Opinion
The challenges of a Chinese tie up
14/07/2016
Shawn Chen photoMany international law firms have sought a tie up with a Chinese law firm, but very few of them have made a real success of it. Often the firms on both sides are genuinely interested in joining hands and creating a much more powerful hybrid firm in this promising but increasingly challenging Chinese legal market. So why aren’t many finally marrying and living happily ever after?   SSQ has assisted some law firms in transacting deals like this over the last few years and in this article, our consultant Shawn Chen summarises the major challenges which international law firms who are considering this route in China will typically face.     

Taking Control vs Maintaining Autonomy
 
Usually an international law firm would prefer to take full control of the Chinese firm, at least in terms of finance and staffing. However, the founding and other partners of the Chinese firm generally want their full autonomy to be maintained, particularly when it comes to building and growing the business in ‘their market’.  This issue typically exists between the China offices and the UK/US headquarters of many international law firms. However a Chinese firm or team joining an international platform would be particularly concerned about this issue from the very beginning throughout the whole discussion period. Finally this concern often proves to be the deal-breaker and results in talks breaking down.   
 
Because of all the uncertainties around a Chinese tie up, many international law firms find it difficult to outline a clear picture to the Chinese party about how to structure the relationship and hierarchy between the two firms, both financially and non-financially. This makes the Chinese partners more concerned about their duties and obligations in the future as part of a combined organisation. 

Complementary Cooperation vs Financial Acquisition  
 
The partners and management from the international law firms generally treat the Chinese firm/team joining on a similar basis as any other lateral partner and team hire. Therefore, paying something to the Chinese firm/team beyond what you usually pay for a lateral hire may not sound attractive, particularly to the senior management. However, the senior/founding partners of a Chinese firm will usually argue that they have been investing in and building their brand and market reputation for years, and that this is an invaluable asset and must be compensated in one way or another.  Plus, they have ‘tangible assets’ such as office premises and computers. Hence, some ‘goodwill payment’ is usually expected, but it’s highly tricky and complicated to assess and agree on the amount of such a payment, given the nature of a law firm’s business being professional services instead of manufacturing, for example. 
 
In addition, some partners in the Chinese team/firm are likely to ask for some guaranteed payment over an unusually long period of time (such as 3-5 years), because they are concerned whether or not they will still be able to maintain their business/revenue after joining one single platform and cutting off their business ties/referrals with other international firms. Such a concern becomes extremely important in the current cautious Chinese legal market.  
 
Regulatory Independence vs Business Integration   
 
On one hand the Chinese law firm needs to maintain independence, both legally and financially, in order to comply with the Chinese regulations. However, on the other hand, the international firm will always want the Chinese partners and team to be integrated into the firm in the same way as other partners across China (in Beijing or Shanghai for example). How to achieve the actual/maximum integration while having to keep them independent is something both parties have to start working on from the very beginning of the negotiations. 
 
Our knowledge of the existing alliances and experience working on similar deals evidence the vital importance of building up the personal trust between the key partners of the two sides – if there is enough trust there through previous dealings or later discussions, this issue between independence and integration may be easily overcome.  But trust often takes much longer to build than a book of business.  

Organisational Procedure vs Boutique Efficiency 
 
Many international law firms will consider an alliance with one of the smaller boutique firms in China. This often happens when an international firm is looking to bolt on a particular practice area that it is lacking in its arsenal. However, these alliances present their own additional challenges. 
 
A large international law firm will have to go through considerable internal discussions, various approval procedures and an extremely cautious assessment before giving any serious feedback to the Chinese law firm in the discussions and before making any decision on such a deal. However, in the fast-changing Chinese legal market, the small partnerships of the boutique Chinese law firms run in a very different manner. They expect much quicker responses from the other international party, and much swifter decisions. The huge gap in timing expectations between the two parties could easily cause misunderstanding at any stage of the discussion and ultimately kill the deal. 
 
Having discussed all the difficulties above, we still predict there will be more tie-ups between international and Chinese law firms over the coming years. We have already witnessed an increasing number of international law firms looking to implement similar plans in China over the past 6-12 months. This will no doubt create more competition among the target PRC law firms and may also change the regulatory landscape on the PRC authority side. Currently, the Chinese regulators are continuing to loosen the restrictions on Chinese/international law firm tie-ups, but this greenfield could be ring fenced to some extent and the newcomers may not be allowed to step in in the future.  
 
If you are considering expanding or restructuring your practice in China or would like more information on this topic please contact Shawn Chen on shawn.chen@ssq.com 
 
Shawn Chen, July 14th 2016
 
 
 
 
 
 
 
 
 
 

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