CEPA shows that the government is serious about opening its legal market to Hong Kong firms, but the liberalisation progress has been regarded as 'too slow and too little' by many. ALB China investigates whether better alternatives exist and if the CEPA framework for the legal sector is now redundant
Six years in the making, the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) has undoubtedly contributed to the closer economic cooperation and integration between the two sides of the Lo Wu Border. It has granted preferential market access spanning across over 20 service sectors to Hong Kong businesses, banking and finance, retail, manufacture and logistics being among the main beneficiaries.
Hong Kong and mainland law firms, however, seem reluctant to take advantage of CEPA. Since Hong Kong firms were first allowed to operate in association with their mainland counterparts six years ago, only a small number of them have tested the new preferential measures and even fewer have achieved meaningful collaboration and commercial success.
Chongqing-headquartered Zhonghao Law Firm and Hong Kong's So Keung Yip & Sin were among the first to take the plunge - they entered into a formal association under CEPA in 2004. Although the two parties have maintained a close business relationship, they are considering a possible termination of the association as no real benefits have been forthcoming.
"The cooperation under the CEPA association arrangement has no real difference from other forms of cooperation - such as a strategic alliance or referral agreement," said Robin Yuan, the managing partner of Zhonghao. "A lack of follow-on measures and rules to support and allow further meaningful collaboration and integration between the associated firms has led to a decreased interest and very low motivation for firms to apply for an association.
"In addition, our clients have developed a stronger risk-aware culture, so the association has added more potential liabilities to both firms. Negligible advantages together with added risk have regrettably resulted in the possibility to terminate the association," said Yuan.
When CEPA was first launched, firms like Zhonghao embraced it with great enthusiasm and hoped they would be allowed to transform the association into a joint venture or even a merger - similar to the case of accounting firms. But the reality has turned out to be far from the expectation.
"We saw the opportunities offered by CEPA as a lucrative cake. But after we had a slice of the cake, we found there was hardly anything tangible on the inside," said Yuan. Aiming to ride the wave of Hong Kong and foreign investment into Western China, Zhonghao is now contemplating opening its own branch office in Hong Kong.
Associations between Hong Kong and mainland firms under CEPA
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Fred Kan & Co and Tianjin JD HANDS
香港简家骢律师行与天津嘉德恒时律师事务所联营
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David YY Fung & Co and Guangdong Zhong Yuan
香港冯元钺律师行与广东中元律师事务所联营
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Philip K H Wong, Kennedy Y H Wong & Co and Beijing W&H
香港黄乾亨律师事务所与北京市炜衡律师事务所联营
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Woo Kwan Lee & Lo and Grandall
香港胡关李罗律师事务与国浩律师集团联营
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So Keung Yip & Sin and Zhonghao
香港苏姜叶冼律师行与中豪律师事务所联营
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Bird & Bird Hong Kong and Xiang Kun
香港鸿鹄律师事务所与翔鲲律师事务所联营
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Who can operate in association under CEPA?
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Note: for a full list of liberalization measures for the legal services sector under CEPA, please visit the website of the Trade and Industry Department of Hong Kong (http://www.tid.gov.hk/english/cepa/tradeservices/leg_liberalization.html) |
Other alternatives
Another first mover under CEPA was Hong Kong firm Fred Kan & Co, which established a representative office in Tianjin in 1998 and entered into an association with Tianjin firm JD Hands in 2004. The firm's partner and chief representative of the Tianjin office, Edward Tse, sees the association as 'two firms working in the same office'.
"It's convenient for us to be able to work together in the same office in Tianjin, but under the CEPA framework the nature of cooperation between the two firms remains on the referral level. Each firm is paid a commission based on the clients and cases it refers to the other," said Tse. Currently, the two firms are collaborating on representing a PRC company in an arbitration case in Hong Kong.
Because Fred Kan only has one mainland representative office and JD Hands is a Tianjin-based local firm, the amount of business generated under the association is limited due to geographical coverage. The firm has had to cooperate with other mainland counterparts in different locations to better serve clients' needs across the country and gain more referral work. It is also a member of ADVOC Asia, an international network of independent law firms. Through ADVOC membership, the firm has established close relationship with other China members, including Shandong Qindao and Beijing Jincheng Tongda & Neal.
"The cost of running a representative office and maintaining the association is quite high, so not many Hong Kong law firms, most of whom are small in size, are willing to pay the price - especially when the return is not equal to the cost," said Tse.
