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The Next King & Wood Mallesons? Don't Hold Your Breath
The Asian Lawyer
Think the March blockbuster combination between China's King & Wood and Australia's Mallesons Stephen Jacques portends a coming wave of tie-ups between Chinese and international law firms? Think again.
"Why should I settle down when I can continue to enjoy the company of 25 suitors?" asks Zhang Hongjiu, a senior partner at 250-lawyer Jingtian & Gongcheng, one of Beijing's top corporate firms.
Zhang's blunt words echo those of many other top partners of leading Chinese firms. They way they see it, King & Wood was always a bit of an outlier in terms of its international ambitions. The others say they have more to lose -- mainly in terms of referrals from other overseas firms -- than to gain from more exclusive arrangements with international firms.
Top Chinese firms Jingtian & Gongcheng, Jun He Law Offices, Zhong Lun Law Firm, Haiwen & Partners, and Fangda Partners all say they have received proposals to establish closer relationships from international firms over the past few years but have declined.
Of course, there are still questions of permissibility hanging over any proposed combination between Chinese and international firms. Foreign firms are banned from practicing Chinese law so true mergers would be illegal. King & Wood Mallesons has adopted a Swiss Verein structure that keeps the Chinese and Australian arms financially distinct, with only the two firms' Hong Kong offices truly combining.
But several international lawyers in the region say it is unlikely that that model would be acceptable to the Chinese government if a large foreign firm were clearly in the driver's seat. "I think it's a challenging strategy that has many risk issues since it essentially circumvents the rules that prevent firms from practicing Chinese law," says the Asia managing partner for a major U.S. firm.
Still, he says his firm is currently discussing some sort of arrangement with a smaller Chinese firm. They are not alone. Norton Rose chief executive officer Peter Martyr told Bloomberg in April that his firm is looking for mergers in the U.S. and in China.
Though Orrick, Herrington & Sutcliffe is not currently looking at a China tie-up, Hong Kong partner Christopher Stephens says he understands why other foreign firms are interested.
"International firms are always clamoring to get deeper into the Chinese market, mostly because they want to be able to say that they have full-service offerings, even in China," says Stephens. "I don't think having a strong relationship with a Chinese firm is critical now, but it's certainly trending towards that, especially as Chinese firms are becoming more capable in advising both local and cross-border deals."
The U.S. firm Asia managing partner says that his firm and others have long had a strategy of trying to practice local law where possible, and would be particularly eager to do so in an important market like China. But it's not just the Chinese government that's an obstacle; though he is confident about the state of firm's current talks, he says there just hasn't been much interest from Chinese firms.
The number of high-quality Chinese firms is relatively small, says Jingtian & Gongcheng's Zhang, so those firms are very in-demand among international firms looking to refer work. At most leading Chinese firms, more than half of the work still comes from international rather than domestic sources, and even work for Chinese companies is sometimes referred by foreign firms. Zhang says his firm regularly receives referrals from Clifford Chance, with which it is currently working on a planned $1.5 billion Hong Kong initial public offering for Inner Mongolia Yitai Coal Co. Ltd., and Shearman & Sterling, among others. Choosing to work with just one firm would surely reduce revenue, he says.
Haiwen partner Lan Jie says that her firm, which also works on many high-profile capital markets deals, takes a similar view and plans to remain independent to maximize referral work. "I'm not sure an exclusive relationship with one international firm would work for us," says Lan. "But we are not opposed to more casual arrangements."
A number of Chinese firms have long had loose, non-exclusive alliances with Western firms. Jun He, for instance, has a "best friends" referral relationship with Slaughter and May. But the much greater volume of referrals into China means such deals tend to be one-sided.
Given the situation facing Chinese firms, Stephens says that he understands why the top Chinese firms don't want to tie themselves to just one firm. "Especially when they are not sure if that one firm has a broad and competent enough practice to justify the loss of potential referrals," he adds.
That loss for a Chinese firm would be most severe in the case of a merger with a large U.S. or U.K. firms, whose many competitors would then look to refer their work elsewhere. In that regard, notes law firm consultant Peter Zeughauser, King & Wood may have dodged that particular bullet by doing its deal with an Australian firm, which competes less directly with British and American firms.
"They are seen as less of a threat," he says.
While most Chinese firms are quite content with the way things are for now, many partners do sense that King & Wood could be ahead of the curve. One Shanghai partner at Zhong Lun notes that King & Wood chairman Wang Junfeng has long pursued an international strategy and, with the Mallesons tie-up, is probably best-positioned to benefit now that the Chinese government is encouraging more businesses in general to look abroad.
"The other firms are less ready," he says.