – the trustee’s role becomes a beneficial tool so that various financiers can appoint a trustee rather than enforcing their own security interests individually.

‘The Aircraft Act offers a great deal of protection to the mortgagee and explicitly states that the above rights can be exercised without the need for court intervention,’ says Gauci-Maistre. In addition, a mortgage is an executive title. This is fundamental, as it allows a mortgagee to proceed directly to the Maltese courts for a judicial sale of the aircraft.

The type of client likely to take advantage of the legislation includes non-EU entrepreneurs and businesses looking for a jurisdiction that provides access to EU air space; financiers in need of a sound jurisdiction where their clients can register financed aircrafts; and private jet owners hunting for a speedy and efficient registration process.

Although the island is yet to experience a snowballing of aircraft registrations, Zammit believes that the industry is gaining momentum. ‘The favourable tax treatment of aircraft leasing arrangements makes Maltese structures very appealing to aircraft owners,’ he says. Over the past 18 months, Zammit’s firm has handled a number of transactions involving the ownership and leasing of commercial and private jets.

The Aviation Act is only two years old and is still in test mode. But the industry – which has also been assisted by lower overall costs, the island’s updated regulatory structure and Malta’s taxation advantages – is definitely growing in Malta.

Tidal wave

Apart from feeding Malta’s lawyers with increasing volumes of mandates, only time will tell if the growth in Malta’s financial services, shipping and aviation sectors will cause ripples in Malta’s traditionally conservative legal market.

While Malta’s profile as a dynamic and viable international financial centre grows, it remains unclear which type of legal practice is best placed to benefit from the changes that are redefining the island. Malta’s legal market is currently characterised by a few large firms, and several small practices and sole practitioners.

Consequently, although it is rare to see major movements between law firms in Malta, many observers expect a wave of consolidation to grip the island’s legal market during the next few years. A number of small practices might agree to being absorbed by larger local firms, so as to gain exposure to certain practice areas they would otherwise find difficult to penetrate.
‘Cost sharing would be a big advantage for small practices and there is currently pressure on law firms to be too generalist, while international clients expect their individual legal advisers to be increasingly specialised,’ says Ambery.

As a small-to-medium sized firm, such a development is not something envisaged by Simon Tortell’s Psaila. ‘We would not be interested in getting together with another law firm purely for the sake of becoming larger and we perceive our clients to be very happy with the current dimensions of our practice,’ he says.

Others are not convinced that consolidation is by any means a certainty. ‘Size and quality do not necessarily go together and clients are increasingly choosing their legal service providers on the basis of the expertise of individual lawyers, rather than the name of a firm,’ says Azzopardi. Even if a wave of consolidation does hit the island, CDF’s Chetcuti Dimech believes that the typical size of a Maltese law firm will remain at around two to three lawyers.

Although rare, recent examples of mergers among Maltese law firms include Buttigieg & Refalo and Zammit Pace joining forces to become Refalo & Zammit Pace Advocates in 2009. Spin-offs have also occurred, including the founding of Simon Tortell & Associates in 2009 by name partner Simon Tortell when he left GVTH Advocates in 2009. In addition, Fenech Farrugia Fiott Legal was formed in 2009 when founding partners Tonio Fenech and Christian Farrugia exited Fenech & Fenech Advocates and Farrugia Schembri Orland – Law Firm respectively.

More recently in 2012, Acumum Services Group was co-founded by UK barrister Geraldine Noel, who has 20 years’ experience of advising multinational corporations in a number of jurisdictions. ‘We felt that there was a need for a modern, international and multidisciplinary firm’, says Noel. Working on the principle of leanness, the firm utilises secure technology and the flexible engagement of highly qualified associates and network partners to provide cost-efficient services to clients.

But if Malta continues to steer clear of its EU neighbours’ troubles, local law firms may have to watch out, not just for each other, but also for a foreign invasion. The Big Four accountancy firms are already in Malta, and the biggest change that could affect the island’s legal market would be the arrival of international law firms.

Because the economy is growing rapidly, many market observers believe that the foreign law firms will come if economic imperatives dictate. ‘The international law firms will one day arrive in Malta,’ says Simon Tortell’s Psaila. ‘They are looking at us more and more regularly. It just takes one of them to make the plunge; and if it is successful, others will follow.’
Mifsud-Parker says Chetcuti Cauchi is very open to international law firms starting operations in Malta. She thinks that it would be beneficial for the Maltese financial services industry and that it will help secure Malta’s place on the map of the world’s financial centres.

