Why Law Firms Collapse

Volume 3 • Issue 3 • March/April 2017
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King & Wood Mallesons’s Expansive Struggles

Highlighting key stories about the profession you may have missed

When Chinese law firm King & Wood merged with Australian law firm Mallesons Stephen Jacques in 2012, they became what is now known as King & Wood Mallesons (KWM), one of the first truly Asia-based global law firms. The following year, KWM merged again with U.K. law firm SJ Berwin, which then became the European arm of the King & Wood Mallesons brand. Prior to these mergers, each law firm had an interesting history all to itself (see “The Rise of Big Law in China” for more on King & Wood’s unique background—to foreshadow a bit, there never was a Mr. King nor a Mr. Wood). Together, they have blazed new trails and made countless headlines in the world of international law firm management, albeit not in the way they intended. In January 2017, the European arm of KWM filed for administration.

SJ Berwin was struggling long before it merged with KWM. Once part of London’s “Silver Circle,” the 30-year-old London-based firm made its name with a heavy focus on real estate and private equity practice. This meant that when the financial crisis hit, the firm was especially vulnerable. By 2009 profits had dropped off to the point where SJ Berwin was withholding distributions and asking certain partners to leave, but these were clearly not sustainable solutions.

In the end, SJ Berwin sought a way out of its struggles that is becoming increasingly common today: It looked for a merger with a stronger firm. (For more on this phenomenon, check out this issue’s “Speaker’s Corner.”) After a few years of searching, it found a willing party in the recently merged global law firm of King & Wood Mallesons.

The demise of KWM’s European arm—and not KWM as a whole—was due to the firm’s structure. KWM is run as a Swiss verein—something that is increasingly common in today’s international law firm market. When these firms merged, they essentially agreed to keep their books—and liability—largely separate, with the intended benefit being an overall stronger brand minus the risk and reorganization that comes with a typical merger. So what went wrong?

To learn more about KWM’s recent struggles, we sat down with Sida Liu, assistant professor of sociology at the University of Toronto and the world’s leading expert on Chinese law firms and the Chinese legal profession.

The Practice: What was your reaction to the collapse of King & Wood Mallesons’s European arm?

Sida Liu: It was somewhat surprising because this had never really occurred with a major Chinese corporate law firm before. That being said, I have been following KWM for some time now, and there were some signs of trouble. News broke last summer that there might be problems with their European arm, and then stories just kept coming until it was almost every other week you saw partners leaving or plans failing. So when they finally went into administration, it was not a total surprise. But for those of us who have been following Chinese corporate law firms—which, apart from this development, have been characterized by overwhelmingly positive news in recent years—the collapse was quite unusual!

Sida Liu

The Practice: How was the news received in China?

Liu: When the news broke in January there was a big shock back in China for a couple of reasons. First, many didn’t understand the Swiss verein structure. They thought that China-based King & Wood had failed in Europe. Keep in mind that when King & Wood, a Chinese firm, merged with Mallesons Stephen Jacques, an Australian firm, in 2012, they did so using the Swiss verein. KWM’s European arm was actually the old SJ Berwin firm based in the United Kingdom, which came into the fold a year later. After that combination, these three firms all operated under the KWM brand. In this sense they were one firm, but the Swiss verein results in more of a confederacy than a singular law firm.

Second, they couldn’t imagine something like that could happen because there have been very few cases of failures in the history of Chinese corporate law firms. All the major law firms survived in one way or another—some of them merged, some of them split—but for a Chinese law firm to go into administration was unheard of.

The Practice: Where would you identify the roots of the collapse? Are we seeing the failure of a Chinese law firm’s efforts to expand to Europe, or a European law firm’s unsuccessful attempt to solve its problems with an international merger?

Liu: That is the question. My understanding is that it has more to do with the internal problems of the old SJ Berwin, but there is something to be said for the demands that the KWM system exercised on its new European arm as well. Before the merger, SJ Berwin was not doing similar business as King & Wood Mallesons—like M&A. However, there was a desire on KWM’s part to restructure the European arm to more closely resemble its larger vision and brand. When partners in Europe became frustrated with this, they started to defect. And once that started happening, it all collapsed very quickly. (For more on partner runs, see this issue’s lead story, “Why Law Firms Collapse.”)

The Practice: It seems like one of the major benefits of the Swiss verein is to improve the firm’s marketing strength—to pool resources for branding purposes. Is that coming back to bite KWM now that they’re getting all this bad press?

Liu: Absolutely. This failure has a huge impact on KWM, and perhaps even on Chinese law firms in general. Yes, this is SJ Berwin collapsing, but we have to remember that SJ Berwin gave up its name. So when it failed, it’s KWM in the headlines.

One of the perceived advantages of the Swiss verein was its potential to develop King & Wood from a Chinese brand to a global brand. Well, they have done that, but the irony now is that if in a few years KWM wants to set up a new office in, say, Paris or Berlin, they will be remembered as the Chinese firm that previously failed to establish itself in Europe. That’s not a good reputation, and it could impact other Chinese firms looking to break into the European market precisely because KWM was the first Chinese firm to attempt this kind of expansion.

The Practice: What lessons do you think other Chinese or international law firms are drawing from this?

Liu: I recently talked to a senior partner of one of King & Wood’s competitors in China, and he said they are not going to follow the KWM model because, from their perspective, it’s more important to be one of the best Chinese firms in China. It’s not that they’re myopic about international opportunities—in fact, it’s quite the opposite. They’re paying close attention to how KWM’s strategy plays out, and they’re learning, along with other Chinese firms, that it is not without profound risk.

That’s an important lesson for Chinese law firms. By and large, I think they will continue to go international—part of state policy now is to encourage law firms to follow their clients that go abroad. That being said, I think they will take a much more cautious approach after the failure of KWM.

The Practice: When King & Wood and Mallesons Stephen Jacques first merged, they had planned to revisit the terms of the merger some number of years down the line. Is this something that will factor into that conversation when they finally get to the table?

Liu: The timing is very interesting. In fact, they are supposed to be reviewing the merger right now because they are reaching the five-year mark of their combination—they combined in March 2012, and here we are in March 2017. They recently announced a delay in that review, postponing it until later this year so that they can take care of this mess first.

My sense is they are not going to split. They are going to continue to be KWM because it takes a lot of effort to build a brand like that. Even with all these negative stories going around, they have a global brand, and I don’t think they will give that up easily. I think the more important question is what defines their next “five-year plan,” to use the Chinese socialist term. That’s a more challenging question for discussion when they actually sit down to review this merger, and it will be intriguing to watch.

Why Law Firms Collapse Volume 3 • Issue 3 • March/April 2017

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