In 1974 the Senate Select Committee on Securities and Exchange (the Rae Committee) concluded that Australia had developed a national economy rather than a series of separate state economies and that, in consequence, it needed a national system of securities regulation.  That system was more or less achieved a decade later, about the same time as the big Sydney and Melbourne law firms were forming national partnerships.  They did so despite the absence, then and now, of a national system of lawyer admission and regulation although an almost national structure appears imminent. Now the ambitions of most of the national law firms are global, reflecting those of their clients.  They are taking strikingly different routes abroad. This essay looks at the global strategies of the major Australian corporate law firms as revealed by what is happening at the moment at Mallesons, Blakes, Allens and Freehills.

Globalisation has fundamentally changed the character of business.  Modern information and communications technology enables firms to operate globally through central coordination of business operations, facilitated by dramatic reduction in transportation costs. The liberalisation of trade, investment and currency flows lowers national barriers and control over business operations.  The components of international production, trade and investment networks are highly mobile and relatively easily transferable.  Corporations are tied to a national jurisdiction through their seat of incorporation but this tie binds very loosely with the prospect always of transfer of domicile to a more accommodating legal regime.

For law firms, however, national (or even provincial) ties are much tighter even for those law firms whose work is essentially global in character. Law is the product of nation states although complemented increasingly by private ordering of a global character.  The right to practise law is jealously guarded by national lawyers’ associations against outside foreign lawyer competition which, in the Asian region, commonly prevent foreign lawyers from forming partnerships with local lawyers as well as practising in their own right. Unlike their clients’ operations, the lawyer’s licence largely stops at national borders unless augmented by some form of cross-border affiliation or relationship.

And the market for corporate legal services is changing rapidly with changes to global financial markets and capital flows. The major US and UK law firms see Asia as the principal area of growth in coming decades, especially in the post-GFC climate with a weakened economic outlook in Europe where so many of the UK firms have sunk resources over the past decade. This, after all, is said to be the Asian century. Australian law firms have been competing for the big transaction work in the region for a couple of decades.  They are well placed by geography and time zone, their long presence, profile and relationships in the region, and the generally high quality of their lawyers. But they face problems in being big regional players alone. The governing law of international business is either English or New York law, not Australian law. In Asia, English law has largely won out and so participating law firms need English law capacity. The major UK law firms all have established Asian offices and a strong presence to exploit this advantage and their colonial connection, especially in the major financial centres of Hong Kong and Singapore.

Australian firms have been flirting with UK firms for some time. The major obstacle to a merger with a leading UK firm is the size of the big Australian law firms themselves. Elite UK firms fear that their partner profit shares, from the higher value and better remunerated transaction work in London, will be diluted if all those Australian partners are taken on board.  The strong Australian dollar, the mining and resources work here and the region, and the European downturn, restore some balance to the transaction.

For some years there have been rumours of merger talks between particular Australian and UK firms but the first occurred only in 2010 when Norton Rose merged with the local firm Deacons and, in the following year, US firm DLA Piper merged with DLA Phillips Fox.  But these did not immediately herald a new rush to merge.  Instead, the UK blue chip Allen & Overy and Clifford Chance targeted key people from Australian firms to give them a practice base here through small local partnerships.  Their focus was on particular practice areas, principally banking and finance, and the opportunity to leverage UK firm expertise locally. And these specialist partnerships face formidable competition from full service, long established Australian firms.

The game has changed dramatically in 2012 with four pre-eminent Australian firms announcing radically different global strategies.

On 1 March 2012, two Australian firms with a long lineage, Blake Dawson and Mallesons Stephen Jaques, announced that they were entering into ‘mergers’ with overseas firms, Blakes with Ashurst, an old UK firm with global operations, and Mallesons with the PRC firm King & Wood.  With immediate effect, Blakes has become Ashurst Australia and Mallesons has become King & Wood Mallesons. Both link-ups have an initial regional focus but are steps in a wider global strategy. And they are very different ‘mergers’.

