It may not be love in the air, but for Chinese law firms some frenetic matchmaking is definitely in the mix, writes John Church

Ever since the announcement earlier this year of the tie-up between King & Wood and international firm Mallesons Stephen Jaques, the legal community has been awash with speculation about who’s next. Many firms are believed to be eyeing up prospective suitors, while behind the scenes negotiations have begun in earnest. Be it domestic or further afield, on the agenda: mergers, alliances, joint ventures, restructurings, consolidations and new beginnings.

To quote one well known Beijing lawyer: “The PRC legal market is in the process of developing from an infant phase to a semi-mature stage, and PRC firms can seek and explore plenty of new opportunities. In the forthcoming days, PRC lawyers are to enjoy a most prosperous time.”

%e8%a9%b9%e6%98%8a-zhan-hao-%e5%ae%89%e6%9d%b0%e5%be%8b%e5%b8%88%e4%ba%8b%e5%8a%a1%e6%89%80-%e7%ae%a1%e7%90%86%e5%90%88%e4%bc%99%e4%ba%ba-%e5%8c%97%e4%ba%ac-managing-partner-anjie-law-firm-beijing

That was Zhan Hao, formerly the executive partner at Grandall Law Firm, and as of this month the founder and managing partner of AnJie Law Firm, Beijing’s newest firm. His quote is included in a story about mergers because in reality his new firm is just that – a merger of talent from several of Beijing’s leading firms.

Aloysius Wee, the managing principal of Dacheng Wong Alliance (DCWA), goes a little further: “There will be at least 10 Chinese firms going international in the next five years,” he says. “Some of these will be up there with the magic circle and large US firms. The next wave will be medium-sized Chinese firms forming alliances locally and internationally, and we may see more participation by Chinese firms in international alliances like Lex Mundi, WSG [World Services Group] and Interlex Group.”

Surprised? Not if you have your finger on the pulse. China Business Law Journal has learned of several pending mergers involving top-tier law firms in Beijing, Shanghai and Hong Kong, where talks are underway and official announcements are due in coming months. Most are domestic tie-ups and there is also interest among mainland firms in acquiring successful Hong Kong practices as a window to the international market. For confidentiality reasons the names of the firms cannot be disclosed, but the sheer volume of them indicates that an era of consolidation is likely to unfold for Chinese law firms.

Lessons from history

In order to appreciate the rationale for consolidation, it’s necessary to view the evolution of China’s legal services market. Andrew Godwin, the author of China Business Law Journal’s Lexicon column, has spent more than a decade in China and is currently the associate director of the Asian Law Centre at Melbourne Law School. He describes this evolution as having occurred in three phases following the end of the Cultural Revolution. The first phase began in 1980, when interim regulations on lawyers were issued as part of the process of rebuilding the legal system. Under the regulations, lawyers were required to work in state-funded legal advisory offices supervised by the Ministry of Justice. The regulations stated that lawyers should not be subject to any interference, but they were nevertheless characterised as “legal workers of the state”. The first national bar examination was held in 1986.

“The second phase was marked by a decision in 1988 by the Ministry of Justice to allow lawyers to practise in co-operative law offices free of direct state supervision and financially independent of the government,” Godwin says. “However, they were still subject to the supervision of the local judicial authorities and were under a duty to put the interests of the state first.”

The third phase began in 1996, when the Law on Lawyers and Legal Representation was promulgated. “This recognised for the first time the function of lawyers as providing legal services to the public and also put legal practice on a more professional basis, recognising the importance of professional independence and establishing a system of legal ethics and professional rules. Significantly, the law permitted the establishment of private partnership law firms.”

“In the early days, state-owned enterprises [SOEs] were allocated as clients to specified law firms and there was no competition between law firms for clients,” Godwin explains. As this began to change, some law firms looked to mergers as a means of building resources, establishing a national footprint and expanding professional networks and connections. “Personal connections continue to be of crucial importance,” Godwin says.

