Taken from LexisNexis Martindale-Hubbell’s Counsel to Counsel forum, “Corporate legal services in China: Reducing legal risks and delivering business-focused advice with little time or resources"

Even for seasoned international lawyers, China is regarded as something of a mystery. While the country is fast becoming a magnet for inward investment, many Westerners are unsure on how to work with Chinese companies, fearing unbridgeable cultural differences. In reality, the aspirations and concerns of Chinese in-house lawyer are striking similar to those in any other part of the world. They wonder how best to manage legal risk with limited resources, aspire to build their internal credibility with business managers, and debate whether to instruct local or global law firms. These were some of the issues discussed in the recent LexisNexis® Martindale-Hubbell® Counsel to Counsel forum in Beijing.

A complex market

While Westerners tend to regard China as a developing country, Chinese in-house lawyers already appear familiar with Western legal principles and business methods. While many of the speakers at the conference officially worked for local Chinese entities, a large number either reported directly to management based in the US or EU, or to “westernised” jurisdictions within the region, such as Hong Kong or Singapore. As a result, many speakers were already familiar with the need to comply with international legal norms.

Of course, in today’s international business environment, many senior counsels are responsible for reporting outside of their home jurisdiction - with all the logistical and cultural issues that that entails. Nevertheless, working for a Chinese entity often comes with its own additional complications. Here, the domestic market is so huge and geographically diverse that simply managing a “local” legal function is often as challenging as running a cross-border operation. One speaker was fairly typically of the convoluted way in which Asian legal functions are constructed. Not only did each of their company’s businesses units have their own separate legal functions, each business also had separate legal office in each of the major cities in which they operated. In terms of reporting, the legal officer reported both internationally to the group legal function in Hong Kong, and also directly to the local chief executive officer in China.

For law firms wishing to win new business in the Chinese market, it is important to bear this geographical reality in mind. Is it actually necessary to open a new office in Shanghai or Beijing, or will this simply result in you liaising with a regional general counsel who works out of Hong Kong anyway? Are local Chinese counsels actually responsible for the whole of their country, or merely a region or city? And who do they ultimate report to? A legal function based outside the country, or a regional CEO based within a major Chinese city?

Building credibility

While in-house lawyers are becoming more prevalent in China, several speakers indicated that, as a profession, they were a long way from having the “special status” within a company that gave them regular access to the company’s senior management. Legally, while in-house counsel can appear in court, they are not entitled to take on the professional title of lawyer. As a result, few speakers said they reported directly to their local chief executive officer. Instead, the chief financial officer was a more common “head of department”.

As a result, Chinese in-house lawyers must build their credibility on the basis of their ability and personality, rather than because they enjoy a privileged status within a company. At the meeting several speakers said they had achieved this, simply by working extremely hard to prove their worth. “When I was a young lawyer, the business people treated me like I was a business administrator,” said one speaker. “By working hard, and putting in the overtime, I gained the trust of the business people. As counsel, you should make a point of going to dinner with them rather than stopping in a hotel room by yourself. They must become aware of your presence.” Another said: “You have to show wiliness to take part in board meetings, and to prepare for them properly,” said Ralph Ybema, who is also a member of board of directors of at Hong Kong-listed Chinese company, CSMC Technologies. “If you disagree with a proposal by your CEO, make sure you can give them an alternative option – otherwise you will not be invited to the meeting again.” Mr Ybema, who is also president of the Hong Kong Corporate Counsel Association, then went on to suggest that new in-house counsel should consider seeking the advice of their counterparts in small local companies. These counsel often had a more rounded experience and comprehensive understanding of working in an in-house legal function, compared with lawyers who worked for very large corporations.

As well as building personal credibility, several speakers advocated mechanisms which made it structurally impossible for a company’s management to bypass the company’s legal department. “Some departments do not dare to progress a project without a signature from the legal department,” said one speaker. “Without that signature, they cannot get reimbursed for their expenditure from the company’s financial department.” However, Mr Ybema warned that, in order to gain internal credibility, the legal function must not act as a bottleneck for their employers’ commercial objectives. “If all of our company’s contracts had to be checked by the legal department, they would have so much work to do that they couldn’t complete anything,” he said. “There had to be a limit to what you can do.”

