King & Wood Mallesons: The Shape of Things to Come?

As has been widely reported, Mallesons partners voted last Wednesday to approve the merger with Chinese firm King & Wood.  Not that we thought they’d do otherwise, despite our controversial editorial to the contrary.

That editorial, and the 50-something comments upon it, was meant to promote debate and reflection about the growing role of Chinese (and other inbound) investment in Australian industries — traditionally resources firms but now also professional services.  We should point out that the tone and content of the article were as controversial within the FS editorial team as among commenters.  Needless to say, FS isn’t an individual or an entity in any traditional sense, and it faces some of the difficulties experienced by other anonymous, leaderless collectives.  But none of us thought it was “xenophobic or racist”, as some commentors seemed to.  Whatever our views on inbound investment and the fate of Australian firms in international markets, we can all agree that it is worth critically reflecting on current and future trends and sensibly discussing their implications for public policy and private enterprise.  We can only do so much to foster constructive and informed debate.

A fair summary of the concerns might yield this top 5 — though we emphasise that whether they have any teeth is really a matter of speculation at this point:

1. Integration issues: for Mallesons to merge under a Swiss verein structure creates a paradox: to satisfy clients and comply with PRC law, they need to remain at least partially at arms-length, simply “locking-up”, as one commenter put it, a referral arrangement.  But to make the merger fruitful, the two firms need to integrate two sets of client management tools, engagement protocols, internal communication/knowledge management tools, IT systems and so on – this will be a long, slow road, and one that may encounter serious resistance.
2. Cultural alignment and lawyer quality: K&W no doubt benefited from having Chris Freeland (Baker & McKenzie’s Managing Partner) come across from G+T in 2008 “to help them understand how to run a Western law firm” – but there are still likely to be a range of areas where K&W is simply behind the cutting edge when it comes to modern law firm management.  Mallesons lawyers are renowned for being best-in-class – will the same hold true of K&W’s lawyers?  Will this create a two-tiered labour force within Mallesons, as some US-HK firms have found?
3. Trust: if clients don’t fully trust their solicitors, something is wrong in the relationship.  Based on the comments to the editorial, it sounds as if some clients (especially the big resources and energy firms with Chinese state-owned competitors) might object to the firm aligning itself with a firm whose existing clients include so many SOEs.  Regardless of actual operational separation, guarantees on client confidentiality, and offshoring of critical documents and systems, clients may be spooked, which would be a problem.
4. Government risk: the elephant in the room is just how close a post-K&W would be to the Chinese government.  While that government has made commendable progress over the last decade, it has still been subject to criticisms directed at its lack of transparency, human rights abuses, protectionism and currency manipulation, involvement in cyber-attacks on S&P 500 companies, etc.  Does legal professional privilege receive as strong protection under PRC law?  We don’t know.  What are the evidence gathering/dawn raid powers of PRC regulatory authorities?  We don’t know.   Are K&W partners affiliated with the Party?  All open questions – and, although some may disagree, we don’t think it’s inappropriate to ask them.
5. Brand dilution: what will happen to “Mallesons Stephen Jaques”?  There’s talk of a rebranding (surely only within China, not Australia) to “King & Wood Mallesons” – a distant third on the brass wall plaque of the future.  For the reasons given below, this is not a distant possibility.  How will this sit in the Australian market?

Mallesons’ notoriously conservative partnership would have been well aware of all these issues when they voted for the proposal last week, so it’s clear that the upside — the potential share of work in a still-booming economy, added value to existing clients and outbound work, and the sheer volume of activity in mainland PRC — must have been a substantial one.

It’s fair to say that some of FS and our readers are for, some against, the merger.  We suspect this mirrors the position both within the partnership and among MSJ’s clients, as this astute tipster noted:

Interesting article re Mallesons and K&W. Perhaps take a moment to consider the blue chip clients reaction to such a merger, particularly those that have existing business with China (ala BHP). You would think that a combined K&WM could present significant confidentiality issues for sensitive client information – particularly for clients like BHP who have relied on Mallesons for so long. How could any client of a combined K&WM with serious business interests in China have confidence that its confidential information not find its way to someone in the Chinese Government ?

Our initial take is that the Swiss verein structure will prevent a lot of the information leakage that clients fear.  The bigger question is whether Mallesons can sell that explanation to its clients — and prevent embarrassing conflicts in high-profile mergers and projects work.  Another tipster also expressed this concern quite pointedly:

Your article re KW Mallesons may have been a bit over the top, but I do wonder about data security if Chinese employees have free access to Australian companies’ sensitive information. There is bound to be more than one member of the communist party amongst KWs 1000 employees who would be happy to hand over sensitive information to the Communist Party and state owned enterprises. Clients should be worried about retaining Mallesons if the merger goes ahead.

It really boils down to trust.  Either clients trust the firm with their sensitive information, or they don’t.  If they don’t, there are doubtless other Australian-owed firms that would be only too happy to step up: cue Freehills and Allens.

On the other side of the paddock, King & Wood has been looking beyond China for some time now.  They have offices in New York and SiliconValley.  One report (AFR, 25/11/11) mentions that K&W have also been seeking a London office.  Well, they may have just found one – in addition to Melbourne, Sydney, Brisbane, Perth and many more besides.

Some have speculated that, despite the talk of “merger of equals” and Mallesons’ strong brand in Australasia, the firm would rebrand as “King & Wood Mallesons”.  This blog thinks those rumours may have some substance – five minutes of domain searches turned up the following entry for “kingwoodmallesons.com”:

Creation Date…….: 2011-08-22 00:00:00
Expiration Date…..: 2013-08-22 00:00:00

Registrant Name…..: Mallesons Stephen Jaques
First Name……….: Ben
Last Name………..: Swindale
Address Line 1……: Level 30
Address Line 2……: Waterfront Place
City…………….: BRISBANE
State……………: QLD
Country………….: AU
Post Code………..: 4000
Phone……………: (+61) 732448636
…

Interesting, because it suggests that Mallesons was gearing up for the merger as early as August this year (and shortly after we first leaked details of the merger talks), and because there is no equivalent entry for “mallesonskingwood.com”.  It’s also slightly surprising, considering that it can’t have been Mallesons’ first choice of branding.  Is the Mallesons partnership more desperate for this merger to go through than first thought?

The K&W partnership is still due to vote on the proposal, which should occur sometime in the next week.  Following that, the merger will be submitted for Chinese government review.

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