Editor: Since we spoke with you in 2005, the firm has opened an office in Beijing as well as Hong Kong. Tell our readers about the reasons for this rapid expansion.
Xiang: For Shanghai, which is our first office, the firm arrived at an opportune time since the M&A market was maturing quickly. There were more and more cross-border transactions, which were becoming more complicated, and transaction sizes were increasing, so we were fortunate to have a good team here in Shanghai. We quickly established ourselves as a force in the area of the firm's traditional strength - M&A and private equity. We recognized that the Chinese transaction market had become quite large with much activity in Beijing as well as in Hong Kong.
The Hong Kong office serves as the basis for supporting China because there are just so many Chinese companies listed on the Hong Kong Stock Exchange. It is the major financial center encompassing the whole of China (along with Shanghai), and it is a base to cover the rest of Asia.
Beijing is an important part of our footprint because there are a large number of companies headquartered here in addition to the regulatory agencies that are necessary for M&A or private equity. The firm has invested in both Beijing and Hong Kong, which enhances the value of the significant Shanghai office. With the three offices now not only do we have a sufficiently large footprint and teams of lawyers who can handle the most complicated transactions within China, but also we can cover the rest of Asia out of Hong Kong. Furthermore, we recently added Hong Kong law capability.
Editor: Do you find that the same kinds of practices are dominant in each of your three offices?
Xiang: In Beijing we also have a regulatory focus to deal with matters such as anti-monopoly. The practices in the three offices follow our firm-wide strength: M&A and private equity, supplemented by a focused capital markets practice. Our capability in the M&A area and private equity is as strong as that of any foreign firm in China.
Editor: At the time we spoke, the Shanghai office had 15 lawyers - two partners, one counsel and the rest associates. What is the composition of the three offices today?
Xiang: We now have four partners in Shanghai and 16 associates. In Hong Kong we have four partners and six associates, and in Beijing we have one partner, one counsel and three associates. I spend time in both the Shanghai and Beijing offices.
Editor: In 2005 a large percentage of your practice consisted of multinational companies engaged in cross-border M&A. Has that practice changed?
Xiang: Our work with multinationals that are doing acquisitions or doing joint ventures in China is still a significant part of our practice. In addition we have served a growing number of private equity funds that have been investing quite heavily in China since 2005. We have also been representing an increasing number of Chinese companies that are going overseas for acquisitions similar to the Lenovo-IBM transaction we did in 2005. Driven by the need for technology, natural resources, as well as channels for their products, Chinese companies are buying assets or companies in the U.S. or Europe. Clearly, the financial crisis that started in the U.S. and Europe had an impact on our practice. We have seen a significant slowdown starting at the end of 2008 and through this summer. The activity level has started to pick up since August of this year. At this point we are almost back to the pre-financial crisis level.
Editor: I understand that the Chinese economy came out of the downturn much faster than did the U.S.
Xiang: The economy, aided by the government stimulus package, has maintained its footing quite well. People are expecting the GDP growth for 2009 to be above eight percent, which is remarkable in a market like this. The slowdown in China transactions was primarily because some multinationals slowed down their investment activities in China since their home base was in turmoil. Some private equity funds were experiencing the same phenomenon, so they understandably became cautious at the end of last year and the first half of this year. Once investors realized the Chinese economic growth will be maintained, the sentiment for continuing investment in China returned.
Editor: I suppose also foreign investors feel more secure in China than they did several years ago.Xiang: Correct. I think one important factor is that they've seen the results and exits that early investments have achieved.
Editor: What other practice areas are also active? You mentioned M&A and private equity. What about the capital markets? What about your IP practice?
Xiang: The capital markets area clearly has come back after a lull of about nine months. Both the Hong Kong and the Shanghai stock markets are leading the world in gains this year. There have been significant IPOs in both Shanghai and Hong Kong in recent months.
Intellectual property is a growing area. We have transactional IP practice in China. It is not yet as significant a practice area as M&A or capital markets.
Editor: Do you see a greater propensity on the part of the Chinese judiciary to enforce IP rights of foreign investors?
Xiang: Absolutely. It's an issue the government is trying hard to address. They recognize there are deficiencies in the enforcement of IP rights. Since 2005 the government has introduced criminal penalties in some circumstances for IP infringement. The other big change is that Chinese companies are becoming participants in the drive for better IP protection.
Editor: When we last spoke, one of the largest and most complex cross-border deals was the Lenovo deal involving its acquisition of IBM's global PC business. What other major acquisitions have been shepherded by your offices since that time?
Xiang: Some of the transactions may not be as large as Lenovo but no less complicated. Our team represented Johnson & Johnson in one of its largest acquisitions in China last year. That transaction was the acquisition of one of China's most well-known cosmetic companies, Dabao.
Editor: What effect has the newly enacted anti-monopoly law had in clarifying the status of the Chinese government's role in the approval of mergers and acquisitions?
Xiang: There are a few significant features. First, it gives the Chinese government a significant say in major global mergers in addition to mergers occurring in China. Now, in addition to clearing with U.S. and European antitrust authorities you have to clear with the Chinese anti-monopoly authorities, assuming certain thresholds are met. It enhances the Chinese government's ability to review and clear mergers, which is consistent with the growing importance of China in the global economy. The second significant feature is that the law is revenue-based with respect to the filing threshold - revenues in China and outside of China. The third significant point is that unlike the old provisional anti-monopoly regulations, the new anti-monopoly law treats Chinese companies the same way as foreign companies. The old regulation was only applicable to foreign investors buying assets in China.
Editor: Do you see more foreign investors choosing to work in joint ventures with Chinese partners rather than choosing to go it alone?
Xiang: This is something that is also evolving. In the earlier days, there was a perceived need of foreign investors to have a Chinese partner to navigate the Chinese market. With the Chinese market opening up, the markets are more transparent. The need for a partner is less important. Many multinationals have chosen to do it alone and set up a WFOE -wholly foreign-owned enterprise - in China. In recent years, we've seen the comeback of the joint venture for a couple of reasons. The Chinese have become more equal partners because of the emergence in the last 20 years of significant Chinese companies who are asked to partner with foreign investors because they have cash and other valuable assets (sometimes more than their foreign partners). They also have the need for channels for international expansion. We are also seeing private equity funds teaming up with Chinese companies to go overseas to do acquisitions. That's another form of partnering with Chinese companies.
Editor: Do you have the same kinds of business schools in China as in the U.S.?
Xiang: China has business schools, and a hugely popular program is the Executive MBA program, which has proliferated. Many of the programs are jointly set up by well-known MBA programs from Europe or the U.S. with typical Harvard- or Stanford-level MBA fees. The executives wish not only to brush up on various MBA business theories, but to develop relationships with their classmates in the EMBA programs. I've heard stories that people keep going to EMBA programs year after year because of the business and social networks it provides.
Editor: What are the growth prospects for Weil in China over the next several years?
Xiang: We will continue focused growth in areas of our firm-wide strengths - M&A and private equity supplemented by capital markets practice. We will continue to look at opportunities for lateral hires. In addition to Henry Ong, our Hong Kong law partner, we also hired a partner-level senior consultant, Jasson Han, for our Beijing office. With 30 or more lawyers among the three offices, we are capable of handling significant and complicated transactions. We have built an excellent team and footprint. We will continue to focus on developing inbound as well as outbound M&A practice and expanding our representation of private equity funds.