Foreign Law Firms Face Pressure in China 

For Western law firms doing business in Asia, last week represented the best of times and the worst of times.

On one end of the spectrum: New York law firm Fried, Frank, Harris, Shriver & Jacobson LLP, which said it plans to pack up its offices in Shanghai and Hong Kong in the coming months. Global law firm Dentons, on the other hand, announced plans to merge with mainland China’s largest law firm, Dacheng, and instantly gain approximately 4,000 lawyers in the region.

The moves underscore the pressure on law firms to succeed in China. Foreign lawyers looking for work there must compete not only with the 170 other international firms with offices there, but increasingly with the more than 19,000 Chinese firms, industry observers and lawyers in the region say.

“In China the competition is fierce for everything,” said Eric Piesner, a Morrison & Foerster LLP partner responsible for the firm’s Asia offices. “And it’s growing more competitive by the month.”

Foreign direct investment into the world’s second-largest economy was $87.36 billion from January to September 2014, according to China’s Ministry of Commerce, with $74.96 billion in outbound investment during that period. Every dollar going into and out of the country represents the chance for law firms to advise clients on how to put that money to work through acquisitions and other projects.

Foreign firms have been in China since the early 1990s, starting around the same time that the Chinese government began allowing local lawyers to form privately run law firms. Even so, restrictions in the country prohibit all foreign lawyers from practicing Chinese law, including appearing in Chinese courts or in governmental hearings. The restrictions make forging relationships with local firms a necessity.

To get around that issue, more international firms could follow Dentons’ move and look for merger partners in China. But scrutiny from Chinese regulators over possible mergers, and culture clashes between Eastern and Western firms, present potential hurdles to such tie-ups.

“It is difficult for people to share business,” MWE China Law Offices managing partner John Huang said of how lawyers in China typically operate. “It’s hard to team up. Those types of things you cannot change in one day.”

Leaders of Dacheng and Dentons insist they are committed to operating as a unified firm. Dentons is already the product of several megamergers that required the firm to undergo an “intense effort to break down barriers,” said Dentons’ global chief executive, Elliott Portnoy.

People familiar with the Chinese legal market say Dacheng is a sprawling enterprise without much consistency from office to office. Peng Xuefeng, the director and founding partner of Dacheng, disagrees, saying the firm has a “rigorous process” to ensure equal standards across offices. (Mr. Peng’s remarks were translated into English.) The 23-year-old firm has added thousands of lawyers since 2003 by absorbing law firms around mainland China and expanding existing offices.

Lili Jian, the China general counsel for chocolate maker Ferrero SpA, said the merger could be appealing if the firms are able to truly join forces. “If they can well integrate, then I believe they are well positioned to combine the strengths of both an international law firm and the Chinese firm,” said Ms. Jian.

The Dentons-Dacheng combination, which could be approved by Chinese regulators as soon as this week, will take the form of a Swiss verein, in which the profits generated by each partnership are kept separate.

The deal is the first such tie-up since Chinese firm King & Wood, largely considered one of the most prestigious firms in the country, combined with Australian firm Mallesons Stephen Jaques in 2012. The deal was heralded as a bellwether, but copycats didn’t follow as quickly as some legal observers expected.

Fried Frank’s decision to effectively close its less-than-10-year-old operations in Hong Kong and Shanghai, meanwhile, underscores the difficulty foreign firms have in turning a profit in China.

Of all the firms in China, “there might be 10 that have any kind of meaningful practice over there,” said legal consultant Peter Zeughauser.

Fried Frank chairman David Greenwald said it was not a decision made lightly. “For us it was a question of discipline and sound business judgment,” he said, adding that the offices in Asia “didn’t have a sufficient return.”

A forthcoming paper from U.C. Berkeley researchers has found that most foreign law offices in China are fairly small, with a median size of 11 lawyers who account for less than 5% of a firm’s global revenue.

The majority of work for foreign firms in China comes from mergers and acquisitions and other transactions, since the country’s restrictions make it difficult to handle litigation there in a meaningful way. Foreign Corrupt Practices Act and antitrust work are also busy areas for some firms.

As Chinese companies increasingly invest abroad, opportunities have also emerged for foreign firms with ties to China to advise on such transactions. Kirkland & Ellis LLP, for instance, is advising a Chinese businessman on a $50 billion project to build a canal through Nicaragua, and Baker & McKenzie last year advised Citic Metal Co. on its joint purchase of a copper project in Peru for $5.85 billion.

Mr. Zeughauser said many law firms “don’t have the guts to close an office,” particularly in China. “They think China is the future.”

Source: wsj – Foreign Law Firms Face Pressure in China

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