The recent US/China Economic Dialogue discussions held
between the two countries further cements their powerful
business and bilateral relations. ALB examines the new
playing field for 21st century deals

More than 50 representatives from over 40 government departments of both China and the US participated in the Sino-US Strategic Economic Dialogue, held in Beijing in May. And as the world prepares for the powerhouse, deals between the two nations continue to roll out. Most recently, a tiny town in Mississippi announced a US$175m investment by China’s Anshan Steel in upstart Steel Development Corp.

Given the ceaseless dealflow between China and the US, lawyers are positive about the impending dialogue; that it will mark the continuation–post-GFC–of the most important bilateral economic relationship in the world. And it is no wonder that China’s law practices are being hailed as one of the few high-growth engines at this time. Firms like O’Melveny & Myers have a bullish outlook. “I think China has come back faster than most markets. In the past few months, different practice areas like capital markets, private equity and FDI have revived quicker than others. We are well into recovery mode,” says Howard Chao, partner-in-charge of O’Melveny & Myers’ Asia practice.

Physical presence is pertinent

Continued growth of the Chinese economy and increased global business ties have been the impetus for law firms to launch in the region. Most recently, Boston-based Ropes & Gray hired Arthur Mok as a partner to help open its planned Shanghai office, taking him from Hogan & Hartson.

Since 2009, several firms – including Winston & Strawn, Latham & Watkins, Steptoe & Johnson, Kirkland & Ellis and Diaz Reus – have set up on the mainland. “Over the past few years, there has been significantly more momentum by US firms wanting to have a physical presence on the mainland. Given the transactional activity flowing through this market, US firms are a lot keener on being here,” says Mok. “It is hard to understand the market and build relationships if you are not physically in the market,” he adds. Besides being able to better identify business issues and understand corporate culture, having proximity to clients and sourcing business locally is also of the utmost importance. K&L Gates is a firm that exemplifies this concept, attributing its increasing mandates to proximity (having offices in Shanghai and Beijing) with clients. “Being on the ground for us is critical for what we do, because we need to be
in constant contact with our clients,” says partner David Tang (pictured). “Having an actual physical platform on the ground has helped tremendously.”

In Morrison & Foerster’s case, proximity has not only boosted the firm’s relationship with existing clients, it also brought in new mandates that it otherwise wouldn’t have attained. “On some of our deals we wouldn’t have gotten the engagement and certainly wouldn’t have been able to support the work the way that we do, without a Beijing office. The work came in because we are here, we are at the front of the line for the client,” says Paul McKenzie, the managing partner of MoFo’s Beijing office. According to McKenzie, the Beijing office plays an important management role by interfacing with clients in their own language and in a cultural manner that they are accustomed to. "Clients are worried about what they do not know, and having someone in the region who can help reassure them is always appreciated,” he explains. Moreover, lawyers say that having an office where their clients are based instils credibility.

Henry Liu, managing partner of Nixon Peabody’s China and Asia practice, adds that this is especially important for Chinese clients. “If you don’t have a solid local presence they just don’t find you credible,” he says.

NEXT: Homebound China desks

Homebound China desk is more than integration

With increasing on-the-ground competition, leaders in US law firmshave been forced to ceaselessly develop new strategies in order to successfully differentiate their capabilities. Pillsbury has done so by building up not only its Shanghai office but also its China practice desk in the US.

The firm has about 20 lawyers focused exclusively on China work and another 20 who focus about half their billable time on the same. But what is unusual about this arrangement is the proportion of practitioners’ working location is divided. “Most of our competitors have chosen to concentrate their team on the mainland but our team is evenly divided in both US and China,” says Thomas Shoesmith, a partner and leader of Pillsbury’s China practice. He sees the idea as a balanced followthrough offering, where clients can get exactly the same service all the way from the mainland to the US – be it on capital markets or M&A interests. “Having that equal capability in both regions, clients can not only have access to all of us on the mainland, they can also access our practice in the US,” he says. “This includes very senior members at their call from both sides. They get a very robust service delivery because each one of us offers the entire range of talent from both US and China.”

 “To us, it simply means that we are able to respond to our clients who are involved in China business but tend to have operations in both countries. But it is critical and essential as opposed to just being useful,” Shoesmith adds.

Fair playground

According to the American Bar Association, there are around 4,891 American lawyers in China (including Hong Kong) today, but under the restrictions imposed by the Chinese government, foreigners are not allowed to be admitted to the PRC bar and practise PRC law. In addition to that, Chinese nationals in US law firms have also been prohibited from practising PRC law. Yet PRC firms have been increasingly adding US capabilities, presenting a new set of challenges to on-the-ground American firms.

The intensity of competition is seeing US lawyers cry out for fair ground. “The increasing market strength of the Chinese national law firms is something we are all looking out for. Chinese firms are increasingly large and are adding more US capability. We now find ourselves competing with PRC law firms for international deals – so that is going to be a challenge,” says Shoesmith.

