In 2001 China practice for international law firms was all about inbound deals—advising multinationals making investments in the developing economy. Most Western lawyers counted themselves happy to have the same clients in China that they had back home. Vinson & Elkins’s China-based lawyers were no different, representing regular clients of the firm such as BP plc, Coastal Energy, and the soon-to-be-infamous Enron Corp. in exploration and production deals. But at a strategy session held at the suburban Beijing home of then-partner Handel Lee, V&E’s China team decided to follow a different path.
"At that point in time we did zero work for the state-owned enterprises [SOEs]," recalls James Cuclis, Vinson & Elkins’s Hong Kong–based corporate head. The largest companies in China, the SOEs dominate sectors like banking, steel, and telecommunications—and energy. "We decided at that meeting that our number one priority for the China practice was to target those companies."
Today virtually all international firms say they are targeting the rising tide of Chinese investment abroad. But Vinson’s early move in that direction has put it at the forefront of the outbound boom. According to the most recent Global 100 survey by The American Lawyer, the 700-lawyer Houston-based firm has handled more cross-border China mergers and acquisitions deals by value than any firm anywhere in the last two years ["Nouveau Riche," The American Lawyer, October].
Much of that is due to its close ties with the SOEs. Last year the firm advised China Petroleum & Chemical Corporation, better known as Sinopec, on more than two-thirds of the $15 billion in cross-border deals the company undertook. In 2009 V&E also advised Sinopec on its $7.3 billion acquisition of Canadian oil exploration company Addax Petroleum Corporation, the largest completed overseas deal ever for a Chinese company, as of press time. "Vinson & Elkins is our first-tier partnership," says Shao Jingyang, general counsel for Sinopec’s international exploration division. "Most times, we will give V&E the first chance to work with us on cross-border M&A, especially in North America."
Vinson also frequently advises the other Big Three Chinese state-owned oil giants, China National Petroleum Corporation, also known as Petrochina, and China National Offshore Oil Corporation (CNOOC). In 2011 the firm advised CNOOC on its $3.47 billion acquisition of U.S. oil and gas leases from Chesapeake Energy Corporation. That same year, it represented Petrochina on a lease deal with Costa Rican state-owned oil refining company Refinadora Costarricense de Pétroleo S.A. (RECOPE). With many of the biggest outbound China deals in the energy sector, it obviously helps that Vinson & Elkins is an old hand in the oil industry, with several partners who are bona fide petroleum engineers.
But Vinson’s toughest competition in China has not been other Texas firms with oil-patch expertise, such as Baker Botts or Fulbright & Jaworski. British firm Herbert Smith Freehills is perhaps its biggest rival for China work, and other London and New York firms with better-known brands, more diverse practices, and bigger geographical footprints are also in the running. Davis Polk & Wardwell is advising CNOOC on its $15 billion bid to acquire Canada’s Nexen Inc., a deal that, at press time, was still awaiting Canadian government approval, but would, if successful, displace the Addax deal as the largest cross-border deal ever involving a Chinese company. Skadden, Arps, Slate, Meagher & Flom; Baker & McKenzie; and London’s Magic Circle firms are also active in Chinese energy deals. Many of those firms have been aggressively expanding in the region, and now big regional mergers like King & Wood Mallesons, where former V&E partner Handel Lee is now a senior partner, promise to alter the competitive landscape.
Can Vinson & Elkins remain a leader in this changing China legal market? Or will the firm need to contemplate some changes of its own?
V&E assembled its China practice with a mixture of homegrown partners and client-approved lateral hires. The mainstay partners are Cuclis and Xiao Yong in Hong Kong, Paul Deemer in Beijing, and David Blumental in Shanghai. Cuclis and Deemer are Vinson lifers who started in Houston but have worked all over the world with the firm. Blumental and Yong, a onetime official with China’s Ministry of Commerce, joined the firm in a group defection from Skadden’s Beijing office in 1997.
That move was largely orchestrated by Handel Lee, who was also at Skadden at the time. "At Skadden in China, we were doing a lot of work for Enron and Coastal Corp., all traditional V&E clients," he recalls. "[The companies] didn’t use Skadden except for out here. Both the general counsel at Coastal and the head of legal at Enron approached me and said, ‘We’re very happy with your work, but we’d be much happier if you were at V&E.’ "
Lee had met Deemer on some deals and was introduced by him to corporate chair Joseph Dilg, who would go on to serve as Vinson’s managing partner from 2002 to 2011. Things clicked, and the five-lawyer Skadden energy team moved over. "We pretty much just changed the sign out front," says Lee.
For lawyers, the Chinese energy sector was much less crowded in those days. "A lot of the other firms that were doing energy then were focused on other places like Russia," says Yong. There also just weren’t many international deals involving Chinese companies. "People didn’t think there were enough deals and were concerned whether Chinese companies could pay the kind of fees that Western firms are used to," says Deemer. "A lot of firms probably decided it wasn’t worth it."