Managing risk

Previously counsel to counsel sessions have focused on the problems of offering legal services in China - specifically identifying and enforcing intellectual property rights. This concern was repeated at this session by Stephen A. Bent, a life sciences partner at the Washington law firm Foley & Lardner LLP. He said that many companies – including Chinese companies - did not adequately monitor the creation and value of their IP assets, and therefore had no way of identify their value in case of dispute.

Several other speakers highlighted more general concerns in relation to doing business in China: One claimed their employer expected them to do exactly what they wanted, rather than what they felt was right. As a result, they were not valued as an “independent” or “objective” advisor – the traditional position of a lawyer in Western legal culture. Instead, contract negotiations were regarded as a game “to set a trap to trick our counterparts”, rather than the coming together of commercial objectives. Although the use of bribes was officially discouraged, it was common knowledge that they continued to take place. Also, counsel accused company managers – many of whom were retired members of the communist party – of simply not caring about observing legal niceties.

Of course, many of these accusations can also be lodged at Western companies, so it may be unfair to single out Chinese companies as being particularly cavalier in their approach to risk. Indeed, other speakers said the position was improving, as local companies seek to work with Western counterparts. Even where Western rules governing transparency and honesty were not legally enforceable in China, many Western companies insist that their local “partners” comply with these rules as a prerequisite for doing business with them. “We explain to local companies that, if they want to join a Western group of companies or sell their products under our company name, they have to adhere to the acquiring company’s standards,” said an attending corporate lawyer. In several situations, counsel reported that the risk of “reputation damage” to Western investors was effectively leading to private enforcement of Western regulatory standards.

Of course, Western standards may not always be appropriate for all matters, particularly when companies are required to comply with specific laws. Counsel must therefore be sensitive to which company policies should be applied globally, and in which situations local laws must take precedence. However, whatever standards are applied, counsel need not jealously protect their role as compliance enforcers. While it is not reasonable to expect other employees to act as surrogate lawyers, they can often be trained to enforce compliance on counsel’s behalf. This can “free up” counsel from becoming bogged down in routine compliance issues, and instead concentrate on more important matters.

Internal or external advice?

As the local legal functions of multinational companies become more established, in-house lawyers have become more adept at handling significant legal matters themselves. Several speakers said they were proud to regard themselves as every bit as competent as the best private practice lawyers, while also having the extra benefit of knowing their business inside and out. “By doing more work in-house, we are saving costs for the company and raising our status,” said one participant. Another said: “Our annual and quarterly reports used to be handled by outside counsel. Now, it is members of my department that attend the key meetings and write the reports.”

Yet, while Chinese in-house lawyers are becoming increasing confident in their own abilities, the quality of external law firms is also increasing. In addition to the well-known US and UK law firms, an increasing number of Hong Kong and indigenous Chinese practices now offer commercial legal advice. “In the past, Chinese firms took up domestic cases, while the international firms took on the foreign ones,” said one speaker. “This has now changed. Many foreign firms now act on internal matters, while Chinese lawyers who have worked in the US or London have established their own local firms. The Chinese market has become very international, very quickly.”

As a result of these changes, Chinese counsels now face the same bewildering choice of outside advisers as their Western counterparts. Several spoke favourably of both local and international firms, saying there was little difference in quality between them. Of course, as in other countries – local firms tended to be cheaper, and more adept as working in local dialects. But generally, the mood of the meeting was that both types of law firm offered their own unique advantages.

Which ever type of law firm they select, several speakers re-enforced the often-repeated statement that the legal department should take sole responsibly for instructing them. “Under no circumstances should business units give instructions to outside lawyers. I tell my local counsels that they cannot compromise on this matter,” said one speaker. “If there are problems with the advice we are given, or if cost concerns are raised, we have to be clear who is responsible. “

Takeaways

■ Do not assume that, although China remains a developing market, that local counsel are not familiar with Western legal principles. Many report directly to foreign managers, and will be tasked with enforcing global standards of practice.

■ Because Chinese counsel are not classed as “lawyers” in the strictest sense of the word, they must develop their credibility by their expertise and efforts, rather than because of their professional title alone.

■ Legal and reputational risk is a serious matter in the China – as in any other country. Global policies can help minimise that risk, but compliance with local laws must always take precedence. Pre-existing barriers between “in-house” and “outside” legal work, and “international” and “local” law firms are breaking down. While counsels now face a bewildering range of options for obtaining legal advice, quality is no longer in short supply.

For more information on LexisNexis Martindale-Hubbell’s Counsel to Counsel series, please visit http://c2c.martindale.com

Last updated -15 August 07

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