Law firm consolidation is no longer a rarity today, yet several recent mergers between mid-tier Shanghai firms have caught the industry’s attention.  Following the merger between Zhongjian and Zhonghui in July and Dacheng and Deqing in June, SG & Co PRC lawyers has recently formed by joining four Shanghai local firms into one partnership.

Lawyers in Shanghai regard the recent mergers as a new trend that will shift the legal landscape, especially in terms of size of and competition between law firms. Many key players in the region are paying close attention to what might happen in the future.

Legal industry: Beijing vs Shanghai

Merger push

SG & Co PRC lawyers was formed through the merger of four law firms – Qinghua, Dongxin, Huali  and Guolian – and one legal team led by partner Lv Yan, in late September. It has become one of the largest law firms in Shanghai and one of the first mergers completed under the background of developing Shanghai into “two centres” (international financial centre and shipping centre), which was officially approved by China’s state council in May. “Apart from our determination to merge, we believe that without the encouragement from the Shanghai Bureau of Justice and Shanghai Bar Association, our merger could not have been accomplished successfully within such a short period of time” said Yin Yande, a senior partner with SG & Co.

"The most important factor for the combination of the four firms is that the practice areas of these firms are complementary,” said Qiao Wenjun, vice president of the Shanghai Bar Association.  “We are encouraging this sort of merger, and hoping Shanghai law firms can take this opportunity of building "two centres” to expand their scale, extend their service scope and enhance their competitiveness."

A recent survey from the Lawyer’s Association of Shanghai predicts that by the time the “two centres” are established there in 2020, the output value of the legal services industry will hit US$6bn dollars. The general scale and service scope of Shanghai law firms, however, will struggle to meet the market demand. For now, there are over 1,000 law firms in Shanghai – but only Allbright has become large firms with more than 100 lawyers. Most firms have less than 20 employees.  Statistics from the Lawyer’s Association of Shanghai shows that on the “Top 10 Shanghai Law Firm” list, local Shanghai law firms have only four seats and the other six are occupied by Beijing law firms.

Top 10 Shanghai law firms by lawyer headcount

According to Shanghai Bar Association’s Qiao Wenjun, Shanghai is five years behind in the size and overall competitiveness of its law firms compared to Beijing. “The building of two centres has created a huge market for legal services. We are expecting a great number of quality law firm mergers that can stimulate the growth of the Shanghai law firm industry and enhance its overall strength and competiveness,” he said.

Caution needed for mergers

It seems that mergers will continue to be seen as an attractive option for firms wanting to build up to meet the huge market demand.  However, there are several pitfalls to watch out for. “Merging two law firms is not as simple as two people living together- it is a tricky business.  A firm considering a merger should take into consideration a number of important factors such as client base, practice expertise and firm culture,” said Qiao. "‘Because everyone else is doing it’ may be the worst reason for merging, and lead to failure.”

Xu Jingke, senior partner of Shanghai Haworth & Lexon, itself recently involved merger talks said: “There are a few reasons why our attempts to merge with a few law firms were not successful, such as the different concepts of management and the different goals for development.  We are currently focusing on our own business until we find the right merger candidate. ”

In addition, many people with insight into mergers believe that they are not the only way to achieve growth and development, even considering the current tide of consolidation. “We are not pursuing expansion in quantity, but mainly focus on the quality of our team,” said Mark Ho, a senior partner from Jade & Fountain, which is one of the fastest-growing firms in Shanghai.

Yin Yande of SG & Co, also a member of the council of the Shanghai Bar Association, hosts the same view:  “We also believe that a merger is not the only option for future development, though we just merged with other firms. A law firm with a condensed size has the possibility of earning good margins as well.”
 
According to Yin, the legal industry in Shanghai should comprise firm of varying size, the ideal proportion being 20% of top-tier law firms, 60%-70% of mid-tier and boutique law firms and 10%-20% of small law firms.  This view is shared by Qiao: “Shanghai law firms should grow and develop based on their own distinctiveness, strength and specific requirements. Having structural diversity will allow the provision of a comprehensive legal ranged service during the time of the building of “two centres” in Shanghai.” ALB