Client demands

In recent years new factors have become significant drivers of consolidation in the legal market, not least the changing demands of clients. Lawrence Lu, a senior partner at SG & Co PRC Lawyers, says it was clients who brought on a four-way merger that he oversaw in 2010 between three Shanghai firms and a legal team from the Shanghai branch of a Beijing firm. “Client demand was becoming more complicated and involving a broader range of legal issues. Strength in one practice area could not meet the demand of large enterprises,” Lu recalls. “Through the merger, we have benefited from complementing each other’s advantage.”

%e5%90%95%e7%90%b0-lawrence-lu-%e8%9e%8d%e5%ad%9a%e5%be%8b%e5%b8%88%e4%ba%8b%e5%8a%a1%e6%89%80-%e9%ab%98%e7%ba%a7%e5%90%88%e4%bc%99%e4%ba%ba-%e4%b8%8a%e6%b5%b7-senior-partner-sg-co-prc-lawyers-shang

Client demand is also putting pressure on some firms to establish an international presence. But the business of becoming an international player is not all plain sailing.

“To comply with Chinese law, PRC and non-PRC firms can’t share profits,” says Kent Zimmermann, a consultant at Zeughauser Group, which has several relationships with US firms interested in developing strategic alliances with Chinese firms. “Non-PRC firms in a combination with a PRC firm must account separately for their work and the revenue it brings in.”

Godwin says that “[Chinese] regulations rule out any joint ventures or true mergers with foreign law firms.” However, he notes that “the regulators have been considering various models for market liberalisation in recent years. “Certainly, closer relationships and alliances with foreign law firms are becoming more common,” he says. “In addition, the CEPA [Closer Economic Partnership Arrangement] agreement between mainland China and Hong Kong allows Hong Kong law firms to enter into associations under which the Hong Kong firm and the PRC firm can share resources but not profit.”

The merger

As a result of these regulations, King & Wood’s tie-up with Mallesons Stephen Jacques is technically an alliance rather than a full-fledged merger.

Zimmermann at Zeughauser Group explains that the alliance uses a Swiss Verein structure, the same structure that Baker & McKenzie, DLA Piper and Hogan Lovells use as a cross-border umbrella to tie multiple partnership together, even when profit pools remain separate between the partnerships. “King & Wood Mallesons has three financially independent partnerships: Australia and London; Hong Kong (which encompasses the combined former King & Wood and Mallesons Stephen Jacques partnerships); and mainland China (which includes the US and Tokyo offices),” says Zimmermann. “As a result, one way to think about the combination is a ‘brand deal’, meaning the combined firm positions itself to benefit globally from a combined brand, although the partnerships are not fully integrated financially.”

Zimmermann says the deal itself remains simple. Mallesons gets the benefit of one of the premier China-based law firm platforms, and entry to highly sought-after work for Chinese companies, including for SOEs and their outbound investment in Australia and beyond. “King & Wood gets entrée to Western markets with this merger, and the deal could be a stepping stone to a merger with a major firm in the US or Europe, or both, which is now easier than it otherwise would have been because a large portion of the firm is English-speaking and rooted in Western-style legal practice,” he says.

Tony Williams, the principal of Jomati Consultants, an international consultancy specialising in the legal profession, described the King & Wood Mallesons deal as groundbreaking at the time, but does he still believe so?

“Yes I do – this was the first major international merger not involving a US or UK-based firm,” he says. “It gives a very clear message that the international marketplace will not be the sole preserve of the international US and UK firms and it is a very interesting position, both in relation to Asia-Pacific generally and in relation to investment, by Chinese companies outside China more specifically.”

Before merging into the fast lane, ensure your firms share a vision.
Before merging into the fast lane, ensure your firms share a vision.

Zhan of AnJie Law Firm says he saw the merger coming. “It is a natural result of the development of the PRC legal services market. Nearly five years ago, I predicted that due to its economic size, China would – and should – have a real international firm to revert to the demand from the domestic and foreign markets. Wang Junfeng [King & Wood’s principal founding partner] has earned respect because of his vision and ambition.

“Of course, the merger will not always be smooth at the beginning. But if we view it in terms of China’s growth track, success in the long term is almost assured, not only for King & Wood Mallesons, but also for other Chinese firms.”

