Chinese law firms are competing with foreign firms for corporate clients on both sides of the Pacific—and beyond.
Crisply dressed and looking fresh, David Cheng betrays no hint of jet lag despite a 16-hour flight from Shanghai to San Francisco the day before. His office on the 19th floor at One Embarcadero Center has an eye-popping view of San Francisco Bay but no décor aside from a work table, a couple of chairs, and a telephone. The spare setting fits Cheng's circumstances: As the head of Nixon Peabody's China practice and managing partner of its Shanghai office, he is abroad most of the time. Since May, he's spent two weeks in the United States.
A corporate lawyer in a global age, Cheng conducts his business on the go. After a day in San Francisco he's off to client meetings in Washington, D.C., returning to SFO the next day and then flying off to more meetings in Los Angeles. Then it'll be back to Shanghai, where his office in Plaza 66 - one of the skyscrapers that give the city its vast, futuristic skyline - has another stunning view. In the People's Republic of China, he's advising a client on transfer pricing, interviewing witnesses for an IP infringement lawsuit, helping with a fund-formation deal, and working up a second round of financing for a public company.
Cheng is competing for business not only with other global law firms, but also with Chinese firms - two of which have outposts just down the San Francisco Peninsula in Silicon Valley. The purpose of these offices, according to some U.S. lawyers, is to cut out the big Western law firms that lead their clients into China. By opening outposts overseas, including in California, the Chinese law firms hope to pick up work at both ends of the pipeline.
"We have helped some Fortune 500 companies to navigate the China market," says Alex Zhang, a partner at Beijing-based King & Wood in its three-lawyer San Jose office. Among the firm's clients, Zhang lists pharmaceutical and high-tech companies, and small and medium-size enterprises in the Bay Area and Canada.
With 800 attorneys in 16 offices on the mainland, King & Wood is China's second-largest law firm. It opened its Silicon Valley office in 2001, and a New York office in 2008. But neither office practices U.S. law, according to Zhang, who is admitted to the bar in China but not in California - even though he's a graduate of Santa Clara University School of Law. Even in New York, "where some of our lawyers have bar licenses," he says "they don't practice here."
In May, the Beijing-based Jun He Law Offices, with more than 300 lawyers in six Chinese cities, also added a Silicon Valley outpost. (The firm has had a New York office since 1993.)
The new Palo Alto office is staffed by two American-schooled, registered patent attorneys, who both are fluent in English and Mandarin. Shareholder James J. Zhu, a former managing partner of Perkins Coie's Beijing office, earned a doctorate in molecular and cellular biology from the California Institute of Technology and dual JD-MBA degrees from Columbia University. His colleague Steven X. Cui formerly was of counsel at Jones Day, specializing in patent law, technology transfer, and IP portfolio management. He has a doctorate in molecular neurobiology from the University of Illinois, Urbana-Champaign, and a JD from Stanford Law School.
This summer Jun He assisted Kirkland & Ellis in representing Silver Lake, a private equity technology firm that purchased a majority position in Allyes Online Media Holdings, a subsidiary of the China-based Focus Media Holdings.
Like Zhang, Zhu and Cui deflect suggestions that their work encroaches on the turf of California lawyers. "We want to collaborate with U.S. firms, because we have certain limits here," Zhu says. "If anything, by working with us, U.S. firms can improve the quality of their China practice. We provide a bridge - offering a Chinese as well as an international perspective - to U.S. clients in China."
But according to a report in Asia Legal Business News,
collaboration also works as a marketing strategy to promote Chinese firms as one-stop shops for outbound M&A deals. Jun He, for instance, is a member of Lex Mundi, an international alliance of law firms that shares referrals among its members. King & Wood is a member of World Law Group.
California is just one port of entry. Lehman, Lee & Xu has been in Chicago since the early 1990s, about the time Richard Wang & Co. opened a New York office. Deheng Law Firm set up shop in Chicago in 2008. And Zhong Lun, a 500-attorney full-service firm in China, plans to open a U.S. office soon.
For now, these firms all say, their practices primarily guide U.S. clients and investors into the Chinese market, where their home offices can provide a full range of legal services - from transactional, tax, employment, and IP law to arbitration and litigation.
