January 22, 2015 / 5:56 PM / 5 years ago

Dentons, China's Dacheng on cusp of forming world's largest law firm

(Reuters) - International law firm Dentons and China’s Dacheng Law Offices have agreed on a merger that is expected to create the world’s largest law firm and would be only the second time a global firm and a domestic Chinese firm have joined forces.

A spokeswoman for Dentons said partnerships of both firms had approved the deal and that China’s Ministry of Justice was expected to sign off on the combination as early as Monday.

The combined firm will count 6,600 lawyers in 120 offices in 50 countries. Dacheng, founded in Beijing in 1992, is already China’s largest firm with more than 4,000 lawyers.

Dentons is the product of successive international mergers involving British firm Denton Wilde Sapte, Chicago’s Sonnenschein Nath & Rosenthal, French firm Salans and Canada’s Fraser Milner Casgrain. The firm handles mainly mid-market deals. The notable transactions listed on its website over the past few months show a particular strength in Eastern European real estate deals, where it has advised clients like Skanska Property Poland and Starwood Capital.

Elliott Portnoy, Dentons global chief executive officer, said the firm aimed to provide service to clients more deeply in China than any of its international competitors. Portnoy said it “can provide Chinese businesses with global ambitions and international clients with interests inside China a reach and depth that simply can’t be found elsewhere.”

Dentons operates as a Swiss verein, meaning it comprises several legally and financially separate partnerships operating under a common brand. Dacheng will also remain a separate entity within the combined firm’s verein.

That structure is necessary because foreign firms are not permitted to practice Chinese law. The 2012 merger between China’s King & Wood and Australia’s Mallesons Stephen Jaques was similarly structured as a verein. The overall wisdom of that merger is still subject to debate almost three years later, but it has been well received in China itself.

The practice ban notwithstanding, many foreign firms with offices in China, including Dentons, have for decades taken advantage of a loophole that allows them to advise multinational clients on “the Chinese legal environment,” meaning they can handle a wide variety of domestic matters short of appearing in court or signing official documents. But in recent years, stung by intense price competition for such “inbound” work, such firms have increasingly sought to advise Chinese companies investing overseas.

The representations listed on Dacheng’s website for December are largely on behalf of state-owned enterprises (SOEs), including BAIC Motor Corp, Shandong Hengyuan Waste Utilization Technology Co Ltd and the China Development Bank.

Lawyers at other Chinese firms said it would not be straightforward to translate Dacheng’s client list into outbound deals for Dentons. On the biggest deals, Chinese SOEs have shown a preference for top-tier New York or London firms, among which Dentons is not usually counted. For example, when state oil giant CNOOC Ltd acquired Canadian energy company Nexen Inc in 2012, it used elite New York firm Davis Polk & Wardwell.

A more direct obstacle to internal referrals could be the prevailing culture at Chinese law firms, where there is typically little centralized management and partners compete with each other for business more than they cooperate.

Then, one of Chinese firms’ strongest motivation in entering into tie-ups with their Western counterparts is the prospect of learning and assimilating Western firm management practices and technology. The more “international” look appeals to clients too.

“Chinese clients do view these moves positively,” said Victor Wang, a partner with Allbright Law Offices in Shanghai who thinks this latest tie-up will shake things up among Chinese firms. “I think a lot of firms here are now asking what they should be doing.”

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