As China’s outbound investment has surged, with several multibillion dollar deals completed in the U.S. in recent years, a new paper suggests the country’s law firms could follow their clients overseas.
“One of the ways in which the leading U.S. and U.K. law firms grew internationally was by following their domestic clients overseas,” Gail J. Hupper, a former research scholar at Harvard Law’s Center on the Legal Profession, notes in a forthcoming paper. “As Chinese law firms gain in sophistication and experience over time, could they not do the same?”
The question of whether Chinese law firms will seek to represent Chinese companies in the U.S. and other countries represents an important business consideration for U.S. law firms: As China’s outbound investment essentially tripled to $45 billion in 2016, many firms have started to reevaluate, or else have already adjusted their China practices to target more of this work.
In August, DLA Piper’s Terence O’Malley, chairman of Asia Committee, explained, “as with many firms, [our practice] has shifted from primarily representing … inbound foreign direct investment … to more outbound investment by Chinese companies.”
Hupper stops short of giving a definitive answer to when or if Chinese law firms will start taking on leading roles in U.S. transactions, but suggests, with many caveats, that it is a possible outcome.
To reach this conclusion, Hupper makes a close analysis of the role that lawyers played in a single deal: China’s Shuanghui International’s $7 billion acquisition of U.S.-pork producer Smithfield Foods in 2013. Although the paper is still in draft form, Hupper said the points outlined below are ready for wider circulation.
By looking at what role lawyers played in the Smithfield-Shuanghui transaction, Hupper aims to decipher the respective expertise and relative importance of the lawyers involved in the deal. She gathered this information from public documents filed with regulatory authorities, press reports, law firm publicity materials as well as three interviews with players involved in the deal.
At least 13 law firms in eight different countries worked on the transaction, according to Hupper. In the deal, U.S. law firms played lead roles, with Simpson Thacher & Bartlett representing Smithfield, and Paul Hastings representing Shuanghui, but the paper notes that lawyers on other continents were essential regardless of their title.
“While the U.S. was an important legal center of gravity for the transaction, the two firms could not possibly have completed the transaction without the participation of lawyers in other jurisdictions, notably China,” she wrote in her paper.
Her basic conclusion is that U.S.-based lawyers played a lead role “engineering the transaction” — drafting legal documents and optimizing the regulatory structure, for example, by making sure the combined entity faced the lowest taxation, and managing normal legal and nonlegal risks.
Lawyers on other continents, notably in Hong Kong and China, played crucial roles bridging the cultural and linguistic gaps between the parties, according to the paper.
For example, Shunaghui’s law firm, Paul Hastings relied on Raymond Li, a partner in its Hong Kong office, to act as the cultural interpreter and help create trust between the parties, she wrote. Hupper wrote that Li played a crucial role in making introductions to the Shanghui executives and the lawyers handling many of the technical tasks.
Trust between the parties was extraordinarily important, according to Hupper, because the parties came from such different backgrounds. For instance, Smithfield’s U.S.-based executives needed to trust that Shunaghui executives were serious in their intentions to buy the company. Because most of its assets are located in China, and thus out of reach of U.S. courts, the company could not rely on the ordinary recourses, such as a lawsuit, if the deal fell through, Hupper notes.
Similarly, Shuanghui executives needed to trust their lawyers to explain the new and foreign regulatory environment that they would be operating in after the acquisition of U.S.-based Smithfield, so that they could determine a correct bidding price, according to the paper.
So while U.S. lawyers handled technical aspects of the deal, lawyers in Hong Kong and also mainland China, helped bridge a cultural gap, and “conceptualized” the deal, according to the paper.
“In this context, cultural and linguistic fluency were as important as expertise and/or qualification in a particular legal system,” Hupper wrote.
To date, no Chinese law firm has been able to muster the technical expertise and resources required to engineer a transaction as complex as the Shunaghui-Smithfield, according to Hupper. But that could change if Chinese firms embark on expansions, and merge with western firms that do have those capabilities.
There are obstacles, according to Hupper: China’s regulation on its lawyers, including restrictions against joint partnerships with foreign firms, prevent them from growing out the resources needed to handle a large transaction. Also, Chinese corporations often choose U.S. and U.K. based firms in order to cast off the impression they hail from a developing country, Hupper writes.
Still, she concludes with the idea that Chinese law firms are slowly rising in the distance:
For reasons having to do with expertise, infrastructure and reputation, both parties chose U.S.-based law firms as their lead counsel. However, a handful of Chinese lawyers also played important roles. As Chinese enterprises and their lawyers gain experience in the world marketplace, one could imagine a situation in which a China-based international law firm would act as the buyer’s lead counsel.