Lessons from the Internationalization of Chinese Law Firms – Highlights From Interviews
Asen Velinov, Esq.
Each consecutive year in the last decade has been a record one for Chinese outbound investment. Even with the relative slowdown in activity in the first months of 2017, China work is still on everyone’s radar - virtually every law firm in the world that has meaningful international practice wishes to participate in the action. As China’s consumers, entrepreneurs and enterprises have developed an appetite for foreign products, travel and targets companies and the government has made it a key objective to encourage “Going Global”, understanding the driving forces, motivation and key factors of internationalization of enterprises and service providers is key to being prepared for Chinese clients and working on transactions with Chinese lawyers.
At the same time, some foreign firms that have had presence in China for a long time, have recently left the market - inbound business volumes have decreased significantly - what makes “business sense” for enterprises, domestic and foreign lawyers and law firms in this new and complicated environment would often vary - and there are numerous soft factors to consider when going regional, international, and especially when “globalizing”.
A few months back, with a Shanghai Media Group show named “Going Global” (for more context, the Chinese name “Ying Zai Quan Qiu” translates to “Winning Globally”, as in, the show focuses on success stories) that I sometimes consult on, I helped produce a short series on the internationalization and international business of Chinese law firms. The firms we covered are some of the most representative in the Chinese legal industry - they are all firms with over a thousand lawyers, and in the case of Dacheng Dentons - it is the largest law firm in the world by headcount. They are all the type of firms that large Chinese corporate clients go to for assistance with outbound inquires, plans or transactions (which often means more than strictly traditional law firm services).
Within this group, there is a notable absence – that of the arguably most international Chinese law firm – KWM. As we produced the series the firm was going through a “restructuring” of its European practice and did not accept our interview request – their collapse in Europe is now seen as a case study of inadequate law firm management, even by the firm’s own new global managing partner.
Understanding how Chinese law firms work also helps understand how Chinese clients approach their international deals, and working with Chinese firms is, for many firms without China presence, the only way to get large Chinese corporate clients (and might be a better approach than establishing presence in China - due to both complicated regulatory environment and cultural barriers). Understanding also that often there are no clearly defined strategies for approaching international work in China can be of value to international lawyers who wish to work with Chinese colleagues - there are many stakeholders, “soft” factors (e.g. branding) and purely domestic reasons to internationalize for both enterprises and law firms. Moreover, even if 2017 has seen a slowdown of outbound activity directly out of China, the fact is that after more than a decade of unprecedented activity there are lots of Chinese assets overseas now (i.e. Chinese money is more reasonably “reachable” through foreign courts) - which would inevitably lead to changes in how Chinese clients approach future deals, further internationalization strategies and risk management.
Highlights from Shanghai Media Group (SMG) Oriental Financial Channel’s “Going Global” Interviews, hosted and produced by Lin Ying
On January 9, 2017 the Chinese Judicial Bureau, the Ministry of Foreign Affairs, the Ministry of Economics and the Legislative Affairs Office of the State Council of China jointly issued the "Opinion on the Development of International Legal Services", which “encourages and supports the internationalization of the legal industry, legal talents and professionals, so that they can complement the "Going Global" efforts of Chinese investors and enterprises”. Against this background, and that of the Belt and Road initiative we look into the internationalization of Chinese law firms.
In recent years the Going Global efforts of Chinese enterprises have become an inescapable topic of discussion - enterprises “go global” in accordance with their strategies, and in search of international opportunities and partners.
Such enterprises naturally encounter legal issues - helping resolve those is the key role that law firms play in the "going out" era. At the same time, law firms themselves have joined the “going out” wave. We will introduce the specific approaches to internationalization of some of the leading Chinese law firms.
The internationalization of Chinese law firms is influenced by various factors such as their specific characteristics, the legal practicability of internationalization, customer needs and future plans, and is still in its infancy in comparison with some foreign law firms that have had international presence for much longer.
Junhe Law Firm Managing Partner Xiao Wei
Junhe Law Firm is considered the first Chinese law firm to “go global” - it set up a New York branch in 1993 - and after years of international practice, integration of resources, carefully planned long term growth strategy and creation of mechanism to ensure and maintain quality of services, has established its own approach to internationalization.
Host: What is the internationalization model of Junhe?
Xiao Wei: Our internationalization approaches vary - we establish various types of cooperation with leading law firms in their respective jurisdictions. One approach is participation in legal networks, another is establishing "best friend" relationships, especially with prominent Asian and European law firms. After our respective teams cooperate on a number of deals, we include the firms in our “Best Friends” network. That is naturally not enough, as clients and their requirements vary - for smaller transactions we need to identify smaller firms - and they are not necessarily included in our networks.