The presence of Chinese lawyers abroad indicates how much these home-grown firms have matured. At the end of 2009, 41 U.S. law firms had offices in China. But there are 14,467 Chinese law firms, employing 140,000 practicing lawyers. At least a dozen firms have more than 200 lawyers. The largest, Dacheng Law Offices, has more than 1,000. Together, they are helping to turn the tables on the expansionist 19th-century "opening" of China: This time, Chinese law firms are assisting their domestic companies that want assets and access to markets in the United States.
In China, direct competition between foreign and domestic law firms still isn't permitted; the practice of Chinese law is limited to indigenous firms. Chinese lawyers who join foreign offices must temporarily surrender their Chinese licenses. "There's an underlying suspicion of lawyers on the part of Chinese authorities," explains Allan Marson, a partner with Baker & McKenzie's China Pacific Group in Palo Alto. "Some branches of the government may be concerned that lawyers could be led into politically sensitive areas."
Foreign firms may open "representative offices," but they must rely on Chinese lawyers for document work, administrative proceedings, and court appearances. Nixon Peabody in Shanghai, for example, outsources legal work to China's Boss & Young and Han Kun Law Offices.
The Ministry of Justice does, however, permit foreign firms to provide clients with opinions about "the impact of China's legal environment." That, local critics say, creates an opening for foreign firms to essentially practice Chinese law by paying local firms to rubber-stamp their legal advice.
Tensions rose four years ago when the Shanghai Lawyers Association posted a memo on its website accusing foreign law firms of illegally acting as domestic law experts, charging high fees for minimal legal work, and evading Chinese taxes. But Sida Liu, an assistant professor of sociology and law at the University of Wisconsin-Madison who studies China's legal market, says the Ministry of Justice keeps the current system in place as "a more flexible and realistic strategy" for regulating the industry.
The global recession of late 2008 slowed direct foreign investment in China, which abruptly cooled its once-hot legal services market. China has now largely recovered-its GDP grew by 8.7 percent last year and it has replaced Japan as the world's second-largest economy. Now Chinese consumers - not their American counterparts - are the target of retailers, franchisers, and exporters of high-end goods. "China isn't just the world's factory anymore; it's a huge market," says Marson.
For foreign firms in China, the economic downturn dried up certain lucrative work - including commercial, securities, and banking/finance practices. To some extent those matters were replaced by work in employment, bankruptcy, and restructuring. But with multinational clients asking for discounts of 10 to 20 percent to reduce legal costs, billings dropped at foreign law firms, according to the University of Wisconsin's Liu.
Many of those law firms quickly made staffing cuts, and some sent partners back home. Baker & McKenzie, for instance, reduced attorneys at its China and Hong Kong offices by 11 percent, and made further cuts in staff. Paul, Hastings, Janofsky & Walker and O'Melveny & Myers also reportedly cut staff. "Significant numbers of U.S. associates, especially those from California firms, have been temporarily reassigned to Hong Kong offices where the deal flow is stronger," says Evan Jowers, a principal at Kinney Recruiting Inc.
In contrast, Liu says, most Chinese firms resisted layoffs, betting that the domestic economy would rebound. Local law firms used the slack time to polish their associates' professional skills and English proficiency. In the Shanghai market, he says, many of the Chinese lawyers whom foreign firms laid off eventually found jobs at domestic firms.
The bet paid off. Local firms thrived as large Chinese companies - many of them state-owned enterprises - quickly recovered and gained market share. The legal market also got a huge assist from China's $1.4 trillion stimulus package, which was intended to shift the economy from low-end manufacturing to higher-value industries. "Chinese firms were able to pick themselves up quicker because of work from domestic enterprises," observes Nixon Peabody's David Cheng.
By October 2009 many Chinese firms were looking to hire reasonably priced legal talent and touting lower fees and focused services. When M&A involving Chinese companies surged in the first six months of 2010, according to a report from PricewaterhouseCoopers, the Chinese firms were staffed and prepared.
King & Wood's 10 first-quarter deals totaled $1.4 billion, according to Mergermarket, an M&A intelligence service, while Grandall Legal Group, another Chinese firm, had 7 worth $630 million. The totals put both firms on the Greater China volume chart along with global firms such as Jones Day, with 13 deals worth $2.5 billion, and DLA Piper, which had 20 deals worth $345 million.
