Features

On 6 February, delegates from Guangdong and Hong Kong governments held the 14th Work Meeting in Guangzhou to discuss ways to further the implementation of the Framework Plan for the Reform and Development of the Pearl River Delta (the ‘Framework’) with joint efforts. Under the Framework, which has created immense opportunities for the long term development of Hong Kong and the Pearl River Delta, the relevant needs of infrastructure planning in Guangdong, Hong Kong and Macau will be more rationally balanced. In the finance sector, financial authorities from Hong Kong and Guangdong discussed ways to deepen exchanges involving financial institutions, tools, funds and talent as the need for cross-border legal services will invariably be on the rise.

Studies show that most client bases and opportunities, in connection with legal services, originate from two major economic growth engines of China, one of which is Guangdong Province, which is located in the Pearl River Delta. Another equally important message from the recent Cross Strait Four Regions Lawyers Summit is that small- and medium-sized law firms in Hong Kong should take advantage of their geographical proximity to the Mainland, especially Guangdong Province, to set up associated firms or representative offices there. At the annual brainstorming session held by the Mainland Legal Affairs Committee of the Law Society of Hong Kong (LSHK) in January 2010, it was also agreed that Hong Kong should further step up cooperation with Guangdong Province in legal services. A question then arises, ‘how can small- and medium-sized
law firms in Hong Kong grasp the opportunities and diversify into the Mainland legal services market?’ I believe that such law firms can make appropriate arrangements that suit their own resources, capabilities and criteria to develop the Mainland market and reap very respectable returns.

In 2004, my law firm established a Mainland office in Guangzhou and, in November last year, went into association with Guangdong Right Word Law Firm under the CEPA framework following the registration and approval by the Ministry of Justice (MOJ). In this article, I would like to share some of my own experience in developing law business in the Mainland.

How do you do it?

Conditions for establishing representative offices We all know that the Mainland market has a huge growth potential but how do you take the first step to enter this market? I believe you should first set up a representative office in the Mainland, as this is one of the preconditions for entering the Mainland legal services market. Under the Administrative Measures for the Representative Offices of the Law Firms of the Hong Kong Special Administrative Region and Macao Special Administrative Region Stationed in the Mainland (the ‘Administrative Measures’) issued by the MOJ, the following conditions should be met in order to set up representative offices in
the Mainland:

1. The law firm shall be in practice lawfully in the Hong Kong SAR, and has no record of any breach of professional ethics or of codes of conduct;
2. The representatives of the representative office shall be practising lawyers and members of LSHK, and shall have been practising for not less than two years outside Mainland China, and shall not have any criminal record or any record of breach of professional ethics or codes of conduct. Among the representatives, the chief representative shall have practised outside Mainland China for not less than three years; and
3. There shall be genuine needs to establish representative offices in Mainland China to provide legal services.

Under CEPA, requirements for Hong Kong law firms seeking to set up their Mainland offices have been gradually relaxed. For example, representatives of representative offices of Hong Kong law firms in the Mainland no longer need to satisfy a specified minimum period of stay there. Currently, any Hong Kong law firm can apply to the MOJ for the setting up of its representative office in the Mainland, as long as the firm and the representatives of its Mainland office satisfy the three conditions listed above.

Documents required for setting up representative offices
Under the Administrative Measures, any applicant seeking to set up a representative office in the Mainland has to submit the following documents to the local judicial department (bureau) where the representative office intends to be domiciled:

1 The application form signed by the main principal of the law firm for establishing the representative office and the appointment of representatives;
2. Documents proving that the law firm has been legally set up in the
Hong Kong SAR;
3. The partnership agreement or articles of association of the law firm and the names of its principals or partners;
4. Letters of authorization for prospective representatives, and the affirmation letter proving that the prospective chief representative is the partner (or equivalent personnel) of the law firm;
5. Documents proving the professional qualifications of all prospective representatives; documents proving that the prospective chief representative has practised for not less than three years outside of Mainland China and the other prospective representatives have practised outside Mainland China for not less than two years;
6. Documents issued by the LSHK certifying all prospective representatives are members of the LSHK; and
7. Documents issued by the LSHK certifying that neither the law firm nor any of its prospective representatives has any criminal record, or been subject to any punishment for breach of professional ethics or codes of conduct. These documents and materials should be written in Chinese or accompanied by Chinese translations and bound in triplicate. They should also be attested by a China-appointed attesting officer.

