In the May issue of ALB, Lauren Scott examined China's commitment to opening up its domestic legal market from the perspective of foreign law firms. This month, she reports from Shanghai on what local firms think of the foreign invasion.

Shanghai assaults the senses. For a first-time visitor to the city, the incessant blaring and beeping of car horns, thick, choking smog and throngs of locals darting and weaving their way through the pulsing, pedestrian-unfriendly traffic prove a heady mix that is almost overwhelming.

In downtown Pudong, the business district where law firms have been encouraged to set up shop, locals and foreigners stride between offices with bustling efficiency. A gaggle of cranes sit expectantly on a nearby lot, ripe for development, and across the Huangpu River, well-known brand names dominate the skyline: Sony, TDK, Samsung, Sharp, Nikon, Canon.

Over the phone, David Liu is apologetic. A partner of local firm Llinks Law Office, which opened in 1998, he has forgotten our 9.30am meeting after a working day that ended at 4am saw him arrive later than usual into the office. We agree to meet for lunch before he leaves for a Bar Association meeting in Beijing that afternoon.

From the top floor of the Shanghai Stock Exchange, we swap conversation over traditional Chinese fare. Liu looks out the window and surveys the sprawl of office towers while I struggle to master the art of chopstick etiquette. Would local firms welcome the opportunity to work with foreign law firms on a more formal level, I ask?

“It’s a question that’s hard to answer,” says Liu. “It’s market driven. I personally would not be against co-operation with foreign law firms. But what kind of co-operation?”

Liu is alive to the desire of foreign law firms to penetrate the China market more deeply than present restrictions allow. “With more and more international investors coming to this market…we have a requirement for international lawyers to provide more services in China. International firms have already come into the market and they have a large market share already in banking and finance, project finance, M&A, foreign direct investment.” He is also well aware of the increased competition opening up the market will bring. “Of course, I think all local lawyers have such concerns,” he says. “There are already in Shanghai more than 40 foreign firms. Some firms are very big – they have over 50 to 60 fee earners.”

But competition is not a bad thing, according to Liu. “We need to improve ourselves to compete with international law firms. That does not mean to fight against each other, because fundamentally, it’s the quality of service [that matters].” In some respects, says Liu, the local firms are at an advantage. “As the [local] lawyers grew up in this market, they have a deeper understanding of PRC law and regulations than their international peers.”

Liu’s assistant, who met with me in Liu’s absence earlier that morning, is far more bullish about the ability of local firms to defend their turf. “We are not afraid that they [foreign firms] are entering into the Chinese market,” he says. “We have established co-operation with many international firms.” He concedes that foreign law firms “are more experienced and skilful than us”. “But in the Chinese legal services market, we have not only international service experience, we have local expertise. We have a long and friendly relationship with local governments, and are also very familiar with Chinese local backgrounds. We have our own value.”

A fledgling market

China’s legal market is still accurately described as nascent, its early development stymied by years of political and social unrest during the Cultural Revolution of the 1960s. Described as a “massive cleansing policy” implemented by leader Mao Zedong to contain unrest within the ruling communist party, the Revolution saw those with “bourgeois tendencies” – which necessarily embraced the intellectual elite – forced out of their offices and into the fields as Mao took his message to the provinces.

Only in 1979 did the first law offices begin to emerge, under the watchful eye of the State. The Chinese Council for the Promotion of International Trade (CCPIT) and the Ministry of Foreign Trade and Economic Co-operation (MOFTEC) together had a hand in managing these offices, the concept of private partnership or equity then unknown. Global Law Office was the first commercial law firm in Beijing, followed by the Great Wall Law Office and C&C Law Firm. In Shanghai, Shanghai Tian He Law Firm and Shanghai Jin Lian Law Firm were among the first state-controlled law offices, eventually merging to form what is now Allbright Law Offices.

In the late 1980s and early 1990s, the Beijing government and the Ministry of Justice (MOJ) began encouraging firms to privatise as part of a wave of regulatory reforms - and firms heeded the call. The government went one step further in 2000, dissolving state-owned law firms as part of its reform of the state-owned enterprise sector. The MOJ has also been encouraging firms to merge in an effort to remain competitive in a legal services market expected to witness an influx of foreign firms on the heels of WTO liberalisation.

