More outbound deals are dying; too many inbound transactions cannot command high enough fees. Mainstream M&A and financing deals are becoming extremely difficult to close. Dispute resolution practice is forbidden under domestic law while international contentious work requires totally different skillsets and a platform rarely seen in China. Niche practices have become fiercely competitive and proved to be unsustainable.

The power of Chinese law firms can be seen everywhere – from client pitching to partner hiring – so what’s the future for the China business of an international law firm? We believe the only solution for international law firm’s China business in the next few years may be to get a Chinese boutique law firm to work together with them, hand in hand.

Regulatory opportunity

Over the past 10 years or so, there have been some 20 different tie-ups between international and Chinese law firms via 5 main types of legal formalities, namely:

1. A firm to firm contract relationship;
2. A formal alliance that is specially approved by the Chinese government;
3. A formal alliance through a CEPA arrangement (The Mainland and Hong Kong Closer Economic Partnership Arrangement);
4. An international alliance via a Swiss Verein structure; and
5. A formal alliance through an SFTZ arrangement (Shanghai Free Trade Zone).

That last regulatory formality, SFTZ, is gathering more momentum and attracting increasing interest from both law firms and the government authority. Given the new wave of the China government’s opening-up policy and its push efforts, it is believed that the SFTZ regulatory regime will continue to evolve and develop positively in favor of the international business community – including the legal profession. Although there have been limited successes so far, it’s believed that more tie-ups via this route in the law firm circle will be welcomed by the authority, and that the bar to achieve this type of alliance is therefore unlikely to be raised higher in the immediate future.

Other types of legal formality such as a CEPA arrangement are a good alternative option, but very few international law firms are qualified for CEPA status in Hong Kong. In addition, this type of arrangement has not evolved as fast as the SFTZ policy, although CEPA does provide some unique flexibilities and a higher level of recognition from the authority.

Chinese boutiques

How do you find a firm to cooperate with you hand in hand? There are tens of thousands of Chinese boutique firms and you just need to be selective and practical. It could be some niche firm that worked with one of your partners on some past deals – which means you have to consult your various partners, listen to them and select the best; it could be a top quality boutique that has international ambition and therefore a keen interest to have access to your know-how and global resources; or it could be a firm that simply recognizes the need for external help to continue their business and provide a better career platform to their younger generation of lawyers.

Over the last couple of years SSQ has successfully assisted several international law firm clients in identifying the right Chinese firms to work with. All of the above options have their own pros and cons; the final decision on which to adopt is less about financial factors and regulatory considerations but more about your overall China business plan, i.e., what you want to achieve through the tie-up.

Talent sources

How do you get the right people into the Chinese firm to work with you effectively? Firstly, you need to look at people around you in your international firm – they may have been thinking of this Chinese tie-up possibility for longer than management has and be keen to be involved. Secondly, do not underestimate the ambition of the young-generation partners and lawyers in Chinese law firms. While it’s true that many have been switching home from international firms to domestic ones in the last few years, don’t forget that many of them were in international firms for much longer; there must be a reason for that – and a possibility to get them back if you can provide these ambitious young partners and lawyers with a promising and truly different platform.

The China legal profession, like many other industries in this country, has always adapted itself quickly and will continue to do so in the foreseeable future. We are still far from a well segmented, highly specialized and reasonably developed market. As many other senior and strategic law firm management consultants have pointed out already, we believe there is still no law firm, no business model and no name in this market which should not be proactively seeking to change. And a tie-up with a Chinese firm is a change which could put you ahead of the game while also attracting the most capable and insightful legal practitioners to work with you in China for the long term.

Internal consensus and support

What should you do first to get a Chinese tie-up? The critical work to achieve this is well before the tie-up – not the search for your China firm, not the identification of the right people and not even the regulatory application. It is the work you need to do via your internal communications to reach the maximum level of consensus and support within your partnership. Without this advance work done properly, the tie-up might be achieved but it won’t function meaningfully and develop sustainably.  You need your internal buy in before you start.

The internal communications and consensus could be limited to or focused in defined jurisdictions and practices in your firm, but after consultation within those particular areas, the communication across and the messages coming out from the whole firm should be articulate and strong.  A clear message of support and enthusiasm for this development will help the tie-up plan to be implemented appropriately by both your people in China and your future China alliance partner; this consensus will also reduce the regulatory risks.

Carefully studying the five SFTZ alliance firms that have been approved so far (namely: Linklaters – Zhaosheng; Baker & McKenzie – Fen Xun; Hogan Lovells – Fidelity; Ashurst – Guantao; and Holman Fenwick – Wintell) could offer you and your partnership valuable ideas on which type of tie-up your firm wishes to establish. This will enable you to identify the pros and cons of each of them against the particular needs and ambitions of your firm.

Cost and Return

Will this cost a huge amount of money and take an unduly long time? When and how much can you expect financial return from a tie-up? In SSQ’s experience, the real cost is not the establishment of the tie-up; instead it’s the attraction of people, development of operations and business integration with your Chinese partner after the tie-up that will cost you real money and serious time. The amount will obviously depend on how ambitious you want the alliance relationship to be. However, the cost is quite similar to what you might spend to grow your own China offices in terms of lateral partner hires and operations expansion, but because of the different tax and local regulations applying to Chinese and international law firms, the costs will come up in different patterns than for your existing China representative offices – some aspects will be cheaper; others could cost more.

Your financial return will come as quickly or slowly as it did previously by investing in your own China offices, but the outcome could be at a different level. If you can get your Chinese alliance partners succeeding on your global platform, the whole of your China business would grow exponentially – you could double or triple your current size and revenue within just a few years, a feat which is unlikely to be achieved by the traditional expansion model in China of hiring one or two lateral partners.

We believe that any international law firm who is serious about developing their China business should be looking at the possibility of a tie-up.

SSQ China has a unique track record and expertise in assisting international law firms and large professional service organizations forming various tie-ups with local Chinese firms. Due to confidentiality commitments and regulatory sensitivity, we cannot share particular details regarding our ongoing projects and clients, but we would be pleased to answer questions from and have discussions with interested parties in general. Our main contact for this topic is our China Director Shawn Chen, who can be reached at shawn.chen@ssq.com.