In the best friend model, the key is meeting client needs, that's why flexibility is its key characteristic. In this type of cooperation, during actual projects the cooperation is close, and after the project or case are completed, the firms return to a “friends” status until the next project. Contracts that protect the clients and their interests are the norm, so the cooperation on particular transactions is always contractually regulated.
Junhe's service model has been tested in more than 20 years of practice - from the help the firm has given SOEs with their overseas bond issuing, real estate acquisitions, listings of pharmaceutical companies. In addition to the “best friends” model, Junhe is also a member of a number of international networks like Multilaw and Lex Mundi, and has cooperation law firms in the US, Italy and Denmark, positioned it well to help clients with their international M&A needs.
Host: Junhe has helped numerous enterprises with their international transactions, what are some suggestions you would give to enterprises from the perspective of risk management of such transactions?
Xiao Wei: Labor issues are a very important consideration - and often they are not given enough attention. Often the management team will be local (non-Chinese) and that leads to various complications and cultural issues - this requires sufficient legal preparation and attention. Another issue is that Chinese companies are often too eager to invest abroad - they are anxious to pick targets and complete deals, without giving much thought to post-deal integration and other subsequent issues.
Chinese companies that “go out” need to address the realities of different legal systems and all resulting risks and challenges. Undoubtedly, law firms play a key role in managing such risks, but the legal industry of China is itself relatively young. Chinese law firms are mostly of two categories – corporate management model and pure partnership model. Junhe is a firm in the first category - meaning that the management and decision making when it comes to the structure, strategy and development of the firm are centralized. Client resources are also more centralized in corporate model firms, while in the second type of firms, they would be held at individual partner level. Internationalization approaches vary between these two types of firms.
Dacheng Dentons Senior Partner Wu Ming
Wu Ming: Internationalization has always been of key importance to Dacheng from the very beginning. We use three models: first, establishing overseas offices, second, membership in organizations like the World Services Group, third, our current most important model, a Swiss Verein structure – with Dentons.
International nonprofit organizations such as the World Wildlife Fund, FIFA, and also professional organizations, such as Deloitte & Touche LLP, have adopted the Swiss Verein model. The key characteristic of this structure is that its members are financially independent, and management is on regional level - for example North American has a North American management team, Asia has an Asian management team and every member is subject to the laws of its own jurisdiction. Within the alliance, the members share a brand and work together on strategy and marketing. There is technological integration too.
Host: Within such a large global team there are numerous nationalities and lawyers and support staff from various backgrounds, how do you deal with the cultural differences?
Wu Ming: Because Dacheng itself in China and is managed locally, there is not much of an issue, when it comes to the different cultures between the different centers, we retain our culture and work together to give value added services to our clients. I think that our commonly shared principle is that working together is like making a bigger cake – and in turn, each of us ends up with a bigger case from that bigger cake – that is more important than focusing on splitting a smaller cake very fairly.
Internationalization has been a key focus of most Chinese law firms in recent years, and how the differences in legal systems, cultural and educational systems affects the process is of key importance to the management teams. The need to compete internationally and for client resources has greatly sped up the process of internationalization despite the inevitable complications.
Host: Please give us an example from practice, when a large Chinese enterprise “went global”, via a merger or an acquisition, was the foreign firm or Dacheng in a more dominant role?
Wu Ming: Recently we are more inclined to take the dominant role when Chinese enterprises go global - our advantage being that we understand the client needs best, and we can convey their needs and intentions to our foreign colleagues better - we can also help the client understand better the important factors and considerations and help all sides discuss and reach a decision on strategy. This role is actually the dominant one.
It is important to note that firms in Swiss Verein structures have experiences some problems, usually financial and operational ones. Also, it seems that there are gaps in the level of professionalism between the Chinese and foreign teams, which leads to communication problems, e.g. in the use of standard documents and an uniform database. There appears to be room for improvement of the model.
Yingke Law Firm Director Li Judong
Host: The "best friends" model adopted by Junhe Law Firm is about working with elite overseas law firms, in short, similar to a relationship between friends, it boils down to contracting for specific projects, and remaining “friendly” while not in touch; while Dacheng’s Swiss Verein approach allows the shared use of a brand while remaining relatively decentralized. Let us next explore what the model of Yingke law firm is, and how it fits within the Yingke group of companies.
Beyond the original legal platform, Yingke has extended its services to include travel, education, immigration and other services, packaging its services in a “one stop shop”. The firm has established overseas offices and the Yingke China Center and we will now talk about the Chinese style internationalization of the firm.
Li Judong: The purpose of our branch offices is primarily to provide legal services, and the purpose of the China Center is to provide what we call “one stop” business and legal services. When a Chinese enterprise goes global, it would need more than just legal services - it needs general business services, like information about the investment environment of the desired country, project selection, management services post-deal, including labor resources, communication services etc. - many of these do not strictly fall under the scope of pure legal services.