The local scene

Fangda Partners is one Shanghai firm that emerged in the 1990s, a product of the MOJ’s privatisation policy. Six partners banded together to form the firm, three with experience in state-owned enterprises. Kenneth X.D. Lu, one of the founding partners, says of the firm’s genesis: “[In 1993] we believed we could have a good marketplace to provide legal services…it looks like our decision was quite correct.” The firm acts for PRC and international clients across various industries, with Lu practising primarily in foreign direct investment and corporate law. “The last decade has been a very interesting and exciting period,” says Lu. “The Shanghai Stock Exchange launched in 1991 and Shenzhen in 1992. Before that, there were not many corporate finance transactions. That’s all changed.”

The firm’s partners decided towards the end of 2000 to open an office in Shenzhen, to take advantage of the much-anticipated creation of a Growth Enterprise Market (GEM) board to attract listings of high-growth, high-tech businesses. That board failed to materialised, delayed indefinitely, says Lu, due to political concerns. “In China, many things are different from Western countries. We have a lot of regulatory issues the government has to consider. The second board is still of interest to the government, but there is no time schedule for when it will be launched.”

Lu says China’s WTO accession and its impact on the domestic legal services market is a “hot topic” in legal circles. “We have been asked by many foreign firms and legal publications [about our views],” he says. “We believe that it could be generally speaking a good event to us. Of course, there will be more competition.”

But local firms stand to benefit from an increased foreign presence, says Lu. “In China, we have a very short history of law firms. We do not have a very developed, mature way of doing things in terms of management and promotion. Many of the Chinese lawyers may not have very good professional training and backgrounds.”

James Chen, a founding partner of Shanghai United Law Firm agrees. Chen, cordial and professional, ushers me into a meeting room at the firm with a view across downtown Pudong. I sip green tea and he apologises for his English (which is very good). “I learn English three times a week,” he says. “In the Jin Mao Tower, with the Wall Street Institute.” The firm has 10 partners, with 66 lawyers in total. “My personal feeling is that we welcome a lot of foreign law firms entering into the Chinese legal market to practise in the legal profession together with us,” he says. “For China, the market is very young. A lot of law firms, they need to learn more about private experience – how to provide a good service to clients. If more foreign law firms come to China, we can learn from those law firms. I think it is really good for Chinese law firms – and Chinese lawyers.”

Chen says the PRC Government’s restrictions on local lawyers practising at foreign law firms are misguided. As a lawyer who himself has not had the opportunity to work for a non-Chinese firm, Chen resolutely believes it should be afforded to the new generation of graduates. “A Chinese lawyer cannot practise in a foreign law firm. If they want to, they must give up their licence. That’s not fair,” he says. “The Chinese government should encourage Chinese lawyers to practise with foreign law firms. If a young lawyer after graduation learns in a local law firm – the law firm cannot provide a lot of experience to him. That’s not very good. But if a young man can practise in a major international law firm, in one to two years, he can learn not only about the law, but how to provide a service – professional advice – to clients,” he says.

And it works both ways. Chen says the firm wants to hire foreign lawyers – but there are problems. “We cannot give them a high compensation,” he says. Associates at the firm receive a pay cheque of between 3,000 – 5,000 renminbi a month – about US$360-560. “Even if we give them US$3,000 – I don’t think this is enough.”

If Chen is worried about competition from foreign firms, he is not letting on. “I don’t think they will compete with us. Our clients are very different. Over 90% of clients of Chinese law firms are Chinese enterprises, not individuals. If foreign law firms come to China, most of their clients will be multi-country companies.”

Not everyone wants the doors opened wide to foreign lawyers. Says Richard Wang, a former partner of US firm Coudert Brothers who founded his own firm, Richard Wang & Co.: “We have not promised to the whole world to open up the legal market. There must be some limitations and restrictions on the practice of the foreign law firms.” He says foreign firms should not be allowed to recruit local lawyers - but he is not against their presence in China. “I have a deep relationship with foreign law firms,” he says. “Some of them are my intimate friends. The problem is the scope of the legal practice of the foreign law firms. It has been a problem for many, many years.”

John Huang of Allbright Law Offices agrees, although couches his view of the local – foreign firm dichotomy in terms of “co-operation and competition”. “If you open it [the market] up too liberally, I think it will be a big setback. Foreign law firms have more support, more capital, more large clientele – If you open up without limitation, the local firms will get hurt.”

