A Chinese Puzzle
During the cold war, world maps produced in the United States typically painted Communist China a bright shade of red. Today, lawyers trying to advise clients doing business in the part-Communist, part-capitalist nation say it should be tinted a murky gray.
Under rules promulgated by the State Council through the Chinese Ministry of Justice, foreign firms from the U.S. and elsewhere are not permitted to practice law in China. When a deal is completed and a formal legal document is necessary, they can’t create it or litigate it. And the Chinese lawyers who join those firms have to relinquish their Chinese law licenses, becoming advisers or consultants, sort of superparalegals. Thus the true legal work has to be done by Chinese lawyers in Chinese firms, albeit firms with names like AllBright or King & Wood.
Still, the China legal market has been heating up, particularly in the past five or six years as medium-size companies follow the Fortune 2000, says Rich Kuslan, a New York City lawyer and principal in Greater China Consultants. He says his 20 years of experience in the People’s Republic tells him they have their work cut out for them.
“When I see announcements from U.S. law firms saying they’re entering the China market to compete on price and product, it seems detached from reality,” Kuslan says. “That’s not what wins the work. If I have a good relationship with someone in China who runs a company and he trusts me, he’ll use me even if I don’t have the particular skills needed–because of that trust.”
A Scarce Resource
Trust may win the account, but Chinese lawyers must do the actual work and, at the moment, there are only so many top-drawer Chinese lawyers to work the huge deals. And with many locals surrendering their licenses to work at foreign firms as advisers and consultants, the numbers are staying slim for the time being.
“The practical difficulties of building and maintaining a competitive capability are growing, and the competition for staff is now intense,” says Lisa Smith, a consultant to law firms with Hildebrandt International in Washington, D.C.
How intense? Blogs and the foreign legal community in China were abuzz recently concerning McDermott Will & Emery’s splash into the market. In January, 20 Chinese lawyers left the Chinese firm AllBright to form MWE China Law Offices.
The MWE stands for McDermott Will & Emery. The two arranged a strategic alliance, meaning that McDermott Will in effect has a stable of Chinese lawyers who can practice law in China–though not as law firm employees, which would violate government regulations. (Most big foreign law firms eschew formal arrangements with just one Chinese firm.)
The departing group was led by AllBright co-founder John Z.L. Huang, who was trained in the law in the U.S. as well as China. Yet months later, Huang was not only listed on the MWE China Web site as a founding partner, but also remained on the AllBright Web site as a current and founding partner. The same goes for many in the group who joined Huang’s move to MWE.
Commenters on China Law Blog say contractual relations among partners in Chinese firms, and possible need for approval by authorities, might have gummed up the deal. But Maryanne Adams, a spokeswoman for McDermott Will in Chicago, says different: “They are now part of MWE law offices and strategically aligned with McDermott Will.” Attempts to clarify this muddle via e-mail with both Huang and a spokesperson for the AllBright firm were unavailing.
Dan Harris, the co-author of China Law Blog, is a name partner in Harris & Moure, a Seattle-based six-lawyer boutique that’s handled matters in China for a decade and touts itself as “the international firm for small business.” Harris says big foreign firms are luring away Chinese lawyers with offers of more money. And for the experienced Chinese lawyers, it’s a seller’s market.
“There aren’t enough Chinese lawyers capable of doing all that work yet. But eventually there will be,” Harris says.
Though it handles deals of less than $100 million, Harris & Moure is plugged into the Chinese legal grapevine. For example, in April last year, when Chinese lawyers wanted word to get out that the Shanghai Lawyers Association was calling for a crackdown on foreigners practicing in China, a copy of the association’s memo to regulatory agencies soon found its way to Harris.
The lengthy memo calls on the Ministry of Justice and other agencies to rein in foreign lawyers, offering a bill of particulars. In “A Report of Anti-Regulation Legal Services Practiced by the Representative Offices of Foreign Law Firms in Shanghai,” the association asks for “powerful measures to regulate and restrict the illegal activities practiced by the foreign law firms in Shanghai.”
The memo says foreign lawyers:
• Have far exceeded what is allowed and have “deterred the creation of a fair and sound legal environment in which Chinese law firms can develop.”
• Are drafting and interpreting contracts under Chinese law and engaging directly in negotiations involved in investments, as well as mergers and acquisitions.
• Handle all aspects of litigation until the time comes to send Chinese lawyers into court. According to the Chinese government’s Regulations on Administration of Foreign Law Firms’ Representative Offices in China, foreign law firms can open “representative offices” in China with “representatives” (lawyers). Those representatives can conduct “legal service activities,” but not practice Chinese law.
Among the permitted activities:
• Consulting with Chinese clients on the laws of their own countries as well as international conventions and practices.
• Engaging the work of Chinese lawyers on behalf of foreign concerns.
• Providing information on “the impact of the Chinese legal environment.”
Foreign lawyers working in China say there are many gray areas in the regulation of legal services. And while the Shanghai Lawyers Association memo got everyone’s attention, there has been no crackdown.
“I think when you look at the way decisions are often made at high levels in China these days, people are very conscientious of what is good for economic growth and development,” says Matthew Adler of Seattle and Beijing, a DLA Piper partner who has been working on matters in China since 2000. “And, in my view, because people are sensitive to those things and what’s good for China’s overall development, nothing has happened.”
Harris offers a different take: “The law and regulations are not that gray–enforcement is gray. If some firms are crossing the line and practicing in China, they’re banking on nothing happening, and they’re probably right.
“The thing that drives me nuts about China is that they seem to want people to violate the law,” Harris says. “So they make it real easy to bring in money and do a deal. But if it’s not legal, it could someday be hard to get the money back out.”