China's Legal Scene: Reform and the Race for Business

The career of Yingxi Fu-Tomlinson, the Managing Partner of the Shanghai office of New York firm Kaye Scholer LLP epitomizes such changes. In the late 1970s Fu-Tomlinson, a Shanghai native, earned a salary of US$4 per month selling sewing kits in a Shanghai department store. "Believe it or not, at the time I had what was considered a good job," she says. And she was lucky; her brother had been sent to the countryside to engage in manual labour as part of a re-education campaign along with millions of other people.

As attitudes and government goals changed after Chairman Mao's death in 1976 and with the beginning of reforms in 1978, the legal profession was resurrected and Fu-Tomlinson pursued a law degree. She later went on to earn a JD degree and practice in the US for over six years before returning to Hong Kong in late 1995, and then to Shanghai in 1998 to set up Kaye Scholer's office there. The firm is now an established component of the legal scene in the "new" China: a society that is engaging with the world and rapidly relegating the past to the dustbin.

The first foreign law firm licences were granted by the Ministry of Justice in 1992. Between 1978 and 1992, no foreign law firms were allowed to offer legal advice to clients in China. In the same period, it is estimated that 40,000 foreign investment enterprises (the main legal form of foreign investment recognized under PRC law, commonly known as FIEs) were established. Thereafter, things really took off, with 60,000 FIEs being established in 1993, and by 1994 the total number of FIEs in China had leapt to about 300,000. In part it seems that the Ministry of Justice's rationale for issuing the first licences was that FIEs would be able to use the firms' legal expertise and to keep up with the spiralling levels of foreign investment.

During the 1980s, most client work for companies getting into China was handled from the Hong Kong offices of international law firms and by a delicate balancing act within China: offering legal services without official sanction, but with a measure of official tolerance. Among the earliest entrants were Illinois-based Baker & McKenzie, whose China practice was largely set up by Michael Moser (who is now in UK firm Freshfields Bruckhaus Deringer's Hong Kong office), and Coudert Brothers, with Jerome Cohen (now Of Counsel at New York's Paul, Weiss, Rifkind Wharton & Garrison) setting up the firm's first China presence. Other early entrants offering China advice included New York's Shearman & Sterling; Paul, Weiss, Rifkind, Wharton & Garrison; Denton Wilde Sapte; Adamas; and Gide Loyrette Nouel.

In the 10 years since the first representative office licences were issued, most major law firms from North America, Europe and Australia have set up China practices. Though considerable restrictions on their China work still remain, they offer a full range of corporate practice services for their clients.

There are today more than 125 foreign law firms working in China. In addition, there are an estimated 10,000 domestic law firms and 110,000 Chinese lawyers. The local firms run the gamut of professionalism and size, from one-man operations offering limited litigation practices to large commercial law firms representing big multinationals working in China. The latter are staffed by experienced lawyers, both foreign and locally educated, with a wealth of experience in handling all aspects of corporate practice and foreign direct investment issues.

Legal work in China in some measure does not differ from other foreign business opportunities in China: there is plenty of hype about great potential and some big success stories, but the reality is a largely immature market years behind the economic and legal development of most law firm's home countries.

Though representative offices of foreign law firms number more than 100, most are "outpost" offices, with minimal staff and limited client bases. Similarly, of the thousands of Chinese law firms across the country, most are engaged in "contentious" services and serve local clients without much, if any, interaction with foreign parties. Only a handful of Chinese law firms, concentrated largely in Beijing, Shanghai and the major cities in Guangdong province, have made the leap and gained international clients and international recognition. These firms have usually been driven by extraordinary personalities who have been among the vanguard of exceptional new Chinese lawyers.

The International Firms

US Firms

Among the early entrants to the China market mentioned above, Paul, Weiss, Rifkind, Wharton & Garrison maintains a strong practice from its Beijing office and is one of the best known of the 30-plus US law firms with a China presence. The firm's practice covers a range of areas, including foreign direct investment, the increasingly "hot" area of mergers and acquisitions (M&A), private equity transactions, project finance (especially large infrastructure projects), capital markets and litigation.

The firm's Beijing office is led by Nicholas Howson, who has recently returned to Beijing full time after an 18-month swing shift between the firm's Beijing and New York offices. The China practice is actively managed through both Beijing and Hong Kong, with strong involvement from counsel Lester Ross in Beijing and Hong Kong-based partners Jeanette Chan (telecoms and FDI), Jack Lange (private equity and infrastructure) and Fred Kinmonth (Hong Kong capital markets and large infrastructure projects).

The firm has been busy with some major transactions. Among the biggest was last summer's AOL Time Warner