Local lawyers say the MOJ has turned a blind eye to certain activities of foreign law firms in its quest to remain attractive as a location for foreign company headquarters – and a destination for foreign investment. This includes the practise of local law, which is forbidden. Regulations on the Administration of Representative Offices of Foreign Law Firms provide that foreign firms may not handle Chinese legal matters, but may provide information concerning the impact of China’s legal environment, the latter a distinction most lawyers agree is decidedly vague. Foreign law firms are also prohibited from engaging in legal service activities in China through the use of consulting companies or other forms. Regulations promulgated by the State Council at the end of 2001 permit foreign lawyers to offer consulting services on legislation of the country or region where they are licensed, and on international conventions and practices. And they can enter into contracts with Chinese counterparts to entrust them to deal with legal affairs and provide information on the impact of the Chinese legal environment.

Says George Wang, a partner of Jun He Law Offices, founded in 1989: “Legally, the foreign law firms are not permitted to conduct Chinese law practice. But in practise, many of them do this.”

Richard Wang says firms have been getting around the restrictions for years. “If you want to make a living, you have to.” He says the MOJ has kept largely silent about the activities of foreign firms for fear of repelling them, and in turn, foreign companies, from the market. “I speak very highly of the foreign law firms and some of the lawyers…but they need to face the problems. It’s not good for their reputations.”

Says Chen: “A lot of foreign lawyers…provide advice about Chinese law to their clients. But they will say: ‘We are not permitted to provide Chinese law advice to you. This is just for your reference.’ The clients never mind that,” he says. “They will not mind whether a Chinese law firm or foreign law firm [is giving the advice].”

John Huang says the MOJ is aware of the activities of foreign firms that breach the conditions of their licences. “Very early they cracked down on two foreign firms – Baker & McKenzie and Coudert Brothers – which were forced to leave because they violated the one office rule.”

But in terms of the restriction on practising local law, it’s a different matter. “It is quite difficult to prove whether you are practising Chinese law or not.”

Says Peter Neumann of US firm Faegre & Benson: “There’s a wink and a nod – provided foreign firms to do not provide opinions or attempt to represent Chinese companies in Court.”

A question of culture

The way Western and Chinese lawyers have traditionally conducted their respective businesses may prove an impediment to future unions between law firms, according to more than one Shanghai lawyer.

Chen of Shanghai United Law Firm admits: “The culture is different. Maybe this is a problem if [local and foreign firms] work together,” he says. “But we want to learn about foreign law firms. We learn a lot of things from Western countries.”

Chunyang Shao, a partner of Jun He Law Offices, says the problem for foreign firms practising in China is a lack of understanding of the business culture at a high level. “They are using expats. Most senior people [at partnership level] do not fully understand the legal system and culture.”

Richard Wang of Richard Wang & Co. recalls one ADR matter involving two foreign clients in which he acted opposite a foreign law firm. “[The foreign lawyer] had been in China three months. It was his second trip. When he came [to the country] he did not learn the Chinese language. It was a very difficult negotiation.”

Wang says he has no problem with foreign lawyers being in the market – provided they obey the rules. “Personally, I do want the foreign law firms – leading international foreign law firms – to play a role in the Chinese legal market. I think it’s good for the Chinese legal community,” he says. “But they have to first comply with the Chinese law practice restrictions and use people who are Chinese law experts.”

Venturing into China

The State Council has made it clear that bans prohibiting the investment of jointly invested law firms would not be lifted following WTO accession – nor the ban on recruiting Chinese lawyers. Allbright Law Offices’ John Huang is not convinced the PRC government will ever open up the market so far as to permit joint law ventures. He points to the situation in Singapore, which he says will surely convince the authorities that the joint venture route is not the way to go.

“Joint law ventures in Singapore – it’s a major failure,” he says. “Singapore law firms don’t get along well with foreign law firms. The two sides do not click.”

There is a tendency on the part of foreign firms, he says, to approach a joint venture more in the manner of a takeover. “They want to have total control of the management/marketing. That creates a lot of friction for the two sides.” Huang represents multinational corporations in M&A transactions, a large proportion where the Chinese parties have been bought out. “I’m not very optimistic about the cooperation between the two parties – whether they can own equity together,” he says. “Dating is okay – marriage could be a problem.”

But Fangda Partners’ Lu does not agree with Huang’s assessment. “It could quite possibly be the case that China will take the same approach as Singapore to allow joint law ventures,” he says. “I believe it will happen. Maybe in three, five, or six years. Definitely it will happen.”