Several other Hong Kong firms have also chosen to expand their business in the mainland through joining international and national legal networks. PC Woo & Co, for example, is a founding member of the Perfectus Alliance, which is comprised of ten members from different cities. Ng & Shun is a member of LAWorld and a driving member of Yangtzejiang Legal Network.
Hong Kong firm wish list
| "Difficulties and challenges apart, Hong Kong practitioners are certain that CEPA is alive and the Hong Kong legal profession is much in need of the further liberalisation of the PRC legal market that CEPA is yet to deliver. " |
Over the past three years, more than ten PRC firms have set up in Hong Kong and nearly half of them have formed an association with a local firm with the prospect of fully merging the businesses under Hong Kong law. King & Wood's three-year association with Arculli Fong & Ng, which led to the full merger of the two firms last year, is the primary example of this trend.
While PRC firms are enjoying the free and open market environment in Hong Kong that facilitates the expansion of their international business, the majority of Hong Kong firms are calling for further liberalisation of the mainland market under CEPA which will allow them to seize more business opportunities in the vast and fast-growing RPC market.
"CEPA opens a door for Hong Kong law firms to expand mainland business. It has helped us a little bit, but it could have been much more useful. The door is not open wide enough to allow more exchange of business or create real benefits for legal sectors in Hong Kong and China," said Wilfred Tsui, partner of Gallant YT Ho & Co, who also serves as the vice chairman of the Mainland Legal Affairs Committee of The Law Society of Hong Kong. "Compared to other sectors, the legal sector is the one that offers the least market access under CEPA."
Like Arculli Fong & Ng, some Hong Kong firms are now prepared to become part of a mega-sized PRC firm, so they can continue developing Hong Kong business and, at the same time, use the PRC partner's resources in the mainland to back up their cross-border business. However, Tsui said most large and mid-sized Hong Kong firms would not take that route.
"Most leading Hong Kong firms are more comfortable with setting up a joint venture or an association in which they can have certain management power to oversee the business operation and control quality. Liability issues are the biggest concerns for them," said Tsui.
In a recent wishlist submitted to the Secretary for Justice of Hong Kong on behalf of the Hong Kong legal profession, requests for extension of the liberalisation have been made. The suggestions included moving beyond "association" to joint ventures, and allowing the China offices of Hong Kong firms to employ PRC lawyers who can retain their PRC qualification and issue PRC legal opinions.
Critical issues
Growing cross-border activity and strengthening cooperative ties between the legal sectors of both sides are inevitable. But whether it is through forging an association in the mainland under CEPA or forming an association complying with Hong Kong law, the harmonisation of Hong Kong and PRC firms is far from easy. The real issues, which senior partners of every firm have to consider before choosing which arrangement to go ahead with, are ultimately the same. "It's critical to identify whether or not tying up with a PRC firm will help a Hong Kong firm achieve real competitive advantage and whether the benefits of the greater access through an association will outweigh the administrative burdens and risks a tie-up imposes," said Keith Brandt. "International and Hong Kong law firms like us are looking for closer collaboration with firms throughout China, and we'll want to maintain our option of being able to work with a number of firms and being fleet of foot. We don't want to lose the referral network of clients that's important to drive our China business."
In addition to the fear that forming an association with just one firm cuts off opportunities for referral work from a variety of firms, finding the perfect match for an association presents another major challenge.
"Even though the cultural gap between Hong Kong firms and mainland firms is generally narrower, it remains very challenging for a Hong Kong firm to find a mainland partner who matches its medium and long-term vision or strategies, in addition to other considerations in terms of size, management structure, capabilities and quality of partners," said Franki Cheung, the head of the China practice group at Deacons.
Difficulties and challenges apart, Hong Kong practitioners are certain that CEPA is alive and the Hong Kong legal profession is much in need of the further liberalisation of the PRC legal market that CEPA is yet to deliver.
"I'm certain that many Hong Kong firms are eager to exploit opportunities offered by liberalisation under CEPA. But it takes time for law firms to assimilate what CEPA measures mean for them in reality and to figure out how to comply with the rules," said Brandt. "There is a trend towards firming up on associations. Firms that are going to succeed in the new world will be these who take the lead identifying and teaming up with firms of likeminded skills, expertise, size and views on collaboration. We'll see a growing number of associations being forged over the next two to three years." ALB
