SPECIAL FEATURE: Foreign Law Firms in the PRC Legal Services Market

The number of foreign law firms in the PRC has grown considerably since the first branch offices were issued with licences in 1992. Economic development, new foreign investment and China's impending WTO accession continue to drive the demand for foreign legal services. Tight restrictions on the activities of overseas law firms remain, but most are confident that the importance of foreign lawyers in China will continue to grow.

In what has become an annual event, the Ministry of Justice (MoJ) in Beijing recently issued an additional 11 licences permitting foreign law firms to open branch offices in the People's Republic of China (PRC).

Ken Gross, founding Partner of US-based law firm Purliss & Gross, attended the licence ceremony: "the other firms all seemed to be looking forward to opening their offices in the PRC. It was just as exciting for them as it was for us. We all share the same enthusiasm ¨C it's something new."

And China's impending WTO accession is only adding to the sense of excitement among foreign law firms. For some, the dream of establishing themselves in the PRC has now become reality. For others, the waiting continues. The process is not easy and foreign law firms realize that they must first fight their way through a complex approval process before they can establish a branch office.

THE WAITING GAME

According to Article 7 of the Foreign Law Offices Establishing Offices in China Tentative Provisions (Tentative Provisions), jointly issued by the MoJ and the State Administration for Industry and Commerce, the MoJ is obligated to respond to a foreign law firm's application within 60 days of receiving the application. But the Ministry has effectively ignored this condition since it began to licence overseas law firms in 1992.

"We were hopeful and always believed that we presented a compelling case, but we never assumed the outcome," says George Martin, a Partner with the US- based law firm Faegre & Benson LLP.

The number of foreign firms receiving licences varies from year to year and it is never known how many the MoJ will issue until the list is announced. "We applied over a year ago. I hadn't heard anything for a while ¨C until it got approved. I wouldn't have been surprised if we weren't awarded a licence this time. I just didn't know how many other people were trying to get in at the same time, if they [the MoJ] had allotted slots and how many firms they would approve," says Gross.

There appears to be no set pattern for the time delay between submitting the application for a foreign licence to its actual approval. For some, the aproval process took less than two years, but for others the wait was much longer. "I think we had been on the waiting list for quite some time ¨C more than five years," said Faith Gan, Senior Information Manager for Singapore firm Shook Lin & Bok.

A CHANGING LANDSCAPE

Of the 11 new entrants setting up branchs offices in the PRC, seven will open an office in Shanghai, three in Beijing and one in Chengdu. The foreign legal market in the PRC (including firms from Hong Kong) now stands with 57 offices in Beijing, 50 in Shanghai, 12 in Guangzhou, and nine more covering Shenzhen, Tianjin, Qingdao, Haikou, Suzhou, Fuzhou and Chengdu.

While many have offices or alliances across the world, the home jurisdictions of the newcomers to the PRC vary. There are five from the US (Dorsey & Whitney, Faegre & Benson LLP, Perkins Coie, Perliss & Gross, and Thacher Proffitt & Wood) and one each from Belgium (Coppens Van Ommeslaghe & Faures), Brazil (Noronha-Advogados), France (Bureau Francis Lefebvre), the Netherlands (De Brauw Blackstone Westbroek), Singapore (Shook Lin & Bok) and the United Arab Emirates (Afridi & Angell Legal Consultants).

The size and specializations of the firms selected for licences in this round also varied, ranging from firms with less than 10 Partners to firms with more than 400. This emphasizes the belief that the MoJ selects firms from a broad range of jurisdictions rather than favouring a particular size or market specialization.

"It was a very good selection," comments Alex Zhang, Managing Partner of the Hong Kong and Shanghai offices of Dorsey & Whitney. "I think the Ministry is taking a very broad view in terms of considering the applications because they want to make the legal community an international one under their jurisdiction. This round of approvals represents deep thinking in terms of making this field of practice more diversified and more international."

WHERE TO SET UP SHOP

Where to set up their branch office is one of the biggest questions for foreign law firms entering the PRC. The Tentative Provisions limit foreign law firms with licences in the PRC to a single branch on the Mainland. Not surprisingly, Beijing and Shanghai remain the two primary destinations and this trend reflected in the licencees.

Beijing is the seat of central government activities and many law firms believe that an office in the capital offers certain strategic advantages when it comes to obtaining the relevant approvals required for business and investment transactions in the PRC.

Shanghai, as the PRC's financial and business centre, has its own advantages which made it the obvious choice for seven of the new licencees.

"We continue to view the Shanghai area as the epicentre of economic activity in China," says Martin. "Shanghai's growing financial services sector, and its strong trading and industrial base, have attracted many of our clients."

Zhang agrees that the financial character of Shanghai attracts many of his firm's clients. "We have a good client base in Shanghai. Quite a few clients have set up operations in the area, so it was natural for us to consider Shanghai as being the location of our office in the PRC."

