The dragon’s teeth
7 May 2012 | Updated: 8 May 2012 9:57 am | By Yun Kriegler
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The first Chinese-Western law firm merger has forced rivals to examine their international strategies
One of the most significant mergers in the international legal market for many years was the tie-up between Chinese firm King & Wood and Australia’s Mallesons Stephen Jaques in March 2012. The Swiss Verein that unites the two is the first combination of significance between a Chinese and Western firm.
The two firms’ practice groups have been working together since the deal was signed on 16 December 2011, so far completing six transactions as an integrated team. Another 10 deals are ongoing and the merged firm has pitched for a further 40.
“On the client side, what we’ve done isn’t just joint pitching,” says Stuart Fuller, global managing partner of King & Wood Mallesons (KWM). “To start with, we’ve engaged with our large clients - multinational companies and Chinese state-owned enterprises [SOEs] - in serious discussions about where their business is heading and what we can bring across the region to help them seize opportunities and realise their objectives. The feedback from clients and our peers has been very positive.”
Major SOEs with which KWM has held discussions include China Petroleum & Chemical Corporation Group (Sinopec), a super-large oil and gas producer that has been one of the most active Chinese investors overseas for decades. Companies such as Sinopec use only international firms to advise on their international transactions.
“Several of our major SOE clients have acknowledged that King & Wood Mallesons is an international firm. That’s a very important client endorsement,” says Handel Lee, a member of KWM’s Chinese partnership. “In the past these clients wouldn’t have considered the legacy King & Wood for their significant transactions, but we can now offer a whole different proposition.”
Although the union of King & Wood and Mallesons is unlikely to prompt another similar tie-up any time soon, and is yet to create direct competition for major UK and US firms, it has made the international fraternity sit up and realise that Chinese law firms are coming of age.
Domestically, King & Wood’s move has prompted many of its peers to think long and hard about their next stage of growth.
“King & Wood has sent shockwaves through the nation’s legal industry by tying up with Mallesons. It’s put a lot of pressure on its peers to review their international strategies and will hasten changes within the industry,” predicts Janet Hui, a partner at Jun He Law Offices, one of King & Wood’s closest competitors in China. “The union will take King & Wood’s practice standards and business model to the international level. It’s an inspiring move to us in terms of the urgency to improve our own products and services, but it doesn’t mean we have to go down the same route.”
Jun He has a reputation for organic growth, but in recent years has strengthened its international practice group with mainly lateral hires. Since last August the firm has recruited former Weil Gotshal & Manges partner Jason Han, Kirkland & Ellis partner Li Xiaoyang, Gide Loyrette Nouel partner Warren Hua and Jones Day partner Chen Luming.
“We’ve put great efforts into attracting experienced partners and senior associates from international firms as part of our internationalisation strategy,” says Hui. “In addition, compared with an international merger, we see more benefits in maintaining our relationships with various firms in many jurisdictions, at least in the short to medium term.”
Closing the gap
With more senior international lawyers making the move to large Chinese firms, the gap between international and Chinese firms is narrowing.
“My expectation is that in the next three to five years several of the top-tier Chinese firms will have at least one or two senior foreign lawyers joining them,” says Zhong Lun international managing partner Robert Lewis. “That will change the dynamics in the legal market considerably for both inbound and outbound.”
On top of its recent London office launch, Zhong Lun hired former Freshfields Bruckhaus Deringer partner Carl Cheng in Shanghai to boost its cross-border offering.
“What we’ll be doing is essentially filling the space left unaddressed by top international firms,” explains Lewis. “Most of them have a dominant market position in their home jurisdictions and they largely focus on the super-premium work. However, the activity level in the mid-cap market’s very high and we’re hoping to occupy this space.
“That’s why we not only need to have senior international capability in China, but also to develop ties with independent firms around the world. My view is that outbound work from China will grow significantly and no one’s going to be disappointed.”
Building from the top
With more international lawyers joining, Chinese law firms need to build up their management infrastructures to support international expansion and enable them to take on more complex and sophisticated mandates.
“When Chinese law firms get their management systems and partnership structures right, they’ll become big players internationally,” stresses David Tully, the chairman and founder of the Professional Development Asia consultancy. “They have practice capabilities international firms don’t have and have deeper relationships with China’s large companies.
“A lot of the main issues in Chinese firms are public knowledge, such as lawyers working together in the same way as barristers’ chambers, a lack of cross-referrals or no sound profit distribution mechanism. Many firms want to break away from the traditional model, but it’s very difficult trying to change the management structure and implement a new system that’s fair for everyone.