But for V&E, Russia became something of a template for China. Cuclis says that Vinson’s decision to start targeting Chinese SOEs stemmed partly from the three years he spent in the firm’s Moscow office in the early 1990s. At that time—and to this day—Vinson had focused on advising private companies in Russia, such as independent gas producer OAO Novatek. "I observed firsthand that some firms took the strategy of focusing on the Russian energy companies back before [the Russian companies] were really going international and had been quite successful with it," he says. "That was a little bit of a model in my mind about what could be achieved in China."
Many of the deals going on in the late 1990s and early 2000s were offshore exploration deals, says Deemer, in which Vinson would represent foreign companies partnering with Chinese ones in production-sharing agreements. The firm advised longtime client Devon Energy Corporation on some offshore China deals at the time. It also represented BP and Kerr-McGee Corporation in the sale of their interests in some offshore blocks to CNOOC. Through such deals, Vinson lawyers started interacting with the SOEs.
"We did the normal things when you try to build relationships in China," says Deemer. "We got to know people and [tried] to help them any way we [could]." It also helped that the summer before graduating from Georgetown Law in 1988, Lee taught contracts and corporations in the nascent legal departments at Sinopec and China National Automotive Industry Corp. as a volunteer in a management education program directed by his father, who was then an official in the U.S. Department of Commerce. Up-and-comers such as Zhang Jixing, now general counsel for Sinopec, were among Lee’s students.
Lee thinks the new relationships were helped along by the Texas firm’s relatively genteel culture. "Coming from Skadden, I thought they were too nice," he recalls. But he thinks the niceness works in China. "It’s this [aspect of] Southern culture that’s very Chinese—it’s very personal," he theorizes. "You don’t just do business, you have to be friends. You give people a lot of face and don’t embarrass them at the table. If there’s a problem, you take it to the back."
But the firm also stressed its expertise in energy. In 2003 V&E hosted a large group from the big oil SOEs—lawyers and managers—in its Houston office for a series of training sessions and seminars. Cuclis recalls that recently in Beijing he met one of the alumni from the trip, now a top-level manager at one of the SOEs that the firm regularly represents. "He reminded me he’d gone to ‘V&E University,’ " Cuclis says.
Vinson’s timing was also good. Under the Chinese government’s so-called Go Out policy, announced in 1999, state-owned oil companies were given a strong mandate to invest overseas. China views oil as a strategic resource and wants to secure supplies around the world. It also wants to acquire technology and know-how in oil exploration and production, particularly by unconventional methods. Many of the biggest deals involving Chinese oil SOEs have been driven by their desire to gain expertise in areas like liquefied natural gas (LNG) and offshore or shale exploration. Addax, for instance, operates largely in offshore areas of West Africa. In 2011 Vinson advised Sinopec on its $2.9 billion acquisition of Canada’s Daylight Energy Ltd., a company specializing in shale oil and gas extraction. CNOOC’s failed 2005 bid to acquire U.S. oil producer Unocal Corporation was driven by the Chinese company’s desire to tap the latter’s deepwater drilling expertise. Nexen, alluringly, has both deepwater and shale operations.
Notoriously, CNOOC was forced to withdraw its $18.5 billion bid for Unocal in the face of massive political opposition in the U.S. Congress and a competing bid by Chevron Corporation. The deal cast a shadow on outbound Chinese M&A for a while, especially into the United States, and there’s a chance a rejection of the Nexen deal could have a similar effect. But Deemer thinks the level of activity has increased too much for it to fall back too far. He also thinks the markets—and Western governments—have grown more comfortable with Chinese M&A activity. "[CNOOC's Unocal bid] was the first really big attempt to take over a U.S. company," he says. "No one involved in that deal really expected the level of public interest."
But performing due diligence on oil companies’ operations, whether upstream in exploration and extraction or downstream in refining and retail, is no easy task. There are a bewildering number of industry-specific terms, practices, and contracts, and numerous parties involved at every stage. "You need to be able to tell the client what it is they’re buying, looking further down into their assets," says Deemer. "All of the partners on our China team, every one of us is an oil and gas lawyer. All of us grew up in the oil and gas industry. We understand the business, of both the target and the acquiror, so we can identify where the problem is, or we can do the due diligence and say that it’s more or less okay."
Yong points to deals in the LNG space as among the most complicated. The gas needs to be discovered and then extracted, often from offshore locations. It then needs to be piped to specialized facilities, where it is condensed into liquid. Specialized tankers are then also required to transport LNG to other facilities where it can be de-liquefied and eventually piped out to consumers. Each stage has its own contracts and contingencies. "Any problem along the way, like force majeure, can disrupt the whole process," he says. "It’s much more complicated than pumping crude out of the ground."