Owen Nee, Partner with the Belgian firm Coppens Van Ommeslaghe & Faures cites an additional reason for his firm¡¯s choice of Shanghai. "There is no Belgian firm in the PRC. For that reason, we thought an EU firm in Shanghai would do well," he said. "With WTO entry towards the end of the year there should be a substantial increase in foreign direct investment and financial transactions in Shanghai."

The PRC government's recent 'go west' campaign, designed to encourage more foreign investment in China's western and central regions, appears to have had an impact on at least one of the new licencees. US firm Purliss & Gross (which will operate as Purliss, Gross & Sellier in the PRC) has chosen to set up its office in Chengdu, capital of the western province of Sichuan. "I guess a lot of firms may have been reluctant to go into the [western] area," says Partner Ken Gross. "It's quite a different place to Shanghai or Beijing."

According to Gross, locating in a city other than the "big two" has its advantages. "We're the only game in town," says Gross. "There are no other foreign lawyers in western China. The foreign lawyers for companies in Sichuan are usually in Hong Kong. With a local presence we can establish ourselves in the market; the rents are cheaper, it is cheaper to hire people, and it's a growing area."

Gross is hopeful that the firm's office will be open by the end of June. "China now has a policy to develop the west, so I think it's a good place to be," he adds.

BUSINESS OF PRACTISING LAW

Market volatility, and the various restrictions imposed on foreign law firms and how they operate in the PRC are often the quoted reasons for the lack of profitability experienced by newcomers. Foreign law offices, strictly speaking, are liaison offices and may not practice Chinese law. Foreign lawyers may provide home jurisdiction legal advice and act as agents for clients in the PRC, but the Tentative Provisions prohibit them from issuing legal opinions or advising on local law and from handling litigation in PRC courts. Foreign firms are thus forced to refer matters of local law to Chinese law firms.

"When we made the decision to set up office in Shanghai we already had existing clients there to support our practice. I think there will be more opportunities for us in the future, though profitability is always a factor to consider. I think we are making a good and strategic move and we expect to be profitable in the immediate future. It's going to be an interesting time," says Zhang.

Martin suggests that already having an established PRC practice will help to iron out any fluctuations. "Because we dedicate significant US resources to supporting our Greater China practice, we look at profitability of the practice area as a whole, rather than accounting for the office on a stand-alone basis," he says. "We understand very well the nature and intensity of competition among foreign law firms in China, but even without our Shanghai office, Faegre's Greater China practice has been profitable from day one. Although we will incur additional office start-up expenses this year, we are working hard to ensure that we maintain our current level of profitability."

Gross indicates the long-term strategy taken by Perliss & Gross will assist them to get through any rough patches. "I hope it'll be profitable as quickly as possible but we're in there for the long haul so we'll be patient. The cost [of setting up] isn't that tremendous and we're optimistic. I think our operations will be profitable and there are many Western companies there that need US lawyers as well as Chinese companies that do business in the US or internationally that need lawyers. So I expect that it [the office] should do well".

WTO

China¡¯s accession to the WTO is eagerly awaited by investors and foreign law firms alike. It is widely accepted that the amount of foreign direct investment activity will increase once the PRC has joined.

Although it is hard to predict exactly when the PRC will become a member of the WTO, accession is anticipated to occur by the end of the year. The new licencees place differing levels of importance on the establishment of a base in the PRC prior to accession.

Gross notes that "gaining a foothold in the PRC market before WTO is a plus for us. I think competition will increase once the PRC gains entry. That was a consideration to do it [apply for a licence] now."

"The longer you're in the PRC, the better," says Nee. "A knowledge of the PRC prior to WTO is going to be important in understanding the PRC post WTO."

Others suggest that while competition in the PRC is likely to pick up once accession occurs, establishing an office in the PRC was already on the agenda and the WTO debate played only a small role in their decision to apply for a licence. "It is difficult to predict accurately the timing or nature of the impact on foreign investment that China's WTO accession will have," says Martin. "Many people seem to be over estimating the consequences of this development. As a general proposition, we are expecting an increase in the level of activity after WTO accession, but our China strategy is not dependent upon that happening," he adds. Dorsey & Whitney's Zhang notes: "With or without WTO, it was important for us to set up an office in the PRC. The fact that the PRC will become a WTO member will make a presence in the PRC itself a more urgent issue for all law firms that provide PRC services."

THE WAY AHEAD

The number of foreign law firms into the PRC market is likely to continue to rise. Their global expertise and experience will combine with the impact of WTO accession to have a positive impact on the development of PRC law.

The increased activity expected after WTO accession will be large enough to sustain the competition between existing foreign and local firms, as well as new competitors that have yet to enter the market. Zhang believes that one current market trend that will continue to grow in importance, is that there will be more cooperation between local and foreign firms where the relationship between the two is complimentary.

Nee agrees and provides that the difference between the two will become blurred. "The market for legal services will grow. There are going to be a lot more lawyers and the distinction between a local firm and an international firm will gradually disappear."