The MOJ is said to want to protect the interests of local firms – but according to some, it does not have the clout to overrule the lifting of restrictions on foreign firms. Says a lawyer from one firm, who preferred not to be named, “The MOJ in the hierarchy [of Chinese government] is not a very important department. It’s not very strong. It needs to acquiesce to the demands of other departments.” MOFTEC is under pressure from foreign firms – and corporations - to open the market further. “The Chinese government is aware more and more of globalisation. To attract more foreign direct investment into China, it needs to give something in terms of legal and financial services.”

Kenneth Lu says while PRC law firms stand to benefit from instruction in the way foreign firms do business, they may be “sensitive” if foreign firms want “absolute control of local management and operation”. Money is also an issue. “I believe the profitability of Chinese firms is not as high as foreign firms. How to organise the profit-sharing scheme within the joint venture may be a problem,” he says.

“I believe both parties could make appropriate arrangements beneficial to both of them….We would like to have a deal with a foreign firm that we could have comparatively independence re PRC matters. We believe it’s achievable.”

But ultimately, joint ventures will not, in Lu’s view, be a “popular phenomenon”. “You might find a dozen,” he says. “On a mass level, most of the PRC firms will continue their own business.”

He says the next two to three years are “very critical” to Fangda Partners. “Definitely we are facing more and more direct competition from these foreign firms – so we need to make a very quick decision whether we are going to develop our business as a niche player or find a foreign firm interested in a joint venture with us….We are very open to talks in this area,” says Lu.

If foreign firms are permitted to form joint law ventures with local firms in the future, they are more likely to target boutique practices, according to Huang. “It would be difficult for any foreign law firm to do a joint law venture with Allbright. Our size is too big.”

Chen does not think joint law ventures will be permitted any time soon. “Maybe in 10 years. The government has a different idea than law firms. Most of them [the firms] will say: ‘no, no, no, we don’t think that competition will be harmful for lawyers’. But the government doesn’t think so. I don’t think they’ll encourage local firms and foreign law firms to make joint ventures.”

Teething problems

The relative youth of the Chinese legal market has its drawbacks – a lack of adequate insurance behind legal practices being one of them.

Faegre and Benson’s Neumann says China as yet has “no meaningful system of professional indemnity insurance”, with average policies providing cover in the order of only $1m renminbi. “It is insufficient for the role that a firm issuing opinions on financial and capital markets transactions has to fulfil,” says Neumann.

Chunyang Shao says the issue of insurance is a problem for many local firms, although they are taking steps to address it. “When I worked for a foreign law firm – when telling clients the difference between a foreign law firm and a PRC law firm – if anything goes wrong, the foreign law firm will have the ability to pay damages.” Says his colleague Yan: “It’s in the process of improving. Insurance is not mandatory for local firms. We do have insurance.” The local bar association is encouraging firms to take out PI insurance – around $6m renminbi.”

The insurance issue is also inextricably linked with the attitude of local companies to the acquisition of legal services. Chinese companies have not traditionally relied on lawyers to assist them in negotiations with other parties. Chunyang says they are used to relying on oral assurances rather than documenting the terms of an agreement in bulky contract. “In the US, a Share Transfer Agreement might be 160 pages…in China – just 20 pages,” he says. “If you produce a very complicated document, they are not used to it.”

His colleague George Wang agrees. “Five years ago when Chinese entrepreneurs conducted a big deal, they would not hire professional people to help them. In the last two years,…they have realised legal practice is very important.”

Neumann says large multinationals prefer to use foreign law firms “because they have partners with deep pockets and malpractice insurance”. “You would want to have somebody with deep pockets putting themselves on the line,” he says.

Forcing open the market

There are some who are convinced the Chinese market must open itself up more fully – including one lawyer from a leading US firm, who declined to be named. “We’re getting a fairly protectionist stance [from the local firms]. We understand they’ve been lobbying consistently for strict regulations,” he says.

He says it is to China’s – and Shanghai’s – detriment to take too narrow an approach to liberalisation of the legal services market. “I think it’s extremely important for the regulators to keep their eye on the horizon. I think it’s very much in Shanghai’s interests to take the broadest interpretation possible of China’s WTO commitments. These all require very solid legal services.”

“The WTO commitments are basically pretty vague. Legal services are one of those categories – one of those areas where China is unbound. They’re not committed to do anything except for very specific commitments.”

He says local and foreign firms need to avoid the ‘us and them’ mentality. “Why can’t cooperation simply take the form of a multinational partnership? That would permit a foreign trained lawyer to get up to the standard multinational corporations are accustomed to. It’s very important to recognise that large multinationals…require a certain high level of legal services,” says Neumann.