Starting the business
Upon obtaining approval, the head office in Hong Kong should start
managing its representative office.

Establishing the infrastructure
First of all, you will need to recruit the local staff, including front desk
staff, accountants, cashiers and other law supporting staff. You should recruit and allocate the right people according to the business and development plan of your firm. Computers and other office equipment should be in place. You may also need to think about installing customised computer management software, designing your own computer system and developing your standard hardware facilities.

File management
We leveraged our experience in filing management in Hong Kong and established standard procedures and guidelines for opening, processing and closing documents, and improved on the relevant filing management model.

Tax arrangements
The tax system between the Mainland and Hong Kong is vastly different; the former has a more complex system of taxes and tax rates. However, thanks to lobbying efforts, Mainland tax authorities have been offering special favorable policies for representative offices
of Hong Kong law firms in the Mainland and have adopted tax collection approaches that are different from those for representative
offices of ordinary companies. In addition, these representative offices are allowed to charge their clients in the Mainland and issue lawful invoices. However from 2010 onwards, Mainland tax authorities will adopt ‘taxation based on audit’ for domestic law firms instead of ‘taxation with levy’ (or ‘taxation on fixed charge’). Due to the particular
environment of the legal profession, it is generally believed by Mainland lawyers that this shift in taxation will have a great impact on the law business. It is not clear whether the tax authorities will change
the taxation method for representative offices of Hong Kong law firms in the Mainland, but we believe that it has become even more important to manage day-to-day income and expenditure with the help of suitable and advanced accounting management applications.

Building pipelines
When Hong Kong law firms have set up offices in the Mainland, it will be easier for them to strengthen their networking and business cooperation with local lawyers, resulting in more business and referral opportunities. In addition, people from the representative office can attend various events organised by local lawyers’ associations and actively participate by providing seminars for local lawyers’ associations or lawyers, which provide them with an opportunity to introduce their counterparts to the legal services sector in Hong Kong and explain the strengths of their own firms. They can also visit their local counterparts regularly and engage in communication with various types of law firms and Mainland lawyers that have different expertise. Furthermore, they can join the local chambers of commerce, actively promote the best products and services of their law firms and participate in various promotional activities.

Moreover, representative offices of Hong Kong law firms in the Mainland will be able to study their own core practices in line with the needs of their clients, and adjust or expand the business scope of the firms, as appropriate, in response to changes in the market. Our experience gained from these years of operation show that Mainland representative offices can help provide and create the following categories of law business.

China-appointed attesting services
Currently, government authorities and public institutions in the Mainland such as courts, administrations for industry and commerce,
the property administration bureau, notary offices and banks usually require and accept certified documents attested by Mainland-appointed attesting officers for Hong Kong documents provided by Hong Kong companies or residents. Under CEPA, in particular, the qualifications of Hong Kong companies or citizens that meet certain conditions need to be verified by Mainland-appointed attesting officers. This will create an enormous market demand and legal business opportunities for Hong Kong law firms, especially those that have set up their representative office in the Mainland.

Incorporation of Hong Kong companies and secretarial services
In recent years, the Chinese government has adopted a policy of encouraging companies to ‘go out’ (ie to go outside of the Mainland and become international) as Chinese enterprises have gained significant financial strength. Due to its free-market status and geographical convenience, Hong Kong has become the destination of choice for Chinese businesses, thus giving rise to great demand for legal services that help to incorporate Hong Kong companies. Their reputation and professional standards will put law firms in a more advantageous position vis-à-vis ordinary secretarial service providers and make them the preferred choice for Mainland clients.