Chao from O’Melveny says that the challenge has presented itself much sooner than he had anticipated. “Chinese law firms are becoming more powerful, more capable and are financially very strong. They are actually starting to go global and it is something that many people didn’t expect to happen as quickly as it did happen,” he says. One main concern is the rules surrounding legal practice. While foreign law firms have been prohibited on practising PRC law by the Chinese government, PRC law firms are allowed to practise US law. The circumstances, lawyers say, hardly create a level playing field.

And given the speed to which local lawyers are picking up business, US firms are beginning to hope that a fair playground can soon be established. Seeing the challenges that PRC firms have laid out before the US firms, American lawyers are driven to further advance their legal skills and offer new products and services. “You need to continue to be looking for new legal products,” says Shoesmith. He draws an example from structured finance work, an area of law that has not quite been established within the PRC legal system.

“This is relatively unknown locally because China doesn’t yet have the legal structure to permit those products – so when those legal structures appear,we have an edge,” he says. “But it also doesn’t last very long because local firms can learn very fast – so then we have to move on to another [area]. You just have to keep staying on the cutting edge. If you keep sticking to what you are comfortable with, pretty soon the Chinese firms will be passing you by.” The fundamental differences in the operations and business structures between a PRC and Western law firm, at least, plays to the advantage of US firms. “If you peel back the layer of operations of a PRC law firm, it is very different from Western law firms.  Under the model used by the majority of the PRC firms, it is hard to access the entire range of a firm’s services, because there are so many more incentives for the individual partner to hang on to the work than to bring in other expertise from elsewhere in the firm,” says Shoesmith. “That gives foreign law firms an edge.”

NEXT: Eye on capital markets

Eye on capital markets

The growth of PRC firms has not only brought about intense competition for international transactions, their increasing expertise has also disallowed later entrants to be very much involved in FDI work. “Most US firms are moving away from commodity work such as FDI, because the local firms take over that domain. They can do that work more efficiently and at a more affordable rate,” says Paul Hasting’s Shanghai managing partner, David Wang. Consequently, US firms have since been nudged into doing more high-end work like cross-border listings. In 2009 there were nine IPOs of Chinese companies on the NASDAQ, including Shanda Games (advised by Davis Polk, Conyers Dill & Pearman, Commerce & Finance, Simpson Thacher and Jade & Fountain), which had one of the largest US IPOs and the largest capital raising for a Chinese company seen in 2009. Changyou.com (advised by Campbells, Commerce & Finance, Davis Polk, Goulston & Storrs and King & Wood) had one of the best-performing US stocks in 2009; China Real Estate Information (advised by Skadden, Fangda, Maples and Calder, Commerce & Finance, O’Melveny & Myers and Shearman &Sterling) introduced the first spin-off of a Chinese company listed on the NYSE.

While the US capital markets bring about some hopeful returns for US law firms, lawyers admit that a lot of that interest has now changed. US firms are having to deal with the fact that Chinese clients are not tapping into the US capital markets as much as they used to – and the response to that has been, in part, for many US firms to acquire a Hong Kong law capacity. O’Melveny & Myers recently appointed Gordon Ng, the former managing partner of Hogan & Hartson’s Hong Kong office, as a partner in its corporate finance/capital markets practice in Hong Kong. Ng has more than 17 years experience in guiding clients through corporate and financing transactions, both in Hong Kong and China. This synergy between Ng’s Hong Kong law capabilities and practice, and the firm’s existing relationships with leading banks and private equity firms, is likely to create new business opportunities for its China practice. “Chinese companies’ listing interest has changed a lot over the years – it has been much less US-centric and become more Hong Kong- and Shanghai-centric,” Ng says. “It has also become less SOE-dominant and more private companies and PE funded company-dominant.” As evidence of this, competitor firm Paul Hastings reports that the firm is currently working on no less than 15 Hong Kong IPOs for Chinese clients.

Tang explains that the receptivity in Asian capital markets is due to having a positive attitude that has been lacking in the western regions. “Investor appetite in  Asia is very high. Companies want to list now because they see it may be possible to obtain high valuations for their listings. It is really a question of speed and pressure to go on the market as soon as possible, in order to catch the current investment climate,” he says. According to Tang, K&L Gates is in the midst of a big push with capital markets; it has been “all hands on deck” to make sure the firm can meet the increasing listing interest. Moving beyond Asian capital markets, the general business outlook within the region is promising. There is a high level of confidence in being able to do business and to go across markets to look for opportunities. This attitude, which has been prevalent for the past 12 months or so, is a source of motivation for US firms to seek out new roles. “In the UK and US, the attitude is very different – after coming out of a very harrowing period, they are very conservative. That’s a big differential trend where Asia has the confidence which does not exist in former market leaders,” says Tang. “A lot of investors are flocking to China because that positive attitude is all there.” ALB