If the last millennium saw China as the target for in-bound foreign investment, the 2000s have shown that China is now taking a much bigger role on the international stage, be it in M&A, in equity capital markets or in disputes. With PRC law firms now fielding talented partners who are alumni of top international law firms, much of the inbound corporate work has migrated to these firms and been subject to price pressure. International firms have long seen the trend coming, since China had adopted its "going out" policy in 2001, but the outward foreign direct investment (FDI) flows have only become more sharply focused post 2009 and the global financial crisis, when China remained cash rich while other countries struggled with collapsing capital markets and asset deflation. The numbers alone have made a compelling case for law firms to re-direct their strategy.
While foreign direct investment into China grew in 2013 to almost $118 billion, outbound investment rose to over $90 billion as mainland companies continued their global shopping spree, buying foreign assets, particularly energy and mining and investing in countries with rich natural resources. A Chinese ministry spokesman predicted that China’s overseas investment will exceed FDI by 2016, if not sooner. Among China's outbound destinations, the United States was a top target country, with investments rising to over $4.2 billion through major acquisitions in areas such as aviation, manufacturing, chemical and energy as well as services. In September, shareholders of US pork giant Smithfield Foods agreed to a takeover by China's Shuanghui International, the biggest ever Chinese acquisition of a US company.
Chinese companies have also made several significant investments in strategic areas such as ports and infrastructure in Europe. Chinese state-owned global shipping giant Cosco's concession deal at the Greek port of Piraeus made headlines in 2009. High profile acquisitions of brands such as Geely’s purchase of Volvo in 2010 and in 2013 of Manganese, the maker of the iconic London black cab, have further bolstered China’s credibility as an investor with long-term vision and not just a voracious consumer of natural resources. Privately owned enterprises in China are also expanding overseas, with Fosun International, China’s largest privately-owned conglomerate, leading the charge. The purchase of 1 Chase Manhattan Plaza from JPMorgan and the recent acquisition of Caixa Seguros, Portugal’s largest insurance group, are just a few examples of the big-ticket deals the company has completed.
This is a practice area in which international law firms, especially those with a global presence, can capture significant market share. The mainland law firms have a way to go before they can offer the varied expertise that such large global deals require. The multi-jurisdictional law capability, the expertise in all the attendant practice areas required, such as anti-trust and intellectual property, are strengths that the global law firms have been using as leverage, but deep-seated cultural affinities of the top decision-makers at these mainland corporations have also highlighted that the ideal combination is the sophisticated and holistic practice of a major international firm together with a PRC partner who has the technical credentials, the leadership abilities and the relationship-building skills to capture the work.
Andrew Ruff, Partner of Shearman & Sterling’s Shanghai office says: “We view this as a strong growth area for the firm and have moved steadily to enlarge in particular our Mainland Chinese partner ranks to capture this practice. While there has been some retrenchment in activity recently by both SOEs and financial institutions due to a combination of anti-corruption campaigning, leadership changes and other factors, we view the outbound market as a broad offering with strong growth potential. Provided they can field a combination of a sound team of technical partners on the ground in China and a global platform, international firms will be uniquely positioned to compete for this work particularly as the Chinese institutions populating the outbound market grow in sophistication.”
Firms that have successfully captured a market share of this outbound work have long recognised the need for partners who have long relationships with Chinese business leaders, often dating back to university days. As an example, Clifford Chance was one of the first international law firms to have hired talented mainland Chinese associates, recruiting them since the early 1990s. Peter Charlton, Asia Pacific managing partner for Clifford Chance says: "On outbound investment from China the investors, whether private companies or state owned enterprises, need the expertise of the international firms such as Clifford Chance, no Chinese law firm has anything like the expertise and experience of the top international firms particularly for complicated high value cross border deals. However, it's very important that the international firms also have partners who the Chinese investors trust, who can advise in their own language, have the right cultural awareness and who work as part of a team with the non-Chinese partners to deliver what the Chinese investor requires. We are investing to nurture these lawyers within our firm.”
Chinese corporations recognise the need to take China Inc. to the next level, developing in sophistication and scope. Paul Chen, partner at DLA Piper in their Silicon Valley and New York offices with an enviable client portfolio, makes an extremely good point with this insight: "The Chinese companies we represent value the access to our international network. While having a strong presence in China is still important for purposes of facilitating relationship building and coordinating certain deal issues, I believe that Chinese companies that are going global are also seeking to use their advisors to help build relationships in international markets where they wish to grow. We at DLA Piper are big proponents of introducing our Chinese clients to our lawyers and business contacts in the various jurisdictions in which we operate to assist our clients expand their multinational network and acquire a deeper understanding of local business practices.”
Thus those PRC partners who can utilise the full scope of the firm’s expertise on these global deals will occupy an important strategic role developing that practice and until Chinese law firms can merge with international ones, these international deals will still be dominated by the global firms who can offer multi-jurisdictional capabilities, multi-cultural liaison and the network of business contacts to help China become a truly global player. The mainland Chinese partners who left the major international firms to practice Chinese law are now seriously considering going back into international firms now that the big-ticket deals are moving outward.
Doreen Jaeger-Soong (chairman and managing director)
Doreen recruits at general counsel and partner level and among her most recent placements have been the Asia Pacific general counsel of a bulge bracket bank, the Asia general counsel for a wealth management firm, the ASEAN general counsel for a global conglomerate, the general counsel of a Hong Kong listed company, a partner for the China office of a ‘Magic Circle’ firm, a banking partner for a major international law firm and the chief counsel for Asia for a private equity firm. Doreen leads the Asia business development function and manages and mentors the teams in all offices.