Yong says U.S. firms know that process particularly well because, about six years ago, the American government was fast-tracking the development of LNG facilities, concerned that the United States would need to import more natural gas to stave off shortages. Since then, extraction via hydraulic fracturing, or fracking, has created a boom in U.S. gas supplies. Now those LNG terminals are being retrofitted for export.
Other Texas firms have similar experience, though. Baker Botts, Fulbright & Jaworski, and Akin Gump Strauss Hauer & Feld all have offices in China and Hong Kong. But so far those offices are much smaller than those of V&E, which has around 50 lawyers in the region, including 13 partners. Baker Botts has 10 lawyers, three of whom are partners, in its Beijing and Hong Kong offices. Fulbright has roughly the same, three partners and eight associates.
John Kuzmik, head of both Baker Botts China offices, says his firm has done some deals for the big SOEs but has focused more on advising on China deals for clients from outside the region. Baker Botts was one of the firms Cuclis saw build ties with Russian SOEs in Moscow, and the firm has carried such relationships east. In 2010, for instance, Baker Botts represented Russian state oil giant Rosneft in a deal, backed by a $15 billion loan from the China Development Bank, to supply oil to Petrochina. Ben Smith, a Hong Kong partner at Fulbright, says his firm often advises on acquisition and financing of equipment in SOE deals. "In a lot of the China energy deals that we do, we have had the background roles and not the front-of-stage type of advice," he says—although he adds that Fulbright has advised CNOOC on its activities in Iraq. (Fulbright’s upcoming combination with Norton Rose, which has a large Asia footprint, could obviously change the picture for the Texas firm’s China practice considerably.)
Most of Akin Gump’s nine full-time lawyers in Beijing and Hong Kong only came on board last February, when Asia practice head Gregory Puff and partner Andrew Abernethy moved over from Shearman & Sterling to launch Akin Gump’s Hong Kong office. Puff says he recognizes Vinson’s and Herbert Smith’s lead in advising Chinese SOEs. "As a relative newcomer, we don’t intend to try to put them out of business," he says, adding that the firm is focusing more now on Japanese and Korean clients investing in Southeast Asia.
Baker Botts’s Kuzmik says the competitive bidding generally required of law firms by Chinese SOEs has been a hurdle. "What do you do when you have premium lawyers getting paid premium fees and then you come to a highly competitive environment like Beijing and you know, walking in the door, that the criteria isn’t just your excellence but also how low can you go?" he wonders. "It makes it hard sometimes."
Deals for big Chinese companies across sectors are frequently handled on a fixed-fee or capped-fee basis. The biggest IPOs or M&A transactions can command a fee in the range of $1–1.5 million, far less than comparable deals might command in the West; there are often firms willing to bid far less in order to land marquee deals they can tout to other clients, lawyers say.
Cuclis declined to discuss the fees that Vinson has received for SOE work, but he doesn’t deny that price competition has been an issue. "We have certainly seen more competition when it comes to price bidding, almost like a beauty contest," he says. "Our goal is to provide value for the price that we are charging. Chinese companies are knowledgeable enough to recognize that you may pay less for someone who does not have the expertise easily at hand, and you may have to teach them."
But there are times the clients decide that Vinson doesn’t have quite the right expertise either.
"Outside of the energy field, it’s tougher for us," Blumental says. The firm does handle some nonenergy work. In 2009 Yong and Deemer advised Chinese steel SOE Capital Iron & Steel Company (Shougang) on a $90 million acquisition of the suspension and brakes business of U.S. auto parts giant Delphi Corporation. It has also done some China work for specialty chemical maker Huntsman Corporation and longtime Texas client Dell Inc. But Blumental says that on big deals without an energy component, both Chinese and American general counsel generally face pressure to use top Wall Street firms, such as Sullivan & Cromwell or Wachtell, Lipton, Rosen & Katz, or Magic Circle firms.
"In China, and Asia more broadly, we see great respect for and attraction to brand in all things—red wine, cars, suits, watches, and advisers," says Blumental. "And the big names from Wall Street and the big names from the Magic Circle carry a lot of weight." He further suspects the recent downturn in Hong Kong capital markets work has sent more of those firms looking for M&A work, including in the energy area.
Even in energy, Vinson hardly has a lock on SOE work, as demonstrated by CNOOC’s choice of Davis Polk for the Nexen bid. Yong says he was phoned about V&E possibly taking on the Nexen deal by CNOOC general counsel Zhao Liguo, an old friend. He says the firm still has a small role in the transaction but that CNOOC ultimately decided to go with Davis Polk, which also advised on the 2005 Unocal bid. The New York firm was recommended by CNOOC’s financial advisers, Yong says. "Also," he adds, "this is a publicly traded company, so it made more sense to go with a Wall Street firm." (Zhao could not be reached for comment.) Though many of Vinson’s previous China deals have involved listed companies, Yong says the firm more typically advises on acquisitions of private companies.
