A legal evolution

Following Deng Xiaoping’s reforms China became a land of opportunities for many foreigners wishing to establish businesses and challenge themselves in a new country. Among those pioneers were lawyers whose role was assisting foreign entrepreneurs entering a completely different economic, political and legal system. In this article Carlo D’Andrea, Founding Partner of D’Andrea & Partners, and Chair of the Chamber’s Legal and Competition Working Group in Shanghai, reviews the current operating environment of China’s legal services industry and strongly advocates the changes necessary to make it more accessible to foreign law firms.law-books-291676

Despite China’s rapid development foreign businesses here continue to face new challenges, such as the regulatory environment, restricted market access or even issues relating to the environment or general living conditions. Foreign lawyers in China face a particularly significant obstacle—the freedom to actually practice law.

Over the years, the European Chamber’s Legal and Competition Working Group has stressed these issues in its Position Paper and continues to register the dissatisfaction of the European legal community in China.

How Chinese law has changed

The post-Mao era

The legal profession in modern China is barely 30 years old. The law faculties reopened in 1980 and the first qualification exam was held in 1986. At that time, lawyers were considered as workers of the State, representing and protecting State interests. They lacked experience in managing international legal issues and also were unable to speak foreign languages, including English, which is essential for learning and comprehending international law.

As soon as western companies began to establish branches in China, legal experts came from abroad to help their clients deal with local authorities. Gradually more foreign law firms established on the Mainland and took the lead in commercial and corporate affairs, as well as the foreign investments sector.

An unequal footing

In the European Chamber’s Business Confidence Survey 2014, it was revealed that 90 per cent of European law firms operating in China feel they are treated unfairly by the government compared to domestic Chinese companies.

Historically, the main problems have been that they can’t be admitted to the bar or provide legal advice on Chinese laws and regulations, as they are not Chinese citizens.

In the event of disputes foreign law firms have to find a Chinese lawyer to represent their clients’ interests before the court. This situation forces cooperation between foreign and Chinese lawyers. While undoubtedly fruitful for both parties, it is more so for the Chinese lawyers, who are able to learn more about international law.

The Lawyers Law (律师法), issued in 1996 by the Ministry of Justice and most recently reviewed on 26th October, 2012, did little to advance things. It states that foreign law firms can hire qualified Chinese lawyers, but can only practice foreign or international law. It further stipulated that if a qualified Chinese lawyer is hired by a foreign firm, his/her license shall be suspended, and they cannot practice as an attorney at law in China while working for that office.

In Europe, Chinese lawyers have equal opportunities. In fact any foreigner aspiring to practice law in any European country will be admitted to the bar. There are no limitations based on nationality.

anti_monopoly_lawChinese firms to conquer the West?

Over the past decade many Chinese companies have taken advantage of the economic downturn to ‘go global’ and the number of Chinese companies investing abroad is increasing each year. This has had an effect on the activities of foreign law firms who are increasingly employed by Chinese entrepreneurs to give advice on outbound investments to Europe, the USA or Australia.

It is now a common occurrence to read that a Chinese company has acquired an important foreign brand in the automotive industry or in the IT sector, but this wave of acquisitions raises concerns for European lawyers as the trend also includes the expansion of Chinese law firms in Europe.

These mergers allow for an easier approach to new markets by avoiding challenges related to relocation or language. However, in many cases a merger can hide an acquisition set up by a stronger Chinese law firm to help another suffering from economic problems. In this situation the ‘acquired’ firm can lose its independence and personality.

In the last few years many mergers between Chinese law firms and those from Europe has led to the creation of new ‘super’ firms with more than 3,000 lawyers. This creates extremely tough competition for the small- and medium-sized firms that form the backbone of the legal society on the Old Continent.

law-books-291692Glimmers of hope

Recently some things have slowly started to change. During the last few years the Shanghai Bar Association has invited some European Chamber members to join as ‘special members’. Although this initiative is welcomed by the Legal and Competition Working Group, and the legal community in general, it is still not enough. At the moment, the status of ‘special member’ only allows foreign lawyers to attend training courses, meeting and seminars on Chinese law, and exchange experience and knowledge with Chinese ‘colleagues’.

In 1995, the Ministry of Foreign Trade and Economic Cooperation promulgated the first law on the Approval and Control of Resident Representative Offices of Foreign Enterprises, which was subsequently reviewed in 2012 by the State Council of the People’s Republic of China (PRC). It stated that foreign law firms can establish representative offices in China if they obtain the relevant business license from the Ministry of Justice. However, since the regulation is not enough clear, many foreign offices opted to set up consultancy companies instead.

On 29th August, 2013, Mainland China and Hong Kong signed Supplement X to the Closer Economic Partnership Arrangement (CEPA). It allows representative offices set up by Hong Kong law firms in Guangdong Province to hire qualified Chinese lawyers as consultants to advise on issues relating to Chinese law. Although Hong Kong lawyers in these offices are not allowed to practice PRC law, the representative offices can handle it and this will encourage businesses in Mainland China.

According to a new pilot work plan, which will only be in force in the China (Shanghai) Pilot Free Trade Zone (CSPFTZ) for the time being, Chinese and foreign law firms can establish cooperation on contractual basis. They will remain financially independent and separate entities but they can work together to provide better legal advice to their clients. Furthermore, representative offices of foreign firms can sign agreements with Chinese firms in order to second lawyers to each other’s offices. Still only PRC lawyers can provide legal advice on Chinese law, but this cooperation allows both sides to offer more value-added professional services.

These recent changes are certainly encouraging. They could indicate a willingness on the part of Chinese authorities to lift the current market restrictions placed on foreign law firms and allow them equal opportunities to practice law all over Mainland China.

Advocating change

The Legal and Competition Working Group has consistently made important key recommendations to the Chinese authorities regarding the current restrictions placed on foreign legal services:

  • Extend the CEPA between Hong Kong and Mainland China to foreign law firms and permit the creation of Joint Law Ventures between foreign and Chinese law firms.
  • Allow foreign law firms to practice PRC law through the employment of individuals who are qualified in PRC law and allow passport holders from European Union countries to sit for the bar exam in the PRC as long as they meet all required qualifications.
  • Allow lawyers in foreign law firms to represent their clients before Chinese government authorities.

These requests are not coming from just the legal community per se, they are also echoed by individuals and organisations across the entire foreign business community in China who are seeking more freedom and efficiency to conduct international business. As legal professionals it is our hope that the Chinese legislators will take these recommendations on board and push for the necessary reforms. In the meantime the legal community should continue to seek meaningful dialogue with Chinese authorities.

With offices in China in Shanghai, Nanjing and Zhuhai and a network of professionals around the world, D’Andrea & Partners assists European companies in China as well as Chinese companies wishing to enter the global market through the establishment of foreign-invested enterprises or by mergers and acquisitions. The team is composed of both Chinese and European professionals, many of whom have experience of legal practice outside their home country.