"Financing deals are back," says Yi Zhang, a King & Wood partner in Shanghai who specializes in venture capital, fund formation, and securities. In the first half of this year, King & Wood topped Bloomberg's chart of China's domestic IPO-issuer advisors, followed by the Beijing Tianyin, Grandall, Jia Yuan, and Zhong Lun law firms. "Chinese law firms, as it appears to me, are busier than the foreign firms," Yi Zhang says.
The unequal pace of economic recovery produced a predictable result: Foreign lawyers in China began jumping ship to Chinese firms. In August, King & Wood hired away Mary Utterback, who had been managing partner of Pillsbury Winthrop Shaw Pittman's Shanghai office. Its other recent hires include former DLA Piper foreign trade specialist Liu Cheng as of counsel for its international trade team; Matthew Seiden, previously a partner at Arnold & Porter; and Rupert Li, formerly a capital markets partner at Clifford Chance. Jun He Law Offices added Wang Jian, also formerly of Clifford Chance, as a banking and finance partner in Beijing.
The interpenetration of Chinese and U.S. markets is even affecting Chinese legal education. China has more than 600 law schools, but the task of training a new generation of lawyers in international practice has required changes. In 2008 Beijing University - known as Beida, China's oldest and most important university - began teaching American-style law in a government-supported program. All instruction is in English, with emphasis on legal writing and oral skills. Beida provides "American legal education with Chinese characteristics," says Jeffrey S. Lehman, the dean of its School of Transnational Law who previously was dean of the University of Michigan's law school. The international program has received financial support from Thomson West; Akin Gump Strauss Hauer & Feld; and Paul Hastings.
Foreign law firms, however, are still in demand for high-end corporate work. For instance, Chinese companies often want U.S. firms to advise on IPOs because of their familiarity with stringent SEC regulations. "Foreign law firms are still way ahead in expertise and international experience," says Jowers of Kinney Recruiting.
"Since mid-2009, the IPO market in Hong Kong is booming again," Jowers notes, adding that many foreign law firms are involved. As one example, he cites the world's largest IPO: the $22.1 billion launch of Agricultural Bank of China, which provided work for the U.K.'s Allen & Overy, New York?based Davis Polk & Wardwell, and both Deheng and King & Wood in China.
M&A activity also received a boost from the Chinese government, which prodded domestic companies to buy international assets in the pharmaceutical, natural resources, and clean-energy industries. Chinese M&A abroad grew by half in the first six months of 2010, and direct investment in the United States was nearly $5 billion last year.
That's where Nixon Peabody's David Cheng comes in. "I also represent clients that are on shopping sprees abroad for manufacturing, retail, and high-tech companies," he says. The majority of his clients are Chinese - private companies and state-owned enterprises in the beverage industry, logistics, and technology.
But Cheng confirms that foreign firms in China face certain disadvantages. "To most Chinese clients," he says, "the strength of a U.S. law firm is the least important aspect. You're just another firm if they don't have a trusting relationship with you. In China, the personal relationship, guanxi,
is still key in business."
Eventually, China will have to open its legal market to foreign firms - the global nature of the economy and the World Trade Organization will require it. "But it will take much longer for this to happen," says Liu, the professor. "For one [thing], the elite Chinese law firms have become more confident and are no longer interested in merging with big international firms. They'd prefer to keep a closed market niche to themselves. For another, the government would like to keep control of an influential professional class for as long as it can."
Back in Shanghai, David Cheng is getting ready to see Chinese clients interested in the U.S. energy sector. Meanwhile in San Jose, King & Wood's Alex Zhang is helping a technology firm that has major R&D centers in the Bay Area and Shanghai to protect its intellectual property in China. And in Palo Alto, James Zhu of Jun He is advising China Medical City, a massive biomedical R&D complex being built in Jiangsu Province, in negotiations with international entities that want to set up subsidiaries within the site.
Despite the mounting competition for business, Alex Zhang says, "The China market is so big it can accommodate everyone. Actually, we point Chinese clients to U.S. law firms that can help them do business here."
At least for now.
Rene Ciria-Cruz is an associate editor at California Lawyer.