Immigration services
Immigration practice has always been very well received in the Mainland. As Hong Kong has implemented an investment-based immigration policy in recent years, many Mainland Chinese citizens have chosen to migrate to Hong Kong indirectly by becoming
residents of a third country first. This has also created quite a lot of business opportunities.

Commercial work
There are always many business opportunities in the commercial field including transfers of company equity, mergers, restructuring, projectbased cooperation, finance and listing. As the economic environment evolves, such activities will become even more frequent.

Intellectual property practice
Issues concerning trade marks, applications for patent registration and intellectual property protection are also on the rise.

Family law and probate
The number of cases concerning marriage, family and inheritance will also increase, as the establishment of a representative office brings more convenience in dealing with such cases.

Pricing
Hong Kong-related litigation is not uncommon, with many hearings or mediations taking place in Hong Kong. However, how to structure fees is a form of art. While Mainland law firms can adopt fixed fee, time-based charges or even risk-based pricing (or contingency fees which is quite common in the Mainland), Hong Kong lawyers are prohibited from charging fees on a contingency basis for litigation services. In Hong Kong, legal services are always priced on an hourly basis. However, Mainland clients generally do not like this pricing method as they believe that it is less certain for them. Therefore, representative offices in the Mainland should bear different market conditions in mind, and conduct business flexibly by taking into account the relevant regulatory rules and guidelines.

Forward-looking strategy

The establishment of representative offices in the Mainland will give rise to new information, new environments and new mindsets, all of which would benefit Hong Kong law firms. However, should we be satisfied with all of this? In the face of the growing Mainland legal services market and increasing needs, we have adopted a forwardlooking and strategic approach.

I often feel that the Mainland legal services market is still like a young man who looks forward to the future with vision and youthful vigor but without the benefit of experience. Therefore, the Mainland legal services market has vast potential. However, if Hong Kong law firms are limited to or content with the status quo instead of entering further into this market, or if they are complacent with the current business scope of their representative office, we will risk missing this largest legal services market and opportunities that go with it.

As the Hong Kong Trade Development Council (HKTDC) has predicted in its research reports, China will overtake the United States in 2020 to become the world’s largest consumer market in terms of domestic sales and services. In addition, Hong Kong alone has invested US$11.8 billion (HK$91.6 billion) in Guangdong Province, accounting for 60% of foreign investment in the province. All this shows that the Mainland will have a huge need for legal and other professional services. To avoid losing good opportunities or being sidelined, we should consider the following strategic approaches under the current legal and policy frameworks:

(i) Association with Chinese law firms
As an old Cantonese saying goes, ‘households of bamboo doors should team up with bamboo-door households and households of wooden doors with wooden-door ones.’ This means that you need to choose the right partner to develop any association. However, as Hong Kong law firms differ greatly from their Mainland counterparts in terms of culture, value system, management style, mental attitude, stage of development and financial strength, even when they appear like good matches for certain Chinese law firms, we still need sufficient mental readiness for numerous difficulties and conflicts.

In the face of cultural differences and conflicts in management philosophies that may exist in reality, we need to engage in communication and collaboration with a positive attitude. It is vitally important to find an association partner who shares the same mindset
and vision. From my experience, I started out in culturally similar areas, such as Guangzhou or other cities within Guangdong Province.Because of the geographical and cultural vicinity, choosing law firms in Guangdong Province as partners does help reduce potential cultural differences and difficulties in communication.

When it comes to management, Hong Kong law firms should ‘take the rudder’, ie they should control the day-to-day administration to bring their Mainland operations closer to the operating models and standards of Hong Kong law firms. In addition, they should develop plans for technology and office facilities.

In terms of financial commitment, Hong Kong law firms may take the initiative to contribute funds in accordance with their own financial position, or they may share all costs and expenses with their Mainland partners. They should be sufficiently tolerant and receptive in their attitudes.