Unique position

King & Wood Mallesons’ global managing partner, Stuart Fuller, says: “From the start, it was clear that both firms shared a common vision for the combined firm and that we wanted to create something different, which would allow our clients to realise their commercial ambitions in China and the Asian region.” He adds that King & Wood Mallesons is now the only law firm in the world able to practice UK, PRC, Australian and Hong Kong law.

“When our clients are increasingly looking at operating in different jurisdictions, this is a great point of differentiation from our competitors,” he told China Business Law Journal. Williams says key risks of the merger relate to cultural integration and the effective development and cross-selling of client relationships across the new platform.

But Fuller appears confident that the necessary systems are in place to mitigate any such risks. “We have dealt with a number of internal aspects of the combination – conflicts and alignment, pricing and retainer terms, systems and so on, particularly in our merged Hong Kong offices, and have a programme for the full integration of the firms over a number of years,” he says, adding that the most challenging aspect of the tie-up is “the need to communicate constantly with clients and with the firm about our successes and next steps, as there is a large appetite to find out more about our combination.

“This takes a lot of time and effort for the leaders of the firm and its partners.”

Client confidentiality concerns

Another concern arising from any tie-up between Chinese and foreign law firms is client confidentiality. “Under PRC law, domestic firms must turn over to the ruling Communist Party any client information that it requests,” warns Zimmermann. “This makes many lawyers in non-PRC firms uneasy about combining with PRC firms.”

kent-zimmermann-zeughauser%e9%9b%86%e5%9b%a2-%e9%a1%be%e9%97%ae-%e8%8a%9d%e5%8a%a0%e5%93%a5-consultant-zeughauser-group-chicago

Godwin shares this view: “Client confidentiality and legal professional privilege are not as clear-cut as in other jurisdictions. In theory, law firms are required to disclose any information that the government or the regulators require them to disclose. Although the same applies to foreign law firms [with offices in China], experience suggests that the regulators have adopted a much lighter touch in relation to foreign law firms than in relation to domestic law firms.”

Clients of King & Wood Mallesons’ non-PRC partnerships are protected from these confidentiality concerns by the Verein structure that underpins the tie-up. Yet Fuller acknowledges that client confidentiality is still an issue for the firm. “We have kept our clients informed and some of them have separately reviewed our systems and confirmed that they meet their strict internal requirements – something that we believe that our competitors should also allow their clients to do with their systems.”

He adds: “Our clients were consulted ahead of our combination, so that we could get their feedback and ensure that it was fully understood by them. All of them were comfortable with the combination and incredibly supportive of it.”

Setting a precedent

The King & Wood Mallesons tie-up may have grabbed the international headlines, but it was only the latest in a series of consolidations.

Zimmermann represented Yuan Da Law Offices, a Shanghainese firm headed by John Huang and Kevin Qian (both formerly of Allbright Law Offices), in its tie-up with McDermott Will & Emery that created MWE China Law Offices. The deal was completed in 2007 and was the first major tie-up between a mainland Chinese and a Western firm. “A novel structure was used,” says Zimmermann. “This structure, which is now available to other firms, allowed McDermott to reduce its costs as it increased the amount of work it did for clients through MWE China Law Offices. It has proven extremely successful for McDermott.”

Jeffrey Stone, the co-chair of McDermott, says the alliance with MWE China Law Offices has been “an enormously successful” operation. “The alliance between McDermott and MWE China Law Offices allows both entities to serve and function as an integrated firm in essentially all respects of service delivery, while offering clients the benefit of full legal representation on both sides of the Pacific and in Europe,” he says.

Stone says the strategic alliance gave his firm the platform to provide a complete legal representation to global clients with interests in China. “By being a strategic alliance partner to a foreign firm, MWE China could still maintain its China licence. In turn, MWE China’s lawyers can retain their China practising certificates, which allows its lawyers to represent clients in every aspect of their legal matters in China, ranging from litigation, to liaising with regulatory authorities on legal issues on behalf of their clients. Only lawyers with China practising certificates are afforded these privileges.”

jeffrey-stone-mcdermott-will-emery-%e8%81%94%e5%b8%ad%e4%b8%bb%e5%b8%ad%e5%85%bc%e5%90%88%e4%bc%99%e4%ba%ba-%e7%ba%bd%e7%ba%a6-co-chair-and-partner-mcdermott-will-emery-new-york

Venturing out

The wave of law firm tie-ups is not confined to international firms travelling to China in search of suitors. In some cases the boot has been on the other foot.