As a Chinese law firm with the largest number of lawyers in the Asia-Pacific region, Yingke’s one-stop business legal service platform deviates from the definition of traditional legal services provider. Their services extend to project matchmaking, management, consulting, etc. This comprehensive model is more suitable to Chinese investment approaches - Yingke does not only assist enterprises in their “Going Out” but also plays role in collecting, matching and integrating foreign resources. Aiming to provide comprehensive internationalization support, Yingke has itself comprehensively internationalized.
Whether it is the road of internationalization of Chinese law, or the adoption of a common international model, local Bar Associations are important participants in the internationalization of Chinese law firms, and play a significant role in it.
Shanghai Bar Association President David Yu
David Yu: To enhance the ability of the lawyer to provide international related services, we often host trainings by internationally recognized experts, lawyers from international law firms and academics who visit to talk about different aspects relevant to servicing the companies that are “going global” . We would also sometimes choose promising excellent young lawyers and arrange internships, secondments or positions for them in prominent law firms abroad. We can say that the lawyers able to provide international services is constantly increasing.
As the Chinese economy inevitably becomes more integrated into the global system, the development and internationalization of the Chinese legal industry deserves our continued attention.
Junhe’s “best friends” model, Dacheng Denton’s Swiss Verein and Yingke’s “one stop shop” international legal services” model are uniquely suited to each firm’s characteristics and objectives. Yet, all of them, as well as the other top Chinese firms continuously explore options for adjusting and improving their internationalization approaches. Next week we will discuss the internationalization of Zhonglun, Tahota and other firms.
Tahota Law Firm Partner Li Jinnan
On December 18, 2015 Tahota Law Firm held an opening ceremony for its office in Washington DC - the first such office for a law firm from the western part of China. It also marked the beginning of the firm’s internationalization.
Li Jinnan: We first opened an office in DC, and at the beginning of this year the opening of our offices in Seoul and Busan was approved by the Korean Ministry of Justice - we are in the initial stages of exploring internationalization. In accordance with China becoming a more integrated part of the global economy and especially in the time of the Belt and Road strategy, an increasing number of Chinese enterprises “goes global”. As a result, they need a more international vision, and need experienced legal teams to help plan their international strategy - the law firms themselves also seek to internationalize, in order to strengthen the quality of their services.
Host: Is it accurate to describe the internationalization strategy of Tahota as one focusing on primarily establishing overseas offices?
Li Jinnan: This is an important part of our strategy - as I mentioned we are in an exploration stage - opening overseas offices comes with various considerations, such as different requirements and a different legal environment. The concrete location dictates whether to set up an office, or to enter into a cooperation with an existing office and at an appropriate time in the future discuss a more comprehensive cooperation or a merger.
Facing an unfamiliar overseas market, Tahota has clearly positioned its DC office - it serves as a “window” to facilitate the hiring of international lawyers, optimizing communication with local resources, and also to better meet the needs of clients in the west of china, thus making the firm more competitive in its region - and, its services being more competitively priced than those of international firms, Tahota also better meets the needs of the clients in Western China.
Li Jinnan: Establishing foreign offices brings about risks to the entire firm, as various issues at the location of the overseas office could affect the entire firm and its reputation within China- thus for us risk management is key during the process of our internationalization. As we focus on the development of a long term strategy, we do not exclude the possibility of establishing close cooperation with overseas law firms.
Apart from TAHOTA’s internationalization through the establishment of foreign offices, there are other models that Chinese firm explore as they try to find one that is optimal for their specific needs and capabilities. One of the oldest full service law firms in China, Zhonglun has numerous practice groups and a very cautious approach to internationalization.
Zhonglun Law Firm Partner Yang Wantao
Yang Wantao: Zhonglun has tried different models in the past, at different stages of our development. Zhonglun as a full-service law firm, with a client base that is also very large and varied, different client groups have different needs, so we aim to be flexible, to consider all the appropriate opportunities and structures, and we have different models for different practice groups and client needs.
The international market offers a couple of approaches to internationalize, one is the Swiss Verein Structure; the second is the “Best Friends” model; the third is to set up overseas branches. These models are different, and in order to maintain its flexibility, Zhonglun has not committed fully to either one of those, instead searching for its own, special internationalization model.
Yang Wantao: The Swiss Verein structures leads to the formation of a large scale union of firms, where the local members are relatively independent, which minimizes risk and responsibility, but leads to often inadequate integration.
The Swiss Verein model is at present the most commonly used model in the internationalization of large-scale law firms at present. This model can quickly establish a large legal network relationship and provide a platform for resource sharing. The members retain relative independence and have the ability to manage their risk within the larger organization. However, in the separation of management, profits and the fact the members are in jurisdictions with different regulations, leads to various issues like competition for client resources.
