Progressive change in China has opened the legal sector in that vast country to international laws firms – while the prospect of Sino-European mergers has enticed Chinese firms themselves to expand beyond traditional Asian borders. All of which begs the question: are these recent moves just a case of chassez-croisé in a wider arena, or a real pas de deux leading to the emergence of a new type of Sino-European firm under their own brands?
Most international law firms have long histories, emphasise their established culture as a factor of differentiation and promote those cultures through élite universities and alumni networks from Oxbridge to Georgetown.
While these international law firm brands may be instantly recognisable to Western clients and peers, however, Chinese businesses adopt a more pragmatic approach when choosing a legal practice to advise on cross-border transactions. Indeed, they focus less on brand names and more on a detailed analysis of actual achievements and industry expertise.
In addition, Chinese law firms have considered expanding outside their borders, either via mergers – as in the case of King & Wood and Mallesons – or through launching and growing overseas outposts, such as Zhong Lun’s recent move in London. As a result, law firm brands unknown to larger Western companies may rapidly appear as contenders on the international mergers and acquisitions scene.

Modified behaviour

In China during the past 20 years, the culture of state-owned law firms has gradually been transformed, not just because of changes to their legal status, but also as a result of wider economic globalisation and exposure to foreign direct investment followed by transnational work. This trend has been accompanied by the evolution of Chinese state-owned companies.
The development of in-house departments in these businesses, initiated by the Chinese government 10 years ago, has modified behaviour. For example, general counsel at these companies deal with sensitive strategic and business issues and, in the process, they have been exposed to international cross-border transactions.
Time patiently invested by international law firms in building relationships with a company to become part of the guanxi (network of relationships) will be key in the identification process of the firm’s brand. Its contribution will help general counsel achieve strategic objectives to become perceived as a significant business partner.
However, it is crucial for international firms to acknowledge that in-house heads of legal are traditionally inclined to instruct local legal practices rather than an unknown international firm. Nonetheless, there is a middle way that will allow international and Chinese law firms to take into consideration each other’s strategies and realise they can naturally complement each other.
Already co-operation between international and local law firms stems from what is often referred to as ‘grey areas’ of Chinese law. But that is changing as the Chinese legal environment modernises. Revisions to the anti-monopoly law and the national security review system have strengthened new ties between Western and Chinese firms, as have changes in foreign direct investment policies and the development of venture capital and private equity funds.

Marketing strategies

Ultimately, any cross-border European-Sino mergers require high-end domestic advice and governmental clearance provided by a Chinese firm, while an international practice will deal with issues such as the Foreign Corrupt Practices Act in the US and the UK’s Bribery Act, as well as other target-focused issues.
Chinese firms involved in Sino-European transactions recognise the need for specific legal expertise. By merging with foreign law firms, or becoming part of international lawyers’ networks, they benefit from being exposed to different legal know-how. Ultimately, while foreign firms in China cannot practise without being associated with a domestic law firm, Chinese law firms are beginning to structure their own foreign operations, recruiting M&A lawyers capable not just of dealing with Chinese transactions but also of attracting a European client base. Before long, the regulation and arbitration fields will also attract the attention of Chinese law firms, as they become full players on the Western legal scene, creating further competition in an already challenging legal market.
This coincides with the end of the so-called cheap China paradigm of another era. The concept of zizhu chuangxin – indigenous or home grown innovation – was highlighted in a 2006 government report and established as a priority in China’s development strategy to reach its long-term competitiveness objective. Now, financial incentives are available for start-up companies. There is still room for improvement, but quality deals with innovative technologies are available in China.

New brands

Technological advances in the pharmaceuticals, life science and renewable energy sectors will lead to further sophisticated cross-border transactions. Gu HongMing published The Spirit of the Chinese People in 1915; a century later, he would surely be inspired by China’s international legal development.
Will mergers between Chinese and international law firms create new brands that will serve the market with business acumen and legal creativity? Getting to that position will not be easy, as cultures, management styles and financial ratios all differ considerably.
Most international law firms are currently reviewing their strategic positions as they view their Chinese counterparts as serious contenders as well as necessary allies. But which strategy will be the best to adopt? Dancing with the dragon may be the answer.

Michael Hatchwell is a partner at London law firm Davenport Lyons, which has recently launched a China law department