Eastern high-flyer
April 2010 was a celebrated month for China Eastern Airlines Corporation Limited, the country’s top-three carrier listed on the Shanghai, Hong Kong and New York Stock Exchanges. Apart from reporting an 18-fold year-on-year surge in first-quarter profit following the successful merger with Shanghai Airlines, the company signed an initial agreement to join the SkyTeam alliance. And on 16 April, its in-house legal department was awarded “Chinese Company In-house Team of the Year” at the 2010 ALB China Law Awards for its outstanding achievements across the full spectrum of in-house legal responsibility. It’s an extraordinary recognition, taking place against the backdrop of a turbulent year in the global aviation industry.
April 2010 was a celebrated month for China Eastern Airlines Corporation Limited, the country’s top-three carrier listed on the Shanghai, Hong Kong and New York Stock Exchanges. Apart from reporting an 18-fold year-on-year surge in first-quarter profit following the successful merger with Shanghai Airlines, the company signed an initial agreement to join the SkyTeam alliance. And on 16 April, its in-house legal department was awarded “Chinese Company In-house Team of the Year” at the 2010 ALB China Law Awards for its outstanding achievements across the full spectrum of in-house legal responsibility. It’s an extraordinary recognition, taking place against the backdrop of a turbulent year in the global aviation industry. “The award is a great honour and an achievement for which our team can be justly proud,” says Guo Lijun, general manager of the legal department of China Eastern Airlines, in his office in Shanghai’s Hongqiao International Airport. “This prestigious recognition comes in a year of significant milestones for the in-house department, which recently reached its first-year anniversary as a separate functional unit in the company.”
Yet although the legal department is merely a year old, having been officially established last April, the in-house team’s history dates back a couple of decades. Guo, who joined the company in 1994, has witnessed the evolution of the nature of the in-house legal function and its standing within China Eastern Airlines. “The legal department is now regarded as critical as [the] finance and audit departments in our company. It’s a cost-effective and expert resource for all the company’s legal affairs. Its influence is on the rise in every stage and aspect of the company’s operations,” he says.
However, he recalls that when he first came on board there were only three legal staff, and the majority of the company’s employees didn’t even know about the existence of the legal team, nor their responsibilities. “It has come a long way since then. Several key turning points have taken the in-house legal team to where it is now. The company’s public float in Hong Kong, New York and Shanghai in 1997 is one, and the parent group’s appointment of a general counsel in 2007 is another,” Guo says.
“The combination of adverse market conditions in the past few years and the company’s business expansions at home and abroad has triggered a substantial increase in legal needs. The company has been swift to realise that having a separate, dedicated legal department is imminent,” he adds.
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About the legal department:
Major achievements:
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Structure and responsibilities
The legal department at China Eastern Airlines’ headquarters currently consists of 22 staff, and comprises four main practice groups – contract review and compliance, litigation and arbitration, general corporate and international affairs.
The head office legal team also oversees the major legal matters and coordinates in-house legal staff for its subsidiaries, including China Cargo Airlines and Shanghai Airlines. More than half of the total amount of legal work handled by the legal department of the headquarters is related to contract review and compliance, while litigation and arbitration work accounts for approximately 30% and the rest are for general corporate, IP and international affairs.
Given the carrier’s key developments that are taking place or are underway, corporate matters and international-related legal issues will become an even larger part of the legal department’s work in the years ahead. “As an international airline company that is actively expanding its presence globally and extending its services and routes to new overseas markets, having in-house lawyers who are capable of handling international affairs and cross-border matters is important to us,” says Guo. He received his Master of Law from Law School of University of Washington, and is heading the international affairs unit, in addition to his general manager responsibilities. Three other legal staff in the team also have international postgraduate credentials.
In April 2010, China Eastern Airlines announced its intention to join the SkyTeam Airline Alliance and signed a Memorandum of Understanding (MOU) with the alliance members, confirming its plan to join the Alliance by mid-2011. Guo now expects the legal team’s short-to medium-term focus to be on this issue. “We’ve already drafted and reviewed a significant volume of legal documentation concerning the company’s SkyTeam membership application and agreements,” he says. “Much more legal work will be generated upon the admission to the Alliance, in the process of modifying its operations for the membership agreements and obligations, as well as when complying with the alliance’s by-laws and rules.”
In addition to this workload, several newly added responsibilities such as overseeing aircraft finance and leasing, as well as assisting in fuel price risk management, have meant the department will need to develop new higher-level skills and expertise in relevant areas. Guo sees a steep learning curve ahead for his team.
“Prior to the establishment of the legal department, the company’s aircraft finance and transactional matters were managed by the finance and planning departments. Most legal work was done by external law firms,” says Guo. “From this year, the legal department has been designated to take a lead role in the legal aspects of the aircraft purchasing, financing and leasing transactions. We endeavour to acquire the necessary knowledge and techniques in the next 6-12 months, and will increasingly handle the legal work in-house,” he says.
Consequently, Baker & McKenzie, a long-term external advisor to China Eastern Airlines who advised on its IPOs in 1997, has been invited to provide training programs to the in-house team in this field. “However, we will still need certain specialist advice from external counsel, as this practice area by nature is cross-border or trans-national and the transaction structures and types used by foreign parties internationally face certain restrictions under existing domestic legal framework,” Guo adds.
Fuel price risk management, in particular fuel hedging, is critical for maintaining the carrier’s competitive position in the aviation industry. This adds a further layer of complexity to the in-house team’s work. In 2008, due to the steep drop in fuel prices, many carriers including China Eastern suffered significant losses on fuel hedging.
