Chinese Law Prof Blog

Editor: Donald C. Clarke
George Washington University Law School

Tuesday, January 27, 2015

Dentons-Dacheng merger: some questions

The New York Times has a report today about a merger between Dentons and Dacheng, a Chinese law firm. According to the report, "[l]ike a number of other large law firms, the partnership will be structured as a Swiss verein, which allows for the companies to maintain separate profit pools." I would really appreciate comments on this post from knowledgeable readers, because I'm mystified by several aspects of the deal. I'll number the paragraphs for ease of reference in the comments.

  1. There have been previous deals between Chinese and law firms that were announced as mergers--for example, between Mallesons and King & Wood--and I don't know the details of those, or whether this one uses the same model. But it does raise interesting questions about whether it really makes sense to call this a "merger" as opposed to a simple agreement to share certain kinds of business.
  2. First, the report says that the firms maintain separate profit pools. It's a strange merger where the two parties don't merge their revenue streams and profit calculations.
  3. Second, if they maintain separate profit pools, then it pretty much follows that they are going to maintain separate decision-making structures. Dentons will continue to decide what clients Dentons will take, how much to charge, etc., and Dacheng will do the same for Dacheng. I don't know this for a fact, but it would be very unusual to separate profits from decision-making power. Again, a strange merger where decision-making remains separate and not unified.
  4. Third, surely Dacheng has not disappeared as a Chinese business organization. Foreign law firms--and although I know almost nothing about the Swiss verein, I'm pretty sure it's Swiss--cannot practice Chinese law, so there has to be a Chinese business entity that remains in existence to engage in the practice of Chinese law. A strange merger where the supposedly merging entities remain in existence.
  5. Fourth, some jurisdictions have rules forbidding lawyers from sharing certain aspects of law firm operations with non-lawyers. I suppose any rules against sharing profits are taken care of by the separate profit pools. I don't know if China has rules about Chinese firms sharing control with foreigners. Again, if the firms are sharing neither profits nor control, in what world does it make sense to call their arrangement a "merger"? The report also speaks of "a unified compensation system." Will that amount to profit-sharing, and is that allowed by all the relevant jurisdictions?
  6. Finally, how much information will be shared between the "merged" firms? Will they develop a unified client database that all attorneys can access? This raises serious issues of information security. It is an unfortunate fact that if the state security folks show up at Dacheng's offices and demand access to information that Dacheng attorneys can access, Dacheng attorneys are in no position to say no. If client information is vulnerable in this way, will Dentons clients feel comfortable about that?

Comments welcome and indeed earnestly solicited.

 

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Comments

First, it sounds like a mutual referring system instead of a true merger as we know it in the industry. The problems of any merger are both business-related and ethics-related. How do you deal with conflicts of interest. This is critical with Chinese state-owned clients. Second, diclsoure rules and attorney-client privileges are not universal. Third, are there malpractice insurance coverage for attorneys of another jurisdiction. Many issues trouble cross-border law firms. In fact, accounting firms are better able to deal with them than law firms.

Posted by: Frankie Fook-lun Leung | Jan 29, 2015 12:34:36 PM

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