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A US firm may have navigated a way around restrictions on foreign laws firms practising law in China says Jun Wang. But the venture may yet run aground

McDermott Will & Emery (MWE), a global legal firm founded in Chicago, has chosen a different way of entering into China. On 29 January, MWE announced that it had formed an exclusive strategic alliance with a Shanghai local firm, Yuan Da. This arrangement has been called a “bold move” by The Wall Street Journal, given that regulations bar international firms from fully merging with Chinese counterparts.

Restrictions on practising in China               

Opening doors to foreign lawyers is one of the most difficult issues for China in its World Trade Organisation (WTO) accession negotiations and now in bilateral free trade talks. Despite the removal of some barriers through WTO commitments, the Chinese Government still takes a stringent view that foreign firms cannot deal with Chinese law matters, for example, providing any specific advice. Foreign firms are only permitted to refer such matters to local Chinese firms.

The MWE model          

While no specific details of the MWE-Yuan Da deal are disclosed, exploration of the firm’s official statement and US media reports may provide clues about features of this venture. Shanghai Yuan Da Law Firm is licensed by MWE and will be known for marketing purposes as MWE China Offices inside and outside China. The local firm will continue as a separate legal entity owned by its Chinese partners led by Huang Zhonglan and Qian Yi, two star practitioners in Shanghai. The Chinese and American firms will share clients and co-host business seminars but will not share profits. Huang and Qian will become non-voting members of the MWE board and MWE will have non-voting representatives on MWE China Offices’ board. The two firms will also develop shared standards for client service, quality assurance procedures and professional training as well as shared IT and telecommunications infrastructure. As well, the two firms will be treated as one for conflicts purposes, MWE will send its lawyers to Shanghai on a periodic basis, and lawyers at the MWE China offices practise Chinese law and do not surrender their Chinese practising certificates.

Reportedly, both firms have worked out incentives to help each other, although they do not share profits. On the MWE side it avoids the headache of building a start-up China operation and could allow the firm to showcase that it has on-the-ground expertise with around 25 Chinese lawyers. In this way MWE aims to ensure its clients don’t turn to another Western firm with China offices. MWE will also gain Chinese clients and can team up with its Shanghai lawyers to provide US legal service.

Can it overcome the hurdles?          

This model, if it goes well, could be the prevailing one for international firms to make a quick splash in China. Supposedly, the leading authority that the Shanghai firm relies upon is Article 15(4) of the Administrative Regulation for in-China Representative Offices of Foreign Law Firms, which provides that foreign firms may enter into agreements with Chinese firms to maintain long-term referral relationships to deal with legal matters.

Assuming US press release statements are accurate, the MWE model would trigger concerns or scrutiny by local market watchdogs, including the Ministry of Justice (MOJ). This adventurous breakthrough has now been widely circulated by mainstream business media inside China. Although MOJ’s position is unclear at this stage, it does prohibit foreign firms from investing in local firms directly or indirectly. The MOJ does not permit foreign firms to establish associated offices, send its people to Chinese firms to engage in legal service or hold any share equity proprietary rights at local firms. It does not allow foreign firms to have agreements to retain Chinese practising lawyers to engage in practice in the name of foreign firms. It also prohibits agreements for foreign firms’ participation in the management of Chinese firms.

Even if all of these hurdles could be overcome, one obvious difficulty for the MWE model is that the MOJ, in its Administrative Rules governing Law Firm’s Name Registration, requires any Chinese firm intending to have foreign language names to ensure these have the same meaning as its Chinese name or have the same pronunciation as the Chinese name. The firm name should not contain any misleading information to the public. Shanghai Yuan Da Law Firm, in Chinese language, does not have any relevant meaning or pronunciation with MWE China Offices. And it is fairly questionable that there is no misleading message in the Shanghai domestic firm’s English abbreviation: MWE China Offices.
Furthermore, there appears to be a lack of communication between the Shanghai lawyers and Beijing MOJ officials. This is evidenced by Huang’s public comments that his new firm did not need the approval of the Shanghai Lawyers Association or other Chinese authorities for this alliance and he did not seek an outside opinion that this arrangement complied with Chinese law.

Implications for Australian firms           

China’s legal market, according to international law firm Lovells, is worth approximately US$2 ($2.5) billion at present and will reach US$20 ($25.4) billion dollars within 10 years. The MWE model and its follow-up developments deserve close watch by outside Australian firms looking towards China, as well as free trade agreement negotiators in Canberra.

In the context of the Shanghai Lawyers Association’s recent allegation accusing foreign firms of “illegal activities”, the de facto interdependent triangle amongst market regulators and domestic and foreign players in China might not be sustainable. Regulatory rules and compliance with these rules are only part of the dilemma in the immature but highly competitive Chinese market. Australian firms should be opening their eyes to discover other alternative models underway in China in order to export their expertise without too much anxiety of being trapped.

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.

© Moulis Legal 2007