Blakes and Ashurst have ‘combined their practices in Asia’ with a view to a full merger in 2014 after a further vote of the partnerships. This seems a conventional law firm merger between two firms with a similar history and culture although with practices in different regions. The firms will be fully integrated with a view to the partners drawing from a single profit pool from 2014 and sharing the profits from the combined Asian practice until then. The next step in contemplation seems to be a merger with a major US firm.

King & Wood Mallesons is the first merger between a Chinese and a Western law firm. King & Wood was founded by Chinese lawyers in 1993 and now has offices from Beijing to New York with 1,000 lawyers.  It is the third largest firm in Asia by lawyer numbers. (Mallesons has over 800 lawyers.)  Chinese law prevents Chinese and foreign lawyers from sharing profits so that, until an exemption or relaxation is granted, King & Wood Mallesons will keep the bulk of their operations financially separate in three distinct profit pools, one for Mallesons’ Australian practice, another for King & Wood’s Chinese offices and the third for the merged Hong Kong office. Separate profit pooling means business as usual for Mallesons’ Australian operations but will presumably see more staff moved to the Chinese and Hong Kong practices over time. There are significant implementation risks: Mallesons is sinking into the venture its vastly superior technology platforms.  Further, three of Mallesons’ four Beijing partners left for other firms within days of the merger announcement. They may not be alone. Global firms generally offer staff better pay and conditions than Chinese firms and there are concerns about more intrusive government regulation of, and Communist Party influence upon, Chinese firms. However, this combination probably makes King & Wood Mallesons more attractive to a major US or UK firm as a potential global merger partner. That seems clearly the strategy.

The game changed further on 23 April 2012 when Allens Arthur Robinson and the UK Magic Circle firm Linklaters announced that they are entering into an ‘integrated alliance’ under which the firms remain independent but will conduct a series of joint ventures in Asia.  In contrast to the Blakes and Mallesons arrangements, Allens and Linklaters eschew use of the term ‘merger’; each will retain their own firm names, identity and brand.  (Allens will drop the name of its Melbourne forebear firm, Arthur Robinson, but that is an unrelated branding decision.)  Profits will be shared only through the Asian joint ventures.

The Allens – Linklaters ‘integrated alliance’ is a hybrid arrangement,  a step up from the ‘best friend’ relationship that Allens has long had with UK firm Slaughter & May under which each referred work to the other and worked jointly on transactions where possible. The ‘integrated alliance’ is a non-exclusive relationship allowing each firm to retain independence and control and perhaps to pursue other relationships although these are likely to be episodic rather than continuing. The integration is presently most evident in the Asian profit-sharing joint ventures operating from 1 May 2012. The first joint venture targets energy, resources and infrastructure work in Asia generally;  the second is focussed geographically upon Indonesia where Allens has a long relationship with a local firm Widyawan & Partners. The Indonesian joint venture is not limited to energy, resources and infrastructure and is likely to target also the banking and finance work accompanying the strong capital flows into that country. The Indonesian joint venture will need be conducted through Allens’ cooperation agreement with Widyawan rather than directly. However, by increasing the number of lawyers employed by Widyawan, Allens and Linklaters will be allowed, under the local formula governing foreign lawyer numbers, to put more of their own staff into the local office.

Finally (for the present moment at least), Freehills is having merger talks with Herbert Smith, a major UK firm.  Its chief executive is reported as saying that, if a structure is agreed, ‘it is more likely to be a merger than an alliance’ and before the end of 2012.  There is some media speculation that this merger may adopt the Swiss Verein equity structure favoured by the global accounting firms which allows constituent firms to retain distinct profit pools.  When this deal is done, six of the erstwhile top 10 Australian firms by revenue will have entered into global relationships, all in the space of the past three years.

What about those Australian corporate firms that so far have stayed at home? They will pick up the larger pool of referral work that is created with every foreign merger.  Local resource work is booming and many clients, such as governments, do not need global representation. But most have smallish offices in Asia and the completion from global firms there is getting stronger by the day. And the cross-border work is often more intellectually challenging as well as lucrative. The pressure to go global ratchets up with each firm merger or quasi-merger. The Ashurst, King & Wood Mallesons and Allens ‘mergers’ offer Australian firms alternative routes to globalised legal practice. They take them, however, with one foot firmly on the home shore and the other on a moving, global vehicle.  The position is not without danger.