“But the interesting development is that increasingly they’re using professional firms to help them make the transition.”
Paths of entitlement
The fact that China offers tremendous opportunities is indisputable, but the hard truth is that having a presence there does not grant you a share of the market. It takes much more to succeed in China, not least because foreign lawyers and law firms remain barred from practising PRC law. Although there are still firms launching offices in the country, several European firms have started opting for alternative ways to build up their China practices.
For example, Irish firm A&L Goodbody and Spain’s Uría Menéndez are forging stronger links with Chinese firms by providing Chinese lawyers with training and work placement programmes.
A&L Goodbody inaugurated its first six-month placement programme in September 2011. This year it has signed an agreement with 12 Chinese firms to continue the initiative. The participating firms include KWM, Jun He, Zhong Lun, Dacheng Law Offices, Yingke Law Firm and Fangda Partners.
Uría has offered a training and placement programme to Chinese lawyers for four years. Each year 10 Chinese lawyers commence a six-month programme at Uría’s Madrid head office, starting with courses on international business law and firm management. Participants are then seconded to Uría’s Brussels office or to one of its best friends across Europe.
Uría Beijing-based partner Juan Martín Perrotto has been coordinating the programme. In his view the firm’s investment is an effective tool to help Uría build stronger relationships with its Chinese counterparts.
“China’s a heavily relationship-led market. It’s critical to have connections there, to know them well and to gain trust with our counterparts and prospective clients,” says Perrotto.
Most of the participating lawyers are mid- to senior-level, so it may take some years before the relationships can produce meaningful referrals. However, Perrotto and his firm have already worked with several of the programme’s alumni on inbound and outbound matters.
“The programme’s beneficial to our clients when it comes to inbound matters in China,” says Perrotto. “We know which lawyers and firms we should refer work to and can be confident they’re competent in servicing our clients.”
He also finds that the Chinese lawyers on placement at Uría’s overseas offices can play important roles in outbound projects involving Chinese companies.
“Last year we advised a Chongqing-based state-owned company on its mid-cap M&A transaction in Brazil,” relates Perrotto. “We happened to have a Chinese lawyer from Tenet & Partners working in our São Paulo office at that time. He was an important member in our transaction team, although his role was mostly in helping communicate with the Chinese client. Having a Chinese lawyer on the ground when it comes to outbound work proves very helpful and value-adding to the Chinese clients.”
Portuguese law firm PLMJ has its own unique model of developing its China practice. Instead of setting up an office in China, PLMJ has entered into a strategic alliance with the country’s largest law firm by lawyer headcount, Dacheng. As part of the arrangement PLMJ has set up a Portuguese desk in Dacheng and works closely with Dacheng’s international team, as well as with PLMJ’s Lisbon-based China desk.
Currently there are two PLMJ senior associates in Dacheng’s Beijing office and one in Shanghai. PLMJ plans to relocate more associates to Dacheng’s main offices in the next few years.
The main function of the Portuguese desk is to coordinate the two firms’ teams working on Chinese companies’ investments into Portugal, Brazil and Lusophone countries in Africa and to promote business opportunities.
“The strategic cooperation’s been very successful to both firms and our clients are happy about the level of legal support they can receive, both inside and outside China,” says PLMJ senior associate Rita Assis Ferreira, who has been based in Dacheng’s Beijing office since July 2011.
This relationship has borne fruit for both firms, as they have already co-counselled on some projects. One of the largest recently closed transactions is Sinopec’s $5.16bn (£3.19bn) acquisition of a 30 per cent stake in the Brazilian subsidiary of Portuguese oil company Galp Energia, on which the two firms featured.
“Without our cooperation with Dacheng, we wouldn’t have been involved in this transaction,” stresses Ferreira. “We’ve seen more Chinese clients contacting us for projects overseas. We’re increasingly being recognised in the market. We’re happy with our model, which is profitable, and we see many opportunities to grow.”
The union between PLMJ and Dacheng is just one example of a strategy that could bear fruit in China’s dynamic and fast-changing legal market. But there is no one-size-fits-all strategy for success - the only certainty is the need for a presence in the region.
East meets West
As the world looks east, Chinese law firms are increasingly looking west. The convergence between Western firms and their Chinese counterparts has begun - but what models can international firms employ to best exploit the opportunities from the region?