Tony Lin sizes up the world’s most lawyered firm and asks what Dentons’ much-hyped tie-up with Dacheng can deliver
Size clearly matters to Joseph Andrew and Elliott Portnoy, the respective chairman and chief executive of Dentons, the international law firm that in January announced a surprise ‘combination’ with Dacheng Law Offices. After all, the tie-up with China’s largest law firm by headcount creates the world’s most lawyered firm.
In talking up the deal, Andrew and Portnoy stress that Dacheng has 44 offices in China, and they plan to keep all of them, from Changchun to Zhoushan.
Their notion is that the Dacheng/Dentons lawyers based in these smaller cities will build relationships with the companies based locally. Over time, as these companies’ ambitions grow, they will be introduced to other lawyers at the firm, onward and upward until Dentons is advising the next Alibaba. Or something like that.
It is a different notion than other major Chinese law firms have had. King & Wood closed many of its provincial offices ahead of and after its 2012 combination with Mallesons Stephen Jaques. A partner at another top Beijing firm says such offices are hard to justify economically – he estimates rates drop by half once a firm is outside the top-tier markets of Beijing, Shanghai and Shenzhen, and another half each tier further down from there. Work on the biggest deals – overseas investments and large capital transactions – also tends to mainly revolve around securing approvals from Beijing-based regulators.
Even if the combined firms’ Chinese lawyers can build the kind of client relationships Andrew and Portnoy envisage, will they actually refer the work to other partners at the firm? The model for virtually all Chinese firms is to have minimal central management and highly autonomous senior partners controlling their own practice groups and budgets. These partners tend to compete for business as much as co-operate, hence the common claim that Chinese firms operate more like barristers than western law firms.
Andrew and Portnoy say a global compensation system that awards points for work referred across the network will incentivise lawyers to share clients. Peng Xuefeng, the founder of Dacheng, also says the Chinese firm is currently undertaking reforms that will create a ‘unified management’ for partners and also encourage specialisation.
A glance at the notable transactions listed on Dacheng’s website highlights the current situation. Deal after deal is described as being handled by one team in one office. If there are matters where different teams and different offices of the firm work together, they seem very rare. Most of the deals are also essentially domestic, such as listings on the National Equities Exchange and Quotations – China’s version of an over-the-counter stock market.
‘Sophisticated clients will know that this doesn’t move Dacheng from being a second-tier firm to a first-tier firm.’
Liu Hongchuan, Broad & Bright
All of this suggests the points system for referrals might not be particularly effective to start with, since there may be limited work to refer across offices or across the network. And changing a culture takes time. Peng says Dentons and Dacheng have agreed on a three-year transition period, during which the latter will try to align its standards of client service and practice group management, and partnership tiers, with those of the international firm.
Such alignment may be harder with its verein-backed model for the union, which preserves separate partnerships. However, it is a necessary move – Dentons’ revenue per lawyer of around $500,000 is five times that of its new partner.
Gaining western operational know-how has been one of the main motivations for Chinese firms to hook up with foreign partners. In that regard, the legal profession is no different from many other modernising Chinese industries, which have often looked to joint ventures with global companies as a means of acquiring technology and expertise. Partnering with an international brand can also add lustre to the Chinese one.
Dacheng’s size – it is already the biggest firm in China with 4,000 lawyers – and breakneck expansion over the last five years have contributed to a downmarket reputation in Beijing legal circles, especially relative to other firms like King & Wood, Jun He and Zhong Lun Law Firm. So the deal with Dentons is likely to give the Dacheng brand a boost. ‘There will definitely be a segment of the market that responds to it,’ one Beijing partner says.
Liu Hongchuan, a partner with Beijing practice Broad & Bright, agrees, though he thinks that won’t happen overnight. ‘Sophisticated clients will know that this doesn’t move Dacheng from being a second-tier firm to a first-tier firm.’
That applies to Dentons as well as Dacheng. The product of successive mergers of generally respected but hardly elite British, American, French and Canadian law firms, Dentons is clearly hoping that both being the world’s largest firm and having the biggest footprint in the world’s largest growth market will elevate its image in the eyes of potential clients around the world.
A look at Dentons’ own recent deal list reveals a firm that is squarely in the middle market, advising on relatively few deals over $500m and focusing to a substantial degree on Eastern European and Middle Eastern markets. There may be synergies as Chinese companies look to these smaller markets, but it is less clear if Dentons is in a strong position to compete for the largest deals going to North America, Australia or Western Europe. Chinese state-owned enterprises have often shown a marked preference for elite Wall Street or City firms on such deals.
And for all the hype about China’s legal market in recent years, foreign advisers have found that restrictive Bar rules, intense competition and a weak domestic regard for the rule of law have made it maddeningly hard to make money in the world’s second largest economy. China’s legal market is estimated to be currently under $8bn in value. That is around 0.1% of GDP, roughly a tenth of the proportionate size of legal markets in most western economies and less than a third of the absolute size of the UK’s.
Dentons and Dacheng seem to understand they are in uncharted territory with their combination. If nothing else, Dentons has finally secured the market differential that has long eluded its constituent parts. Andrew says they haven’t set any targets for revenue or any other metric of success. ‘There’s no playbook for this.’
Tony Lin in Hong Kong