A Different Approach To A China Practice

Tuesday, May 1, 2007 - 01:00

Editor: Blackwell Sanders Peper Martin LLP, a law firm with roots in the Midwest, (Kansas City and St. Louis) has distinguished itself by growing a leading China Practice. How did this come about?

Shen: The leadership of our firm recognized a growing need among our clients for China-related legal expertise and was willing to commit resources to build up that practice, assembling a team of attorneys who were willing to devote time and energy to it. Those of us engaged in the China practice see it as an evolving field, being driven by our clients' demands. We have worked on several different types of transactions, ranging from contracting for manufacturing to intellectual property protection to setting up operations or joint programs in China. Recently we have also been consulted for real estate development and securities investment in China.

Randolph: One reason this firm started this practice early is that Kansas City has a long-term, special relationship with China. There was a famous journalist from Kansas City named Edgar Snow who wrote the book Red Star Over China and was a confidant of Chairman Mao. Kansas City residents established the Edgar Snow Memorial Fund, a joint Chinese-American group that puts on biannual programs rotating between China and the U.S. Social and business leaders have been attending these programs since the 1970s. Because of the long standing involvement of Kansas City with China, I was able to develop a scholarship program at the University of Missouri-Kansas City Law School for outstanding Chinese law students. Fang Shen was one of the first Edgar Snow scholars at the law school who is now with this firm.

Editor: Please describe the number of attorneys so engaged.

Shen: The core members of the group are four in number but we draw on attorneys from other practice groups all the time because the projects involve Chinese and U.S. law. I spend a considerable amount of time on the Chinese practice. There is another native Chinese attorney in our St. Louis office. Patrick spends a significant amount of time in China. We are still a small and growing group, but we make sure that we devote a lot of time learning the law and traveling to China to ensure that we are current with changes in the law, done at no cost to clients because the firm is willing to make the commitment to develop our Chinese expertise.

Editor: Fang, please tell us about your background and the types of practices you engage in for the China Practice of the firm.

Shen: I am a native Chinese and was educated in China. I have a law degree from the People's University of China. I came to the University of Missouri-Kansas City School of Law because of the Edgar Snow Scholarship. I attended the JD program here, completing it in 2003. I was not the first Chinese lawyer at Blackwell.

My practice is split between China-related commercial transactions and U.S. corporate practice. The China-related transactions I handle are primarily international contracts or establishing operations for clients in China with the related government approval processes. I also assist clients with due diligence for acquisition projects in China.

Editor: Patrick, how did you become engaged in the practice of real estate law and other aspects of Chinese law?

Randolph: I have been heavily involved in U.S. real estate law my entire career, having started my career at O'Melveny & Myers, then gone into teaching. I have been teaching law for 35 years. I have also been heavily engaged in practice through a good portion of that time, not only direct practice of law but also engaged with organizations focusing on real property law such as the ABA Real Property Law Section, etc. I publish the leading treatise on leasing law in America.

About 14 years ago Istarted to teach real estate law at Peking University. A young faculty member was assigned to me to learn about U.S. real estate law. He was Lou Jianbo, who today with me co-directs the Center for Real Estate Law at Peking University, and we have jointly published a book on China's real estate law. He is now regarded as one of the leading experts on real estate law in China. I get calls from lawyers throughout the U.S. who know about my dual expertise. Clients come to our firm to seek guidance for investment projects in China.

Editor: Are there similarities with U.S. real estate law?

Randolph: The fundamental difference is that no private party owns real estate in China. You own a land-use right for a period of time - between 40 and 70 years - which you pay for up front. However, once purchased, you own the lease and you can sell it or mortgage it. Those rights can be inherited. Whether it can be renewed or not is still an issue to be decided. Once you get beyond this fundamental difference their commercial leasing law is not unlike ours. Their bankruptcy and mortgage laws are similar to ours. Their economic regulations are more similar to U.S. law than European law.

Editor: Your firm works closely with Chinese affiliated firms. How were they chosen?

Shen: We realized that it is important for us to have competent and capable Chinese firms to work with. We assembled a group of reputable Chinese law firms through our experience and recommendations of others. When we had the list of candidates, Pat, a senior partner at the firm and I took a trip to China to interview these firms. We spoke with firms in four major cities: Beijing, Shanghai, Guangzhou and Chongqing. Based on our interviews we selected three firms.

We are taking a different approach to building our Chinese practice. We have considered the possibility of opening a Chinese office, but we prefer working with a network of Chinese firms because this is the most cost effective way to provide the services our clients need. It provides enough flexibility to combine our U.S. commercial experience and knowledge of Chinese law with Chinese lawyers' local expertise, without over-committing the firm's resources and driving up the client's cost.