DCWA is a Singapore-based joint law venture (JLV) between Dacheng Law Offices – headquartered in Beijing and the largest law firm in the Asia-Pacific region – and Wong Alliance, a full-service Singapore firm. “Our joint law venture is unique in Singapore,” says Wee, the managing principal of the JLV. “There are foreign firms with representative offices on one end of the spectrum (only doing liaison work) and qualified fully licensed law firms on the other. We are in the middle, where we have the licence to practise in cross-border, corporate and other specialist areas, but not for areas where local firms only practise. For these areas, we enlist the assistance of our local firm, Wong Alliance.

“As a JLV, we leverage on each other’s client base and network. Wong Alliance has associated offices in Jakarta and a joint venture in Dili. Dacheng has 40 offices across China and another 10 offices around the world.” Wee says the structure is different from a merger in that two separate entities come together to form a third, hybrid entity. “A joint venture creates a new entity as opposed to a merger, where one entity survives and the other dies, so to speak. An alliance co-operation model may work for Chinese firms as they are often more fluid and less able to adapt to rigid arrangements.”

%e9%bb%84%e6%98%8e%e6%88%90-aloysius-wee-%e5%a4%a7%e6%88%90%e7%8e%8b%e7%9b%9f%e5%be%8b%e5%b8%88%e4%ba%8b%e5%8a%a1%e6%89%80-%e7%ae%a1%e7%90%86%e5%90%88%e4%bc%99%e4%ba%ba-%e6%96%b0%e5%8a%a0%e5%9d%a1-man

DCWA deepened its reach in the region in September by entering into a memorandum of understanding with Indochine Counsel, a full-service law firm in Vietnam. “Our MOUs with Indochine Counsel, and various other firms in ASEAN, operate on a collaboration model where we share resources, client base and networks.”

Opening the floodgates?

From strategic alliances to overseas partnerships, members of China’s legal community have differing views on the benefits of consolidation and whether the deals that have been witnessed so far will open the floodgates for many more.

Zhan at AnJie says that King & Wood Mallesons-style mergers are off the radar at his firm for now. He adds that such mergers “will be a challenge for Chinese firms.

“Mergers will bring roots in foreign countries, and they also will give pressure to foreign firms and may damage referral opportunities. Mergers will enlarge a firm’s size and influence, and they will also provide more distortion, conflicts of interest and management costs.”

Zhan believes that the development options for firms are now more diverse. “Some will devote manpower into the PRC market, and some will make legal alliances of co-operation, and some will open branch offices in essential cities such as New York, London or Paris. No matter which way they go, more international exposure and more comprehensive services will be the trends for the big firms,” he says.

Yet while consolidation and power building beckon, building an international presence through tie-ups remains a difficult option for Chinese law firms.

“Most US firms find fairly unattractive the very low profits per equity partner performance of firms in PRC,” says Zimmermann. “However, Western and PRC firms have an interest in exploring tie-up options. It may be that future combinations are ‘brand deals’, meaning they combine to benefit from a combined brand, but not to combine their finances, similar to KWM.”

Zimmerman continues: “The only Western firm that I know of that is fully satisfied with the financial performance and development of its China practice is Baker & McKenzie. Other firms with global aspirations may be firms to watch when attempting to determine who will be next to emulate the King & Wood Mallesons deal. For PRC firms, we hear that the central government has interest in working not only with domestic PRC firms, but those that have the benefit of a global platform, particular to handle highly sought after transaction work of the SOEs, as they increasingly invest globally in natural resources and other assets in areas such as Latin America and Africa.”

Fuller believes China may not yet be ready for another international wedding. “We have chosen a combination to create a leading international law firm which is based in the Asia Pacific … From the look of some of our competitors, we think that they are not yet able to do this in a way that differentiates them from their competitors.”