Others are not convinced that the major international law firms will ever launch in Valletta unless they see evidence of truly exponential growth to justify such an investment. Camilleri’s de Gabriele says that Malta is too small a market for foreign law firms. ‘Our relationships with overseas practices are a major source of referral work and if Maltese firms carry on providing an excellent service, there is no reason for the international practices to establish operations here,’ he says.

Although Azzopardi does expect foreign entrants to land one day, he does not believe that there would currently be much incentive for his firm to merge into a foreign legal practice. It could potentially lose referral work from the merger firm’s international competitors and would find itself having to answer to a foreign head office for the first time. The overheads could also increase significantly.

Nonetheless, Malta’s lawyers are already seeing a great deal of interest in this issue. ‘We are aware that some local practices have already been approached with a view to merging with an overseas firm,’ says Psaila. ‘We ourselves would prefer to keep all doors open.’

Some believe that an offshore law firm could be the first to test the water and open in Malta. Irrespective of who lands first, such an investment is most likely to be client-driven so as to justify the establishment of a permanent office in Valletta. If one or more important clients move substantial businesses to Malta, their legal advisers may do the same, potentially triggering an opening for a merger with a local law firm.

Safe waters

In a time of global uncertainty, most Maltese lawyers can count themselves lucky to be working in practice areas that are either anti-cyclical or in growth mode. In addition to financial services, shipping and aviation, e-gaming work continues to develop, while Malta is still investing in infrastructure projects, which typically require government debt. Calleja says that Guido de Marco has acted on a number of multimillion-euro infrastructure projects in the past 12 months, while Patrick J Galea Advocates’ founding partner, Patrick Galea, tells LB that his firm has not experienced any dramatic downturn in work flows. ‘We remain busy with litigation, corporate, advisory, financial services and banking mandates,’ he says.

Some lawyers have tapped into the island’s more eclectic industries. In 2011, Zammit & Associates’ Andrew Zammit led the advice to SysPay, assisting it with obtaining a financial institutions licence to carry on activities as a licensed electronic money institution (EMI), becoming the first Malta-licensed EMI.

Trusts mandates are on the up, since the introduction of the Trusts and Trustees Act in 2004.

‘Two of our main markets for trust work are Switzerland and Italy,’ says Azzopardi. ‘Switzerland is an international centre for private client work but does not have its own trust legislation,’ he explains. It is extremely rare for a civil law-based jurisdiction to have its own trust laws and Malta appeals because of its historical mix of both civil and common law.

Trusts are considered to be transparent for tax purposes under Maltese law and unless the beneficiaries are resident in Malta there is no Maltese tax to be paid. However, the trustee may elect to have the trust treated like a company from a tax point of view and to take advantage of Malta’s refund system. At Chetcuti Cauchi, its tax practice group has seen a significant increase in the structuring of businesses through tax-efficient structures, such as the setting up of trusts and foundations according to clients estate planning needs.

‘The favourable tax treatment of aircraft leasing arrangements makes Maltese structures very appealing to aircraft owners.’ – Andrew Zammit, Zammit & Associates

And with M&A activity sluggish, the nature of the work seen by Maltese transactional lawyers has altered, with regulatory and litigation work replacing purely transactional work. Malta’s legal market is not overly specialised and it is relatively straightforward for Maltese lawyers to leap between M&A work and dispute resolution or regulatory mandates.

Certainly the island’s clients are feeling more litigious. ‘Fuelled by a generally negative sentiment towards banks and financial operators – and at times on the most flimsy of pretexts – investors, having lost millions of euros, find fertile ground to complain and sue institutions,’ says Camilleri’s de Gabriele. Debt recovery work is also common – again a direct result of the economic downturn – as is intellectual property litigation, such as domain name disputes and counterfeit goods cases.

Nonetheless, many are confident that when M&A does return, Malta will see its fair share of both structured finance transactions and acquisitions. ‘Not only does the island offer efficient entry routes but for businesses looking to exit smoothly within three or four years, Malta is an ideal location,’ says de Gabriele.

As for which kind of law firm is best placed to benefit from the changes sweeping over Malta, Ann Fenech, the managing partner of Fenech & Fenech Advocates, believes that those legal practices that are constantly developing, and that keep up with Malta’s legislative and economic changes, have the most to gain. ‘We pride ourselves with having done exactly this since our inception in 1891,’ she says. ‘The last 25 years have witnessed meteoric growth and we have been heavily involved in this development, sometimes even ahead of time.’

With Malta offering high service levels, low costs and quality work, the island’s lawyers feel optimistic. Malta has taken several years to evolve into a successful international finance hub and the island and its legal advisers should continue sailing in the same direction. LB

julianmatteucci@legalease.co.uk
 

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