Randolph: We do not need to have specialists in each province because in China you are dealing with a national law. However, should we need to have an attorney in another province, it is not difficult for us to identify lawyers and government officials who may have relationships with the schools I work with. China is a place where relationships are very important.

Editor: Fang, please describe some of your China-related experiences in helping U.S. companies set up operations in China.

Shen: The structure of each transaction depends on the client's needs and the industry involved. If a client is simply looking for entry into China's market, it could be as simple as a distributorship relationship. Other times the client may need a wholly owned subsidiary in China or a joint venture with a Chinese partner. Recently, entry to China through acquisitions is more and more common. Across the board my experience is that regardless of the structure of the deal, there will be heavy government involvement since there are extensive regulations requiring government approvals for foreign operations in China. Much of my focus has been in helping American companies to seek government approval to enter the Chinese market.

Editor: What has your experience been in protecting U.S. intellectual property rights?

Shen: By background I am not an IP lawyer. In this area I work with our IP group and our local counsel to help the client understand the current status of law, the practical issues and problems. Based on that we come up with practical solutions to protect the U.S. company's interest in China, installing some protections before the problems come up.

Editor: What has been your firm's experience in assisting Chinese companies in litigation in the U.S.?

Shen: When Chinese companies grow in size and enter the international markets, they do an increased amount of business in the U.S., and they will have inevitable disputes here. Our firm has been representing Chinese companies in U.S. litigations. Recently we helped a Chinese company enforce an arbitration award; we are doing an increasing amount of work for the same company on insurance claims and transportation contract disputes.

In addition, a partner at the firm, John R. Phillips, has combined his Alternative Dispute Resolution Practice with heavy involvement in Chinese projects and organizations in Kansas City. He is one of just a few Americans who have trained in Beijing and qualified as Mediator Panelist on the CPR/CCPIT US-China mediation panels. In addition to acting as a neutral in US-China business disputes and assisting clients in resolving business disputes involving China, he has been particularly active in strengthening ties between various departments at the University of Missouri-Kansas City and sister institutions in Beijing, Xian, and Harbin, China.

Randolph: To set up an office in China with western lawyers is extraordinarily expensive and requires fees higher than our charges. We can demonstrate that we can do as good a job as would be provided by an international law firm. We have Chinese-speaking lawyers and experts in business dealings throughout the U.S., can provide a hospitable environment and equivalent services to what they would get from U.S. firms in China for a lower cost.

Editor: Patrick, what are some of the major issues in the real estate area that U.S. companies face in establishing operations in China?

Randolph: The single most important issue is that there are significant limitations on foreign investing in real estate in China. Last year the State Council concerned about massive inflation in housing and commercial real estate placed restrictions on foreign investments in China. It is not impossible to invest but foreigners have to do it through a licensed Chinese investment company unless they are investing for their own use. In addition, there are limitations on how much of your investment can be leveraged. While there is one national law, every provincial government has a long list of licensing regulations. Foreign investors are also not used to the strong anti-speculation policy in China. If you acquire a land-use right, you are expected to develop the land within two years. If you discontinue the use, you stand a good chance of losing the investment and the property. Dealing with the Chinese on these matters requires knowledge of the laws.

The other problem foreigners face is that they do not have inside information. China is a flexible business environment so that there are ways around the existing laws that not everyone knows. Business competitors may have inside opportunities that you do not have. You have to find a domestic partner in whom you have confidence who can participate in a local information exchange.

Editor: How do each of you see the future for U.S. business in China?

Shen: Overall we see a great potential, but one should expect obstacles and be patient. Opportunities are not equal across the board. You really need to know your industry and the Chinese government's policy about that industry. You need to be patient because the Chinese are not used to reviewing a transaction document a few times and then sign it at the first face-to-face meeting. It will take more than one trip. You need to be prepared for bureaucracy of the government and economic slowdown. Overall it is still an immature and opaque environment, full of opportunities but with risks.

Randolph: There are going to be obstacles because China's legal system has not faced a big test in a long time and we shall not be sure until that happens. One should not look at the major successes as an indication that China is universally successful in business. They have invested in discrete areas of interest which they have developed successfully, but at the neglect of other areas. For instance, they have a huge environmental problem. They have a huge wealth distribution problem that is getting worse - what to do with the countryside along with the need for employment for the people who will be leaving farms and state-owned enterprises. These are massive problems for China.

But the Chinese also have many strengths. For example, most Chinese participate in the same culture unlike the cultural differences we have in the U.S. They understand one another better. There is a lot more predictability with their culture. That is a strength that China has been using and will continue to use.

Please email the interviewees at fshen@blackwellsanders.com or prandolph@umkc.edu with questions about this interview.