Regardless of the overall economic climate, the energy sector in China always plays a very fundamental role in the economy. Foreign corporations still see opportunities of growth in the China market for its consumption potential; and the state-owned Chinese companies are busy “going out”, sweeping up assets abroad. Clean energy is a common concern, and the general legal environment is also changing as laws are increasingly becoming completed.

The voices

Tina Chan, Chief Corporate Counsel, Greater China, Chevron Downstream Law Function (Chevron)

A Hong Kong-based veteran counsel in the energy sector, altogether she possesses more than two decades of in-house experience related to China.

Zhang Fei, Deputy General Counsel, China Resources Power Holdings Co Ltd (CRP)

Zhang’s legal department engages in the all the investment, development, operation and management of power plants of the Hong Kong-listed CRP, a flagship subsidiary of central-owned state-owned enterprise (SOE) China Resources (Holdings).

Hong Yuwen, Chief Legal Director of China National Aviation Fuel (CNAF)

CNAF is the largest state-owned aviation fuel supplier which integrates the purchase, transportation, storage, quality management, sales and into-plane service of aviation fuel in China.

Tong Liping, Chief Legal Officer of Shanghai Electric and director of the legal department of Shanghai Electric.

She has dedicated her 19-year-long career to the company, one of the largest diversified energy equipment manufacturing groups in China.

Yu Lemin, General Manager of the Legal Department, Sinochem Group (Sinochem)

Yu’s team of over 75 members are in charge of China’s no.5 “Top Transnational Enterprises” whose energy business includes exploration and production of oil and gas, oil trading, oil refining, storage
and logistics, and distribution and retail.

Li Ling, Chief Legal Officer and a member of the Executive Committee of the State Grid International Development (SGID)

SGID is an overseas investment focused subsidiary of State Grid Corporation of
China, the largest utility in the world.

The team

ZF: Currently we have recruited 12 in-house counsels all together in our legal department, and we also strategically positioned some counsels in our key subsidiaries around our major operation areas. These lawyers are all competent, graduated from top-tier law schools and have at least more than five years PQE.

HY: There used to be only seven workers including me last year in the whole legal department of CNAF. But the full-time headcount has now reached 38, plus some more contract dealers.

TL: At the moment, my team has over 80 full-time legal professionals, which is relatively quite a large team for a “non-central SOE”.

LL: We, the in-house legal team, have been an independent department since the establishment of SGID. We now have 10 employees.

TC: Chevron doesn’t have a large legal team in the region, only two lawyers in Hong Kong including myself. But we, at the same time, are in charge of the legal affairs in mainland China. Neither of us has a licence to practise in the PRC, thus we would commission local firms to handle the China-related affairs for us when necessary.

The role of in-house

HY: Our job is no different from any other well-established in-house legal department, which includes various meetings, negotiations and talks, drafting documents, communications, and appearing before the court. The main affairs a legal department takes care of are: Major operational decision making; contract; internal regulations; and litigation. We fully participate in all these areas.

TL: The strategy of my team is to develop a functional line into an organic structure and mechanism, which is fully integrated into the overall operational and management system of the company as an indispensable part, a lookout for risks, and a gatekeeper of conduct.

LL: Apart from day-to-day legal affairs management, my team mainly works on supporting the business development of the company. We provide support to outbound investments and mergers and acquisitions, and we also advise on strategic decisions that are in the process of being made. In addition, we also collect and compile relevant knowledge and experiences concerning cross border business to educate our employees on the legal aspects.

TC: Our value-adding point is that we know the business of the company well; we know what we are doing in China, and what kind of legal services we want. Selecting proper law firms is only a small
part of our job. We also connect with the lawyers, telling them how we want the deal to be done, how the team should be organised, and helping them decide how the deal should be structured. This is where
we play a leading role.

The quality of in-house lawyers

ZF: Personally, I believe four qualities are essential as far as a qualified in-house lawyer is concerned:

Professional competence. In a specific practice area like M&A, and in our specific sector – energy, we all have to constantly keep an eye on the latest regulations and practices, and be fully aware that where we
can retain the best lawyers and firms in the particular practice area once we need support from the outside counsels.