To gain the necessary knowledge and techniques in this niche and highly specialised area, the department once again looks outside for help. It has arranged a series of workshops on high-risk derivatives and risk management to be provided by Rajah & Tann’s Singapore and Shanghai offices. The firm will also conduct a due diligence and assessment exercise in its current derivatives trading positions and arrangements.
“Expanding the knowledge and expertise beyond the in-house team’ traditional scope of practice doesn’t mean we no longer need the services and advice of external counsels. Instead, it’s a necessary progress that will lead to improved and more efficient collaboration between in-house and external counsels. This development is in the client’s best interest,” says Guo.
Achievement highlights
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Over the past 12 months the in-house team has assisted the company in successfully raising RMB14bn through A-share and H-share equity placements, and advised on its absorption of Shanghai Airlines via share swap – a high-profile and complex transaction involving an RMB16bn asset acquisition. The team has also participated in more than 50 aircraft transactions with a total value of US$10bn, and in addition to its growing contribution to the company’s commercial and transactional matters, the legal department has gained extensive experience managing domestic and overseas litigation process and outside counsel.
Among all the litigation cases the department has handled, a lengthy court case filed in the US against the company is of the most significance for precedent. The litigation, arising out of a personal injury accident in 2004, kept a large team of in-house and external lawyers busy for five years, eventually ending with a court decision in favour of the defendant in March last year. This is the first case heard in the US where an appellate court granted Chinese courts an appropriate jurisdiction, on the ground of forum non conveniens.
The legal department chose O’Melveny & Myers as its US legal advisor and to represent the company in the legal proceedings. “We engaged O’Melveny & Myers at the later stage of the proceedings and adopted a different approach and strategy in responding to the lawsuit. The changes marked a turning point that led to the favourable outcome,” says Guo, who led the team on the case. “The court decision is an important precedent establishing that China is an adequate alternative forum for cases involving airline personal injury claims in China. It would mean that future cases of its kind will be litigated in China, rather than the US.”
However, China Eastern Airlines’ legal department is also known for its pioneering work in the field of anti-trust law. In 2006, the department worked together with two US law firms, Davis Wright Tremaine in Seattle and Wilson Elser Moskowitz Edelman & Dicker in New York assisting the company in an investigation by the US Department of Justice (DOJ) into alleged price-fixing fuel surcharges among major international carriers.
As a result of the investigation, China Eastern Airlines and two other China-based carriers were found not guilty of misconduct, but British Airways and Korean Air were both fined US$300m after being found guilty, and other carriers were also hit with fines.
The in-house legal team and its US counsel have also defended the company against two anti-trust class action lawsuits filed in the Eastern District Court of New York. “Since 2006, we’ve come to a profound recognition of how critical complying with anti-trust and competition laws in all major jurisdictions is to companies operating on a global scale,” says Guo. The department, subsequently, has arranged several training sessions for all leaders and staff of the business units, delivered by anti-trust experts from US firm O’Melveny & Myers.
Last August, the legal department compiled a comprehensive anti-trust and competition compliance manual for all of its employees, providing key information on anti-trust and competition laws in major jurisdictions including US, Europe, Japan, China and Australia, with a focus on the aviation industry. The obligations of company employees to comply with these laws globally and the important ‘do’s and don’ts’ are also outlined in the manual. “With the rules in different countries becoming stricter, and enforcement and sanctions on the rise, having a consistent and dependable means of training staff in competition and anti-trust law compliance is now a key component of the company’s risk management framework,” says Guo.
External legal panel
China Eastern Airlines has worked with a long list of external legal advisors such as Grandall, Allbright, Hongqiao Zhenghan, O’Melveny & Myers, Baker & McKenzie, Sullivan & Cromwell, Davis Wright Tremaine, Freshfields, Clifford Chance and Clyde & Co on a wide range of issues and projects since before the company went public in 1997. “We should keep in mind that the expertise and resources of in-house legal departments are rather limited compared to law firms, which have a broad range of resources at their disposal and offer a wider pool of expertise,” Guo says.
“External advisors are in the position of offering support and supplement to the services provided by our in-house legal team. That’s why firms will always have an important role to play, particularly as the depth and breadth of our company’s legal needs has been increasing significantly. Good collaboration and relationships between in-house and external legal teams can help reduce the spending on external legal services and derive more value from the services,” he adds.
In the past, law firms were usually instructed directly by different business units within the company, but some changes are coming. After the first anniversary of the department’s establishment a new structure has been developed to address the increasing need of a centralised system to administer the company’s numerous legal service providers.
The legal department is in the process of establishing an external legal advisor panel and formalising the procedure for selection and monitor and measure the performance of each panel firm. The new legal panel will appoint a mix of accredited specialist, top-tier full-service and lower-cost mid-tier firms to provide the company with quality legal advice, greater choice and flexibility.
Up to five law firms will be listed as preferred advisors under a set of different practice areas, including aircraft financing and leasing, regulatory and compliance, derivatives, litigation and arbitration. “The new system aims to drive efficiency and cost-effectiveness of legal outsourcing, and to ensure the most appropriate firms are engaged to perform legal work in particular service areas that reflect their core strength and expertise,” says Guo.
The panel will be constantly updated based on feedback from internal clients, hence any panel firm could be eliminated at any time if its performance and services are unsatisfactory. New firms will be added to the list regularly. The ratio of international and domestic firms on the panel, however, will remain the same – 60% will be comprised of domestic firms and the rest are foreign firms from different key jurisdictions where the company operates in.
“International firms will be increasingly useful to Chinese companies that are having more international exposure and increasingly having to handle legal matters outside the country,” Guo says. “As the leader of the in-house legal department, part of my responsibility is to figure out a way to make effective use of in-house and external resources to meet the needs arising from the company’s globalisation process.” ALB
