Shanghai permits Sino-foreign law firm alliances in FTZ

The Shanghai Bureau of Justice has issued guidelines that allow for increased cooperation between foreign and domestic law firms in the area. Seen as a step towards legal market liberalisation, the move provides opportunities for both international and PRC firms in the Shanghai Free Trade Zone (FTZ).

The new rules allow law firms to cooperate in two ways: through association and mutual dispatch of lawyers between firms. The Implementing Measures for Associations Between Chinese and Foreign Law Firms in the China (Shanghai) Pilot Free Trade Zone (中国（上海）自由贸易试验区中外律师事务所联营的实施办法) and the Implementing Measures for the Mutual Secondment of Lawyers by Chinese and Foreign Law Firms in the China (Shanghai) Pilot Free Trade Zone to Serve as Legal Counsel (中国（上海）自由贸易试验区中外律师事务所互派律师担任法律顾问的实施办法) were both issued on November 18 2014. More details on implementation are set to be released in September this year.

“This provides the way forward for many foreign firms to be able to provide advice on PRC law under legally recognised arrangements,” said Andrew McGinty, managing partner of Hogan Lovells in Shanghai. This is the first time there has been a breakthrough since CEPA [the Closer Economic Partnership Agreement] in providing a practical way to associate with Chinese law firms.

A win-win situation?

“Global firms will benefit most from this,” said Helen Haixiao Zhang, a partner at Zhong Lun Law Firm and legal counsel to the Shanghai Pudong government. “Some international firms have recently dropped out of the PRC market but a few still have a deep bench there. They may be able to supplement their practice with litigation by tying up with local firms, which is a profit engine in the US but closed off in China.” The development will also have sparked interest in small- or medium-sized boutique firms specialising in areas such as dispute resolution as they can benefit from global platforms, she added.

Hogan Lovells' CEO Steve Immelt has said the firm is considering opportunities to collaborate with Chinese firms in the FTZ under these new rules. The firm has an open mind, but will probably look more at small- to mid-sized ones “since it's always more difficult when you have a large number of partners to get over the line amid different currents of opinion,” McGinty said.

Hubert Tse of Boss & Young questioned the kind of business foreign firms will be bringing in, and whether this will lead to cooperation or competition: “Maybe we'll see more on-the-ground arrangements or partnerships, but are they going to be competing with Chinese firms? Are boundaries going to be extended?”

Two ways to cooperate

The first arrangement allows foreign and local firms to provide joint services on cross-border deals, with the Chinese lawyers advising on PRC law through a shared office.

The other permits overseas and Chinese firms to exchange up to three lawyers on a secondment-like basis for two years. “This could be useful in that a practising Chinese lawyer in our office can sign off on deals and advise on PRC law without our having to go to a Chinese firm,” said McGinty, adding that it will also be helpful the other way around. In the rest of the country, any Chinese lawyer who moves to an international firm has his licence to practise PRC law suspended.

But practitioners agreed this new method would be less useful than forming a joint operation. “The dispatch arrangement is collaboration at a casual level,” said Zhang. “Firms that are more serious will form a cooperation, which allows Chinese lawyers to practise PRC law under a foreign brand name.”

To engage in the association scheme, Chinese law firms must have been established for three years in the form of a partnership, have a minimum of 20 PRC-licensed lawyers, have the ability to provide high quality legal services under an effective management system, be free from any administrative punishments in the past three years and have their headquarters or a branch in Shanghai. International firms must have a representative office in Shanghai that has been established for three years and also be free from any administrative punishments.

All lawyers to be dispatched or seconded through the exchange must have five years of work experience and expertise in both Chinese and foreign affairs.

“The legal market's concern has been the lack of reciprocity in the profession,” said McGinty. “While any Chinese lawyer who wants to be foreign-qualified is able to do so subject to passing the relevant bar exams and meeting other admission requirements, until now foreign lawyers have not been permitted to take the bar exams and be admitted to practice in China. This new scheme at least offers the first channel for foreign firms to team up with Chinese firms since CEPA without the qualification process associated with CEPA.”

Waiting for procedure

The implementing rules contain the official timetables, schedules and procedures, so firms will not be able to register until these are released later this year. But Zhang told China Law & Practice she has seen the rules and that there are gaps. “This is only the beginning, so there are limitations and questions, such as financial and information-sharing considerations,” she said. “This isn't a real integration of firms like in other jurisdictions.”

Tax is likely to be an important consideration with the new structures. McGinty said that the legal market is still waiting for the tax bureau to issue its rules regarding the new collaborations in the FTZ. Chinese lawyers operate as partnerships and typically pay 15-20% tax on a straight pass-through basis to partners and the partnership entity itself does not pay tax. Foreign firms have to be representative offices, are taxed as enterprises and individual lawyers are taxed at rates up to 45%. He said that the arrangement involving association between firms will work as a quasi-joint venture without the creation of a new legal entity, and accounting and liability will be kept separate. The new rules also state that, in the course of the engagement, the partner responsible for a client's loss will be held liable.

MWE China Law Offices, founded by former AllBright Law Offices partners John Huang and Kevin Qian, has an exclusive strategic arrangement with McDermott Will & Emery. This helped the latter, which did not have a China presence before. King & Wood Mallesons, a combination between King & Wood and Australian firm Mallesons Stephen Jacques in 2012, uses a Swiss Verein structure where finances remain separate. The firm is financially integrated in Hong Kong as it cannot be in China. The recently announced Dentons and Dacheng merger will use the same structure.

So far, no firms have formally announced they are going ahead with the FTZ scheme. The implementing rules will provide clearer guidance on procedural issues and restrictions to allow firms to weigh out costs and benefits.

“This is really new and what is proposed so far is only the FTZ version,” said Boss & Young's Tse. “I don't know if this is going to be replicated on a national scale and how it would work.”


By Katherine Jo