Business acumen and broad knowledge exposure. It is quite plain that without fundamental knowledge about your employer’s business strategy, business model and information on its rivals, or if you are
unable to decipher a financial statement, it will be very difficult for you to provide practical legal advice to the executives and other associates.

Communication skills. The clients of an in-house counsel are narrowed down to the internal associates only, and it is a fine art to know how to brief the boss in an effective way. It requires time and practice to sharpen these skills.

Pursuit of excellence. Comparatively, in-house counsels are under less pressure than private practice lawyers, so we can easily lose the motivation to strive for excellence and enhancing our professional capabilities unless we keep pushing ourselves to stretch further, and have the audacity to walk out of the comfort zone sometimes.

HY: An ideal counsel must possess four things: First, professional skills; second, integrity; third, worldly wisdom, or a businessman mindset besides a legal perspective; and four, the love for the law and loyalty to the company.

TC: I think first, an in-house lawyer has to have analytical, logical and strategic thinking, and clear ideas. Second, one should have a commercial acumen, not just as a lawyer, but to think from a commercial
perspective. Then, an in-house has to know the business of the company well.

For instance, in the energy sector, we sell a number of products, like aviation fuel and lubricants, and we operate petrol stations, etc. And the business models vary from products to products. External lawyers
know little of this, so we need to make it clear to them what they should be aware of, or how to draft the contract each time. We need also to review and revise their drafts. Since we cannot 100 percent rely on external lawyers accurately finishing work for us, we have to carefully supervise.

In addition, to our colleagues from the business units, who are on the frontline of making money, we are the backup from behind. So we need to have the emotional quotient and abilities that are strong enough to influence them. Sometimes, their assumedly feasible acts would violate some certain regulations like that of tax. We’d have to tell them they cannot do it, but in a better way like providing alternatives, which is really important.

Communication also matters and relates to the ability of influence. We have to effectively communicate with them to help them understand the nature of the problem. Teamwork is important for us to complete
a task together. Last but not least, it is necessary to give the staff opportunities for self-development, and offer them coaching and the chance to diversify their skills.

LL: Looking at the overall functioning of in-house teams in Chinese companies, it is a good start that many have the attention of executives. In fact, this attention is growing. But we in-house counsel must work on how to influence the decision making, how to present ourselves and add value to the company operations, and how to enhance the interaction between the legal team and other departments. More
down-to-earth practices and a better founded culture of the “rule of law” are needed.

Job evolution in recent years

YL: In the past 10 years, having learned a lesson the hard way, we have undergone a sharp learning curve as the conglomerate branched out into diverse business units and cross border transactions have become more commonplace. The 1990s were a difficult and chaotic period for Chinese SOEs. That was a time when China went through a transformation from a central-planning economy to a market economy. Many SOEs, Sinochem in particular, suffered heavy losses during that period due to mismanagement and lack of risk and credit control.

ZF: My observation is that SOEs, in particular those SOEs directly controlled by the central government, are gradually paying more and more attention to in-house jobs. Thus, the in-house lawyer’s functionality
is strengthened in corporate China. Hopefully in the foreseeable future, the in-house lawyers can be more proactive, and their career development can be more diversified and promising. However, the gap between corporate China and the MNCs is still large enough that it will take time and strenuous efforts to fix it.

TC: I have been working in the field of China-related legal affairs for more than 20 years. I joined Chevron 12 years ago after years of experience in other energy companies. Basically, I have been an inhouse counsel for the energy sector throughout my career, and it has been over two decades since my first involvement in Chinese laws and regulations.

Over the years, I think the major change is that the Chinese legal system has become more affluent and complete, in comparison to the old times when there weren’t many laws and regulations. What I’ve been
witnessing is a great change, a progress of evolution. Another change is that the Chinese lawyers have become much more competent.

