Chinese firms have matured, but are they ready for marriage?
20 February 2012
Chinese legal profession’s progress not in question, but the extent of it remains subject to debate
Many Chinese lawyers point to 1979 as the time of the reinstitution of the Chinese legal profession following a long period of dormancy under Chairman Mao, but in fact 1993 is the year when private law firms were first allowed to be set up. Prior to that firms had been ‘sponsored’ by state-owned companies or organisations.
King & Wood, Zhong Lun Law Firm and many other Chinese practices were created at this time, and in the same year the Ministry of Justice of the People’s Republic of China issued the first batch of approvals for foreign law firms to open representative offices in Beijing.
So what was the state of play in the Chinese legal market 20 years ago? Clients were, for the most part, Fortune 100 industrial companies from the US and Europe that had the resources and patience to penetrate the fog of Chinese regulations and policies to be able to set up manufacturing plants in the country. This was essentially all that was open to foreign investors at that stage.
These foreign multinationals gravitated naturally towards the handful of US and UK law firms with presences in China. The deals may have been in China, but the dealmakers were all in Hong Kong, so that is where the China practices of these firms were located.
The trend towards moving China practice lawyers into Beijing and Shanghai had just begun and was in the process of being regularised, with the adoption of regulations on foreign law firms that required them to choose just one city in which to open a formal office. Most set up in Beijing in those days, but a few, including Clifford Chance, opted for Shanghai.
For most of the 1990s Chinese law firms were not even on the radar. The multinational clients that dominated the demand side of the legal services market did not instruct Chinese firms except to sign opinion letters drafted by foreign legal counsel.
China practice lawyers in foreign firms almost never considered it useful to consult Chinese law firms for general legal advice. Such advice was uniformly either a turgid chapter and verse recitation of some Chinese regulation only tangentially related to the issue, with no analysis as to the practical commercial application to the facts of the case, or a summary of a telephone consultation with a government official who may or may not have the authority to take a view on the relevant prevailing ‘policy’.
Neither was the Chinese client side necessarily a significant source of business for Chinese firms, at least on foreign investment projects.
For the first five years of my practice in China I rarely saw a Chinese lawyer across the table, and it was a couple more years before I observed a Chinese party actually seek (or take) legal advice from their legal counsel.
The dragon lady
On one project I worked on, the Shanghai team was led by a ‘dragon lady’, who was of the age that suggested her middle-school education had been interrupted by the Cultural Revolution. Her negotiating style reinforced this suspicion, as she spent many sessions screaming at the foreign lawyers that the documentation was incomprehensible.
When I approached the local counsel for the Shanghai side (who showed up only occasionally when summoned) privately to seek their views, they said they thought the documentation was acceptable in form and language; but when I asked them to convey this to the dragon lady they literally shook in their inexpensive, locally manufactured boots. There was no upside to incurring the wrath of the dragon lady, so we all endured her tirades and tried to wait her out.
All in all, not great business for Chinese lawyers being paid a pittance on a fixed-fee basis to represent the Shanghai parties on the deal.
So what are the take-aways from this brief tour of the early days of Chinese law firms?
I suggest there are two things to bear in mind. First, many foreign China practice lawyers of my generation are stuck in the 1990s in terms of their view of Chinese lawyers. In other words, generally they will not use them except when they have no choice. This ignores the extraordinarily rapid development of Chinese firms in the past decade and more, and is driven in large part by self-interest and a lax regulatory environment for foreign firms.
The truth is that the former ugly duckling Chinese law firms are now beautiful and powerful – albeit adolescent – swans, and the China practitioners in foreign firms who are unwilling to acknowledge this dramatic shift in the market are in the process of becoming dinosaurs.
Second, with regard to the King & Wood-Mallesons Stephen Jaques merger, much has been made of the fact that King & Wood has a relatively brief history of 20 years or so. I am not sure you can count all those years if you are making a true apples-with-apples comparison. If you start counting from when the top few Chinese firms were operating more as ‘real’ law firms, and taking a leading or at least substantive role in deals, we are really only talking about 12 years.
This means the firm culture is still being formed in most Chinese firms, and practice capability and quality is still uneven from office to office and practice group to practice group. In the grand tradition of Chinese organisations and law firms the world over, not all edicts and initiatives from the centre are implemented at the edges at individual partner level.
In short, the legal profession in China is young, so all the key players are also young. At the top Chinese law firms there is still the natural turmoil and angst – as well as the promise and energy – of an attractive, maturing, robust adolescent. Which begs the question: are Chinese law firms ready for marriage and all it entails?
Robert Lewis, international managing partner, Zhong Lun