"Energy deals are not the sole province of oil and gas specialist firms," says Alan Schiffman, the Hong Kong–based head of the Asia energy and infrastructure practice for Skadden. "Especially in large M&As, SOEs will not necessarily look to Vinson & Elkins but to top M&A firms instead." In 2011 Skadden advised Sinopec in its $2.5 billion acquisition from its parent of a 55 percent stake in Sonangol Sinopec International Ltd., an oil exploration and production company operating in Angola. Last year the New York firm also advised Sinopec on a $3 billion bond issue.
However, it’s not a New York firm but London-based Herbert Smith Freehills that gets mentioned most often as a competitor to Vinson in advising to Chinese SOEs in the oil and gas space. Herbert Smith earlier this year advised Sinopec on a $1.1 billion acquisition of an additional interest in coal seam gas producer Australia Pacific LNG Pty. Ltd. Last year, it also advised Sinopec on a multibillion-dollar investment in a liquefied natural gas project in Queensland, Australia. In 2010 Herbert Smith was counsel to CNOOC on one of the biggest LNG deals ever, a 20-year supply deal with London-based BG Group estimated to be worth as much as $80 billion.
Herbert Smith’s China energy practice is led by three partners based in Hong Kong: Anna Howell, Hilary Lau, and David Clinch. According to Lau, Herbert Smith has about 70 partners and 190 associates worldwide working full-time on energy matters. Herbert Smith’s broader practice bolsters its energy group, he adds. After all, Herbert Smith started working for the oil SOEs not as an oil and gas specialist but as a capital markets adviser; the firm was Sinopec’s Hong Kong counsel in its $4 billion initial public offering in 2000. "I think it’s an advantage for Herbert Smith, being one of our key competitors, that they have a large Hong Kong capital markets practice that draws a lot of state-owned companies to them," says Blumental.
Cuclis does not dispute that Vinson has been more narrowly focused on energy in Asia. "We have not gotten into capital markets and litigation and haven’t tried to be full-service in that sense of the word," he says. "We have tried to be full-service in anything that has to do with energy."
Whether the firm, which is more full-service stateside, should try to expand its practice scope in Asia beyond energy is a topic of frequent internal discussion. Blumental thinks it would be helpful. "I would say we could use some broader corporate capability here, maybe some capital markets, maybe commercial finance, things we know about but aren’t our core practice," he says. The firm has been trying to expand its finance and international arbitration practices in the region, though so far it has stayed away from capital markets.
The easiest way for Vinson to expand beyond its core capability would be to join the regionwide merger trend. Rumors have swirled that Vinson would be the next piece of the international puzzle for Chinese-Australian giant King & Wood Mallesons. Theories focus on V&E’s ties to King & Wood Mallesons’s Lee; the firms’ long history of working together; and the reasoning that a U.S. merger partner from Texas could be less disruptive to King & Wood Mallesons’s existing referral relationships than, say, a firm from New York or California.
But both sides pour cold water on the idea. "It’s not like we haven’t thought about it," says Lee. "But it would be very hard. [Vinson is] very big and [has] a big focus on energy. It may be a bit disruptive in terms of our current U.S. strategy"—although he declined to say what that strategy is. Deemer has similar thoughts: "For a firm the size of V&E to link up with a firm like King & Wood Mallesons, that would just be a huge change for any of the firms involved, especially for V&E," he says. "I tend to see us continuing to build the firm independently."
Of course, King & Wood Mallesons will be targeting SOE work too. It recently recruited Dirk Walker, one of the Beijing energy partners left adrift by the collapse of Dewey & LeBoeuf and a onetime Vinson partner as well. But Lee acknowledges they’re a long way off from competing with his old firm. "V&E is a cut above the rest," he says. "They’re stellar. I’m obviously biased, but I think the quality of the lawyering, the depth of the energy practice is without peer."
Cuclis does think King & Wood Mallesons will be a very strong competitor for energy work in Australia, where obviously Herbert Smith Freehills will be present in force too, along with Clifford Chance, Allen & Overy, Ashurst, and all of the other firms that have recently expanded Down Under.
But Cuclis also sees Vinson having a potential edge advising Chinese companies heading to North or South America. And that is where much of the excitement is in the energy world these days, where unconventional methods like fracking have transformed the industry. Deemer thinks that such companies, many of which are in the U.S., will be the next big target for Chinese overseas investment. "The most significant market is shale oil gas," he says. "We’re going to see that market really expand."
It’s a bet, but then so was Vinson’s decision to concentrate so early on SOEs.
"We were focused on a relatively small group of companies that we hoped would emerge and become more active internationally," recalls Cuclis. "Frankly, they’ve become even more active than we ever anticipated."
Additional reporting by Jessica Seah.