In the beginning there weren’t many lawyers at all, and great lawyers were rare - those who spoke fluent English and completed their work to perfection. I found that lawyers are getting better and better, as we’ve been using Chinese firms all the way. I also found during my in-house career, especially over the past five years, that the Chinese are getting more precise and sticking to the law. For example, the recently issued Anti-Monopoly Law is what was absent before. As a result, we are paying particular attention to those antitrust Chinarelated issues. We are extremely careful with whether there are any relevant provisions in a specific area. In general, the law is getting stricter, and we are getting more cautious.

The company plan

TC: In the past, we didn’t have a really large-scale business in China. But now, as far as I know, there is a full marketing plan to promote one of our various products in China. And there are also some solid
plans for our upstream development in China – upstream in the petrol industry referring to exploration and exploiting, etc. Besides, some foreign-based branches of Chevron International, like our Australian
company, have large procurements in China. Therefore, they are sending over inspectors to guarantee quality assurance. In a word, the China-related business, both the inbound investments and the procurements, would have plenty of opportunities to develop and expand.

TL: In the near future, I think Shanghai Electric will continue to focus on overseas expansion. Either we will purchase assets overseas or establish cross border partnerships with international corporations.
The methods vary, but the tendency is getting stronger and stronger. This will occupy most of our attention.

Energy industry and risk control

ZF: The central government has recently promulgated a series of laws and regulations on clean energy. We also observe that the change in the international carbon emissions market will surely have great
impact on the industry and its business model. The change of policies and business models will have various impacts on our practice. I think the in-house legal team should not only manage the legal affairs on a daily basis, but it also needs to do research and keep track of the development of relevant state policies and legislations. Of course, the research is not purely for academic interest, but mainly for paving a clear road map to ongoing business operations.

TC: In terms of the present economic condition, what I can say is that it might have some impact on our business, but is not likely to affect our development plans. I think the two most influential laws to us are
the Labour Law, a new law issued only a few years ago, but already deeply affecting us, and the Anti-Monopoly Law. As our company focuses highly on compliance, we are paying particular attention to
these two laws. An instance of the obvious effect of the Labour Law is the occurrences of labour disputes we’ve encountered with employees. There have been only a couple of them though, which deserve special high vigilance.

HY: Since the financial crisis, the economy has gone up and down. The trend has yet to be clear, and perhaps there will be some worse times to some extent. The indicators of Chinese companies dropped from same time last year. Inevitably we have been affected in the following ways: First, legal disputes increase in the unstable economy with problems once covered by growth emerging in the downturn. Second, companies and departments have become more aware of legal risks in such harsh time. Third, we hope we can come out as winners and survivors of a tough environment.

TL: Currently, the state policies of tightening investment have slowed down many projects. It has more or less some impact on us. But, as one of the fundamental industries, our energy equipment manufacturing would perform relatively better than many other industries since there isn’t as much of a bubble here as in some sectors. When the bubbles burst they are the ones that get hurt, not us. Furthermore, the energy industry will always be needed to a certain extent as it is a basic demand of all sectors. I think for a significant period of time, this would remain the case. Anyway, we will strategically seek new growth points, such as overseas investment and projects. But the traditional business will remain our advantage in the market and our core competitiveness.

LL: We are not going out for the sake of going out. We examine each M&A and investment opportunity calmly and cautiously. With open minds, we also do thorough research and investigation. To evaluate
and make choices on opportunities and timings is so important that the professional advice of legal practitioners is indispensible. The first role we play here is carrying out the due diligence investigation. We also provide comprehensive information and analysis to the decision makers after thorough research on the investment environment, and the laws and policies of the target’s country. Secondly, in order to proactively promote the projects, we utilise our expertise and experiences in law to prepare the documents and organise the negotiations. With our increasing experiences in overseas M&As, we can improve the international reputation and image of Chinese companies by successfully supporting the operation and execution of our investment projects.

The challenges

TC: As for our current challenges, the first one is the shortage of resources due to the accumulation of work and explosion in number of laws and regulations as a result of our growing business in China.
There are still only two of us, which means a heavier load and more hard work. The second challenge is the difficulty and time consumption in finding a law firm that meets our standards in the smaller cities, unlike those in first tier cities like Beijing or Shanghai.

