Once seen as the next big thing for all self-respecting international law firms, China is now seeing a wave of retrenchment by US firms, with Morrison Foerster the latest to close an office in Beijing – Alex Ryan spoke to those who know the market to find out why
As statements of intent go, they don’t come much bolder than Dentons’ groundbreaking 2015 tie-up with China’s Dacheng. In one move the firm became the biggest in the world by headcount, with the verein combination bringing together more than 6,500 lawyers and granting Dentons access to what was then seen as the must-have market for truly global firms, dwarfing the efforts of many UK and US players to build up a presence in the country.
However, less than a decade since that deal, new fears around data privacy and cyber security in China have reached such heights that no fewer than six US firms have closed offices in either Beijing or Shanghai since Dentons called time on the tie-up last August, on top of three others calling it quits earlier in 2023 (see box, below).
The latest is Morrison Foerster, which this week confirmed it is winding down its Beijing base. In a statement, the firm said that its Beijing lease was due to terminate later this year, and that ‘nearly all’ of its work for clients in China was already being handled by its offices in Shanghai, Hong Kong and elsewhere. The process of closing the office is expected to be completed by the autumn.
In addition, Winston & Strawn closed in Hong Kong earlier this year, while Mayer Brown ended its longstanding combination with Hong Kong’s Johnson Stokes & Master in May.
On the rationale for the split from Dacheng, Dentons global chief executive Elliott Portnoy sets out the central issue in plain terms. ‘Clients come to a law firm to solve their most important confidential problems,’ he explains. ‘If we cannot solve that problem or advance that highly sensitive and confidential business opportunity with an assurance that the information they have shared with us remains confidential, then we are literally unable to meet one of our most important obligations.’
‘The current regulatory framework in China imposes on lawyers in China a set of obligations that are inconsistent with those best practices, such that if the government were to seek information about client business activities, client data, or other confidential information, it is a legal obligation imposed on a Chinese lawyer to share that information with the government.’
‘If we cannot provide assurance that the information clients share with us remains confidential, then we are literally unable to meet one of our most important obligations.’ Elliott Portnoy, Dentons
China passed its revised Counterespionage Law on 26 April 2023, with the US National Counterintelligence and Security Center stating that the new law raised the risk that: ‘any documents, data, materials, or items could be considered relevant to PRC national security due to ambiguities in the law.’
The concerns appear well-founded. The Chinese government has already raided the offices of multiple US-headquartered consulting companies, including a police visit to Bain & Co’s Shanghai office on the same day the new law was passed.
While to date no international law firms have been publicly reported to have been raided, some are concerned that it is only a matter of time.
‘There is no limit about which I am aware,’ says one partner. ‘Everything in your server is subject to review and access by regulatory authorities, simply on request.’
While most firms closing offices have been reluctant to comment on their China operations, all have so far opted to refocus on other offices in the region rather than closing altogether.
Indeed, despite the challenges and concerns around the Chinese regulatory regime UK firms have yet to announce similar plans to close, with some actively continuing to expand in China. HFW and Bird & Bird, for example, both opened in tech haven Shenzhen in the second half of last year.
But there are concerns that even Hong Kong’s position may come under threat in future, with some partners pointing to the territory’s new Article 23 national security law – which relates to what the Chinese government views as espionage – as a potential challenge.
One recruiter says there is already a sense of government intrusion casting doubts over the island’s prospects, pointing out: ‘Hong Kong has been tainted by the same brush.’ Another adds: ‘It’s just not as free a market as it used to be.’
It was these concerns around Hong Kong and China that prompted Eversheds Sutherland to shift its approach to the region when it announced an exclusive referral agreement with APAC leader King & Wood Mallesons in July last year.
‘We felt a referral agreement with one of – if not the best – law firms in China was a more sensible strategy than trying to build offices in China in a changing regulatory and geopolitical world,’ the transatlantic firm’s co-chief executive officer Lee Ranson tells Legal Business.
Commenting more broadly on the shift in firms’ approach to China, he expands: ‘Some of it is a response to lower activity levels. Some of it is a response to changing geopolitical dynamics, which have meant that China isn’t considered at the heart of strategy for US firms in particular. And some of it is concerns around issues like data.’
Despite these concerns, he stresses: ‘It’s very difficult to see how firms can have a long-term, realistic Asia strategy that doesn’t involve China in one form or another. China is the world’s second largest economy; our clients can’t ignore that. But they do need a different type of service than what was provided five or ten years ago. Our relationship with KWM gives us the resources to meet those changing needs.’
Whether more firms go down the referral route remains to be seen, but even Portnoy acknowledges that ‘the time may come when China is resurgent, and businesses may want to staff up or refocus their attention on China.’
As firms grapple with their approach to China and Hong Kong, some suggest the region’s challenges will likely produce a pivot from firms towards other countries in Asia, such as Singapore and potentially India. Orrick explicitly mentioned its existing Singapore office as part of the statement on its China closures, while Proskauer opened in Singapore last year, the same year it closed in Beijing.
‘It’s very difficult to see how firms can have an Asia strategy that doesn’t involve China. But they do need a different type of service than what was provided five or ten years ago.’ Lee Ranson, Eversheds Sutherland
‘Broad geopolitical conditions in the last four or five years have made doing business in China more difficult,’ says Ashish Raivadera, managing director for South Asia in the partner practice group and Singapore office founder at Major, Lindsey & Africa. ‘American law firms in particular find it an increasing challenge to do business in China.’ He adds: ‘We’ve seen more firms coming to Singapore, more of an investment appetite to put bodies in Singapore rather than in Hong Kong and China, and more looking at Asia through a pan-Asian lens rather than solely through a Chinese lens.’
‘That many companies are pivoting their Asia-Pacific businesses towards other countries is good news for us,’ says Portnoy. ‘We’re the only global law firm in India, and we have a very strong presence in many of the markets in the region that clients in the region are quietly or not so quietly shifting their focus to.’
Raivadera concludes: ‘We’re in a phase at the moment where big American firms who are going gangbusters in the US are saying, “Why are we active in these Asian markets when we’re less profitable there?” But these questions have been asked as long as I’ve been in this business. We talk to clients about the concept of “but-for” revenue: the revenue that you wouldn’t win from clients in the US and elsewhere if you didn’t have offices and a presence in Asia.’
alexander.ryan@legalease.co.uk
Firms readjusting operations in China
| Firm | Details | Date | Remaining Greater China offices |
|---|---|---|---|
| Perkins Coie | Closed Shanghai office | March 2023 | Beijing |
| Proskauer* | Closed Beijing office | June 2023 | Hong Kong |
| Ropes & Gray* | Relocated operations from Shanghai to Hong Kong | June 2023 | Hong Kong |
| Dentons | Ended partnership with Dacheng | August 2023 | Hong Kong |
| Latham & Watkins | Closed Shanghai office; all lawyers relocated to a larger Beijing office | August 2023 | Beijing and Hong Kong |
| Akin | Closed Beijing office | December 2023 | Hong Kong |
| Weil | Closed Beijing office | December 2023 | Shanghai and Hong Kong |
| Winston & Strawn* | Closed Hong Kong office | February 2024 | Shanghai |
| Orrick | Closed Shanghai and Taipei offices | March 2024 | Beijing |
| Mayer Brown | Ended partnership with Johnson Stokes & Master | May 2024 | Beijing and Shanghai (representative offices) |
| Sidley Austin | Closed Shanghai office | May 2024 | Beijing and Hong Kong |
| Morrison Foerster | Closed Beijing office | June 2024 | Shanghai and Hong Kong |
*Firm did not respond to request for comment.