China has recently seen the setup of its first joint operation between PRC and foreign law firms in the Shanghai Free Trade Zone (FTZ), a breakthrough that could lead to the opening of the country’s legal services market to foreign law firms, said a legal industry expert.
The joint operation was built by Baker & McKenzie and FenXun Partners, with the licensing ceremony held by the Shanghai Bureau of Justice in mid-April.
“The joint operation is the only formal structure under which international and Chinese law firms can jointly execute client work in China under the current PRC regulatory framework,” Zhang Danian, a partner of Baker & McKenzie and the chief representative of its Shanghai office, told China Business Law Journal.
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According to Zhang, in general the FTZ regulations permit an international law firm with a representative office in China and a Chinese law firm with an office in the FTZ to enter into joint operation, subject to approval by the Shanghai Municipal Bureau of Justice.
Baker & McKenzie and FenXun will remain structurally separate and independent under the joint operation model, but they will be able to provide collaborative responses to client needs, jointly execute client matters, exchange know-how and second lawyers between the two firms.
“In my judgment, this is a first step in the ultimate opening of China to the practice of law in China by foreigners, which I expect will occur gradually,” Peter Zeughauser, a consultant of Zeughauser Group, told China Business Law Journal.
“It will be important for the regulatory authorities in China to become comfortable with it … a major like this is probably best accomplished one step at a time.”
Cao Yang, head of the Ministry of Justice Department of Guidance of Work of Lawyers and Public Notaries, reportedly affirmed the importance of carrying out joint operations and mutual secondments in the FTZ between PRC and foreign law firms, expressing his hope that Shanghai would implement the new business models in a way that would enable them to be reproduced and introduced elsewhere.
Zeughauser said that international and PRC firms that choose to build such alliance have the comfort of knowing that China provides a “safe harbour” for them to practice together. “Big law firms and their clients are, generally, risk averse. The FTZ rules provide a pathway for avoiding risk,” he said.
“By organizing the alliance and practising under the FTZ rules, the firms can be sure that their relationship doesn’t violate Chinese laws and regulations that restrict the practice of law by foreigners.”
According to Zhang, their clients have been seeking a one-stop-shop for their Chinese and international legal needs, which is now possible with the joint operation. He said that clients themselves do not need to be based in the FTZ to engage the joint operation in legal services.
Zeughauser said the joint operation model is a big step forward for foreign law firms in China, and for China itself. “It will provide clients with greater peace of mind knowing that their regular counsel will be able to advise them, and at the same time have the benefit of the advice of top Chinese licensed lawyers. Having the combined expertise under one roof will produce great synergy for clients,” he said.
Zhang anticipated “the majority of the work undertaken by the joint operation office will initially be transactional, as the clients that are likely to take advantage of the joint operation will include Baker & McKenzie’s existing multinational clients doing business in China, and FenXun’s Chinese clients doing business overseas.”
Zhang expects a substantial increase in work along with strong growth for both firms in the years to come. “The joint operation will allow us to direct work for Baker & McKenzie’s multinational clients investing and doing business in China to FenXun, and in the meantime, FenXun will be able to introduce its clients to Baker & McKenzie’s 77 offices across the globe when they invest and do business outside of China,” he said.
However, while the FTZ rules grant more freedom, they also place restrictions on the firms forming a joint operation. “Only three lawyers from each firm may be seconded to the other firm. Naturally, this will restrict the amount of legal work that can be accomplished,” Zeughauser said.
In addition, each firm is liable for the other’s mistakes. “So there is tremendous incentive for the firms to choose their partners carefully and to work together closely. This will always be true when two top firms cooperate. But, the Chinese government was very wise to ensure that the regulations encourage the firms to learn from one another and to be careful in their work together.” Zeughauser said.
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