TL: The biggest challenges were the ones we encountered while “going abroad”. As a large SOE, we have been increasingly targeting overseas development. Our in-house team has also advised on, and
directly taken part in our overseas moves like cross border M&As, infrastructure projects, overseas asset management, and even the opening and running of branches in a foreign country.

LL: Nurturing talent and recruitment. Although we have a good start, there is still much to improve.

External counsel

ZF: In picking domestic and international law firms, we consider mainly their professional expertises and reputation. We also try to strike a delicate balance between cost and the quality of service. In addition,
we tend to retain the firms and lawyers who can fully understand our concerns and business.

TC: We have gone through a change in terms of cooperating with external lawyers. In the past, I mean some 20 years ago, we would only turn to international firms who might have proper knowledge on
PRC law. Nowadays, we sometimes engage Chinese firms with direct communications and contacts.

Most importantly, the firm we pick is determined by the professional capability, which is the fundamental factor. Some firms have unique expertises in certain areas, like trademarks or branding. There are such
boutique firms practising in these niche markets in China. Normally, the firms we choose are those who have their own specialties and distinctive strengths, the most professional ones. We continue to work with international firms, too. And under most circumstances, it depends on the object at hand that needs to be dealt with. For instance, where there is a small litigation or dispute, a local firm is a probable advocate for us, as the object is not that large. However, in the cases of huge merger and acquisition, where some special regulations or multinational corporations are involved, we might consider an international firm that has a branch in China.

HY: We consider first, professional skills, second, the enthusiasm in service, and third, a long-term partnership that we could develop together. We don’t want a law firm to bring its service to an end at
the closure of the case. We hope they look from the company’s point of view to pick a path for the company’s best and offer us the most additional value. It would be mutually beneficial if they help to correct our shortcomings and improve our abilities.

TL: When choosing external counsel, cooperativeness and adaptability are important. We consider how much we understand mutually and match culturally. Price is an issue, but I never take it as one of the key
criteria. Actually, I do not agree that we should pick a cheap one. What I value are which person the firm sends to us, whether he or she fits our project, how good he or she is professionally, how dedicated he
or she is, and whether he or she values our business. For the different sizes and difficulty of deals, we need different levels of lawyers. We should not waste a senior partner’s time on a minor case, nor risk our important business in the hand of a first-year associate. Therefore, we need our contacts to be clear enough about our business. Also, there is a certain amount of competition among them.

LL: We wish there were stronger lawyers specialising in cross border transactions. We need lawyers who have mastered the relevant laws and knowledge, are experienced in overseas deals, are proficient in the needed foreign language, are skilful in international negotiations and communications, and most importantly, are familiar with the style and needs of SOEs. At the moment, we rarely see external lawyers
meeting this high bar. We need to work together with external lawyers to develop their expertise and grow this market.

YL: Sinochem strives to establish a transparent, fair and efficient mechanism where a mismatch or juicy contract can be prevented. As the Chinese saying goes, “you don’t need to use an ox-knife to kill a
chicken”. We don’t necessarily have to use a mega international firm for every single deal. Rather, we select the counsels according to the size of the deal and also which jurisdictions they operate in, especially when we have to conduct a multijurisdictional transaction.

Experience certainly counts. The lowest bidders are not always the best. And the Haigui, or Chinese overseas returnees with substantial multinational firm experiences, they provide better quality work than
the home grown firms, yet their services are priced lower than foreign ones. We increasingly invite them to bid for our work and even let them handle our relatively small outbound deals valued less than $200m. Consultants such as investment banks can be a dangerous crutch. Some inexperienced SOEs misplace their trust on their advisers and fail to realise that these advisers don’t carry any fiduciary duty to protect their interests. And their financial advisers, in particular, are more often than not driven by the common incentive scheme of success fee to get a deal done. Eventually you have to rely on your own
in-house deal team and your own judgement.

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