“By permitting an open and deeper level of co-operation, it will also raise the basic common denominator of the local firms.”

John Huang says it is “natural” US firms would like China to open up the market further. “[But] whether the Chinese government is going to allow this – it’s difficult to predict,” he says. “Hong Kong, Singapore, Taiwan, Korea – neighbouring jurisdictions – they have different practices. Korea is very conservative – almost none of the foreign law firms can practise there. Japan is very tough – it is quite highly regulated. In Singapore, [former prime minister and lawyer] Lee Kwan Yew opened the door – but it was not successful.”

“Japan is a much more developed country. Why are they not opening up the market?”

But Richard Wang says foreign firms have to accept restrictions on their ability to practise the law in his country. “If you want to practise in the US, you have to take the examinations,” he says. “It’s fair for China to say to foreign law firms – if you want to practise Chinese law, you have to take the examinations. Even if you know Chinese law, it’s very difficult. There are some [foreign lawyers] who speak excellent Chinese, but are not confident practising here.”

Peter Neumann of Faegre & Benson says allowing greater scope for foreign firms is the way forward. “The best of the Chinese law firms recognise the benefits of expanded collaboration,” he says, “that it will lead in the long run to more and better work for them.”

---

Blake Dawson Waldron: Making its way in Shanghai

Blake Dawson Waldron is leading the charge of Australian firms into China with its Shanghai practice.

Granted a licence by the Chinese Ministry of Justice in 1998 to open an office on the mainland, the firm chose Shanghai as the location to offer legal services across the areas of corporate advisory, employment, property, projects and infrastructure, telecommunications and technology, financial services and all aspects of foreign direct investment in China.

Says Peter Stapleton, the firm’s resident partner: “Shanghai is much more the commercial heart of China than Beijing. I think overall this city is very active, vibrant, developing fast and very focused.” But the firm is looking beyond Shanghai. “I think a presence in Beijing is also important,” says Stapleton. “We’re considering applying for a licence to open an office in Beijing.”

Stapleton’s experience of China spans about 14 years. He was initially attracted, he says, to its “history, culture and diversity”. “I had an interest in China itself as a country.”

Blake Dawson Waldron’s Shanghai practice advises both Australian and non-Australian entities across many industry sectors on establishing representative offices, joint ventures and wholly foreign-owned enterprises in China. It has advised Macquarie Corporate Finance Ltd and AMP Life Limited in relation to their investment in a Pudong housing development, Goodman Fielder International Ltd in relation to a baking products venture in Shanghai, and an Australian printing company in relation to franchise printing operations throughout China.

The firm also acts for Chinese companies with business ventures outside China, including iron and steel producer Shanghai Baosteel Group on its investment in iron ore interests in Australia. Blake Dawson Waldron was also recently appointed the Group’s international legal advisor in relation to its South East Asian and Pacific transactions. Other Chinese multinational clients include Air China International Limited and Qingdao Haier Group.

Assisting Stapleton in Shanghai are senior consultant Li Ping, who has particular experience in large-scale investment and joint venture projects, senior associate Mary Studdert, a fluent Chinese speaker who practises in projects and infrastructure and foreign direct investment, and senior associate Trevor Goh, who specialises in corporate advisory work. Two graduate lawyers are also on staff.

Stapleton says Australian-based firms such as Blake Dawson Waldron, which has offices across five Australian capital cities, Jakarta, London and Port Moresby, are at an advantage in the market. “Our rates are much more competitive than the British and American firms – and we’re just as good lawyers.” Hourly rates at partner level range from US$300-US$350.

He says the firm also has the edge over local firms in terms of its experience in areas such as infrastructure projects. The Shanghai practice is representing the Beijing Municipal Government in relation to the tender of the Beijing No. 10 Water Treatment Plant, a Build-Operate-Transfer (BOT) project with an anticipated capital expenditure of US$200million It is the first BOT water project in China being solely undertaken by a municipal government. “No Chinese law firm would no much about BOT infrastructure work,” says Stapleton.

Blakes has developed close working relationships with government authorities and officials in Shanghai, Beijing and other parts of China, as well as links with several local law firms in Shanghai and other cities.

Stapleton says China is not an easy market to crack – but the firm is making headway. “You’ve got to know what you’re about. It takes a while. It’s exposure. The legal market here is a tough legal market. Interesting and challenging, but tough.