“Best Friends” is also a model commonly used by international law firms - it comes with no legal obligations, and is the formation of a “friendly” relationship through “friendly” cooperation. Law firms typically choose to cooperate with similar other firms, thus reducing communication barriers. During the duration of specific cases of cooperation is governed by a contract, and the rest of the time the firms retain full independence.
Yang Wantao: According to my understanding, the “Best Friends” approach is motivated not by the actual search for “friends” and applies usually to smaller, specialized firms - as they are smaller, their client needs are also specialized and this approach typically does not lead to forming large global networks.
Compared to the first two models, the establishment of overseas branches is another simple and efficient internationalization approach. The overseas establishment of the branch office model can directly carry out international business development, and as Chinese enterprises go global, many Chinese law firms choose this approach.
Yang Wantaot: Establishing a small foreign office is a quick and cost effective way to meet short term needs and establish presence. However, in countries with mature legal systems, local competition is intense and local firms provide competitive services for large scale projects which make it difficult for smaller Chinese law firm offices to compete for such projects - and also, if such offices are established for only a short period, acquiring and retaining talent is an issue.
In Zhonglun we don’t have a rigid model or a fixed approach.
At this stage, most Chinese law in the process internationalization, while also still in the stage of exploration and selection of their own model. As an important window for opening up, in 2014, the Shanghai Pilot Free Trade Area under the Shanghai Municipal Government issued the “Notice of the General Office of the Shanghai Municipal People's Government on Forwarding the Implementation Measures for Mutual Assignment of Lawyers to Serve as Legal Consultants by Chinese and Foreign Law Firms in China (Shanghai) Pilot Free Trade Zone and the Implementation Measures for Economic Association between Chinese and Foreign Law Firms in China (Shanghai) Pilot Free Trade Zone Developed by the Shanghai Municipal Bureau of Justice.” These regulations allow Chinese and foreign law firms to coordinate sharing human and other resources, cooperate on providing legal services and other relevant projects. They also allow Chinese and foreign law firms in the Shanghai Free Trade Zone to form joint ventures. At present, Baker & McKenzie and Fenxun Law Firm have set up a joint office in the Shanghai Free Trade Area to deal with international and Chinese legal affairs. The internationalization model of joint ventures between China and foreign universities is still in the first stages and perhaps will prove to be a worthwhile one.
No matter what exact model they choose, Chinese law firms are well on the road to internationalization. Legal talent is one prerequisite for internationalization and it appears that its internationalization also has room for optimization.
[Shanghai Jiaotong University Koguan Law School Vice Dean Yang Li]
Yang Li: It should be said that in the past decade, Chinese law education has entered a period of a “Great Leap Forward”, but this period has had two downsides, the first is oversupply, the second has to do with structural issues. The main reason is that there is sufficient number of junior legal talent, with grasp of foreign laws, foreign languages, foreign culture and cultural differences, as well as experience with international enterprises and firms, but what is lacking is more senior talent with sophisticated foreign legal experience.
Colleges and universities are constantly striving to improve the cultivation of legal talents.
Yang Li: According to the system of the ministry of education, top tier universities should be training lawyers to engage in diplomatic affairs and to be able to represent China’s national interests in the international arena. Some financial and trade - focused universities, as well as language college graduated, after having received a systemized practical-focused education, would benefit from training in our law school for example.
In addition, Universities close to national borders naturally establish exchanges and cooperation with foreign universities in their regions. SJTU cooperates with the Shanghai government, numerous social and business organizations and foreign lawyers in order to train stakeholders so that they are ready to engage in foreign related legal affairs and projects.
Host: In recent years, due to the internationalization of law firms in China law more and the proliferation of foreign related business, in addition to those Chinese legal talents with overseas experience, many foreign lawyers are more attracted to the Chinese market, the status of foreign legal talent in China should also be discussed.
[Foreign Attorney Asen Velinov]
Host: What’s the role of foreign lawyers in the process of Chinese enterprises "going out"?
Asen Velinov: “Foreign” lawyers play an important role in the process of “going out" of Chinese enterprises. When Chinese enterprises engage in overseas investment, most of the drafting of documents is actually done by “foreign” lawyers (who are at that point “local” lawyers in the target jurisdiction). Foreign lawyers themselves have communication advantages, and many (of us) foreign lawyers working in China believe that we should be more involved in these processes - and as culture is more important than language skills when it comes to successful deals, foreign lawyers with Chinese backgrounds are more able to add value more in this respect than many Chinese lawyers. When foreign lawyers are a part of the legal team of a Chinese law firm, such a firm can better serve their clients and clients should take this into account when choosing a domestic team of lawyers to provide international legal services for them.
Whether it is Dacheng Dentons, Junhe, Zhonglun, Tahota or Yingke, these leading Chinese law firms, with their approaches to internationalization, they are also in constant search of ways to optimize and fine tune their approach, not just cautiously exploring their internationalization strategies but constantly adjusting their approaches.