In accounting and book keeping, they need to introduce models commonly used by Hong Kong law firms for management purposes. There are significant differences between Mainland and Hong Kong law firms in their operating models. For instance, Mainland law
firms do not have client accounts. With the exception of a few large corporate Mainland firms that are willing to exercise self-regulation or make arrangements for provident funds, most Mainland law firms often take legal services charge as their own income which they can dispose and draw on at any time, even in its entirety. As Mainland firms are less prudent in management, their overall development may be compromised. In contrast, Hong Kong firms have a better understanding of accounting. Therefore, the expertise of Hong Kong firms can be introduced to their associated Mainland firms, and
promoted and shared across the organisation.

Our management model for the associated firm is based on eLaw, an advanced computer program with our own intellectual property developed jointly by our senior lawyers and computer system consultants. In addition to essential settings such as log-in, time-based billing and service categories, eLaw is featured with case opening procedures, daily document registration, file management, employee performance reporting, accounting, account statements and other practical functions. Through eLaw, we have integrated our file management, financial accounting and administrative systems, which have brought enormous convenience and benefits and improved the efficiency, management standard, practising competence and reputation of our law firm.

(ii) Taking advantage of CEPA to sit for the National Judicial Examination to become Mainland practising lawyers or even Mainland partners
Under CEPA, Hong Kong lawyers can sit for the National Judicial Examination to obtain the qualification for practising both in the Mainland and in Hong Kong. In addition, the LSHK will continue to lobby the MOJ through various means and methods in order for Hong Kong lawyers with no less than 15 years of practising experience to be allowed to obtain PRC lawyer’s qualification through special assessments under Article 8 of the Lawyers Law of the People’s Republic of China, so that they would be able to deal with Mainland legal affairs quickly and conveniently.

(iii) Executing agreements in association with limited liability or allowing the engagement of Mainland practising lawyers as local law firms
Although the current laws and policies allow Hong Kong law firms to enter into association with Mainland law firms, there are still many uncertainties or even restrictions on specific details and operations. As a result, such association, even after it is established, still appears to be remote or hindered. If Hong Kong lawyers (or Hong Kong law firms) could be permitted by law to form association or partnership firms with limited liability with Mainland lawyers (or Mainland law firms), or if Hong Kong lawyers could be permitted to set up Mainland branches directly by engaging Mainland practising lawyers as local law firms, they would be able to consolidate the mutually cooperative relationships and gain even greater market shares. Indeed, under Article 15 of the Lawyers Law, partnership law firms can be incorporated in the form of a special ordinary partnership whereby partners of the partnership law firm are accountable for the liability of the law firm in the form of a limited liability partnership according to law. However, no rules on implementation have yet been issued. If there is any breakthrough in this area, it will be a great blessing for both Hong Kong lawyers and Hong Kong law firms alike.

(iv) Learning from the current international trend on the new association model
In recent years, international law firms and accounting firms are flocking to adopt Swiss Verein, a model of international alliance, as a way of running their global business. Swiss Verein is a corporatelike organisation formed under Swiss law whereby no member of the organisation is liable for any act or negligence by any other member. This new alliance arrangement really needs to be considered by Hong Kong and Mainland law firms for adoption.

Conclusion

My firm set up its representative office in Guangzhou in 2004 and established an associated firm in 2009 after obtaining approval. We have taken a firm step to enter the Mainland legal services market and participate in the country’s economic construction. The revenue of the Guangzhou office is increasing steadily. I look forward to leveraging
Hong Kong’s experience in legal services and business management to make active contributions to the economic boom of the Mainland and play my part in helping to develop our motherland.

I believe that Hong Kong law firms should move quickly and select an appropriate location to establish their branches in the Mainland. In addition, they should seek good and like-minded partners to jointly develop an associated firm or other forms of cooperative relationships. They should plan carefully, taking into consideration their particular position, and once the time is ripe, they should not hesitate to put their plan into practice. Last but not least, I believe LSHK’s policies on Mainland legal affairs will certainly provide positive and full support for the profession.

Junius KY Ho
Vice-President and Chairman of Mainland Legal Affairs Committee
Law Society of Hong Kong
Partner
Ho KC & Fong