Be sure your firms are compatible. Some mergers are doomed to fail.
Be sure your firms are compatible. Some mergers are doomed to fail.

Why not? “I suspect that this is more a question of leadership within those firms, rather than the lack of opportunities available to them. We are a unified and strongly led firm across all markets, including China, and that is essential to executing any strategic opportunity.”

Williams at Jomati Consultants is more circumspect. “There is a limited pool of major Chinese firms with a very strong international focus. Some may be prepared to contemplate transactions of this sort, others will be concerned as to the potential loss of referrals from a significant number of international firms that are already instructed. These sorts of combinations take a considerable time to develop and negotiate, but I would certainly not rule out other combinations in due course.”

tony-williams-jomati-consultants%e5%85%ac%e5%8f%b8-%e4%b8%bb%e7%ae%a1-%e4%bc%a6%e6%95%a6-principal-jomati-consultants-london
Adds Zimmermann: “Many PRC firms are increasingly benefitting from what is widely perceived as an increasingly protectionist approach of the PRC when it comes to steering highly sought-after legal work of PRC SOEs to Chinese firms. Additionally, many PRC firms benefit from referral relationships with multiple non- PRC firms, and don’t want to tie the knot and marry one partner when they can date around.”

The future

Godwin says it is difficult for any country, even China, to resist the global trend towards opening up its legal services market and allowing foreign law firms to practise local law. “For some time, the regulators have been considering joint venture models such as the model adopted in Singapore and it is my prediction that some form of joint venture model will be allowed within the next three to five years,” he says.

“However, in the short term, it is likely that they will continue to provide breathing space to PRC law firms so that they can become stronger and compete more effectively with foreign law firms. Ironically, many people argue that the approach adopted by the regulators to date has just benefited the large PRC law firms and has actually limited the growth potential of the smaller PRC law firms. As a result, there is increasing pressure from within the ranks of PRC lawyers for China to deregulate and to allow tie-ups between local and foreign law firms.”

Hooking up with another outfit can offer you a completely different perspective.
Hooking up with another outfit can offer you a completely different perspective.

Williams says it is possible for firms to develop their own international footprint but this is both time consuming and expensive, and is particularly difficult at a time when revenue and profit growth is constrained. “We are likely to see cross-border mergers continuing and these are likely to produce a growing number of firms with revenues of at least US$1 billion and US$2 billion, and if we see some very significant mergers we could by 2020 see firms of US$4 billion or even US$5 billion,” he says.

“Chinese clients have already been very active in relation to natural resources and projects, not just in Asia but also in Latin America and Africa. Capturing Chinese clients as they invest outside China will be increasingly important to firms as it is likely that Chinese corporates will be involved in a significant portion of cross-border transactions. These firms will need to show not only the level of connection and credibility that they have within China, but also the ability to lead and execute these transactions wherever they happen in the world.”

Fuller says it is clear that China will continue to develop its commercial and legal framework as it further internationalises its economy. “The modern legal profession in China is only 20 years old, and has made significant progress over that period of time. It will continue to do that. My personal view is that there is a lot of ‘me too’ going on in the international legal market at the moment, and that only time will tell whether some of the recent mergers, alliances and combinations will succeed on that point.

“Chinese law firms, like any other market in the world, are stepping up to deliver second to none client service. You only need to look at how far these firms have come in 20 years to see what they will become in the future.”

stuart-fuller-%e9%87%91%e6%9d%9c%e5%be%8b%e5%b8%88%e4%ba%8b%e5%8a%a1%e6%89%80-%e5%85%a8%e7%90%83%e7%ae%a1%e7%90%86%e5%90%88%e4%bc%99%e4%ba%ba-%e9%a6%99%e6%b8%af-global-managing-partner-king-wood-mal

Wee says more Chinese firms will look further afield as the economy booms. “The crux of how fast they can expand lies in the management styles and the legal structures that are in place to allow their expansion,” he says.

“Ten years is all that is needed – there will be a Chinese Clifford Chance with the international exposure and expertise.”