Legal Business Blogs

Comment: What a ‘combination’! Dentons Dacheng pushes the concept of a firm to breaking point

In January 2005 DLA hooked up with US duo Piper Rudnick and Gray Cary Ware & Freidenrich, triggering a debate that looks no more resolved as I type these words in January 2015. The issue boils down to: what is a firm? And can unions between legal practices maintaining separate finances, partnerships and governance be considered by clients, staff, peers and regulators to be a single institution?

The debate has only become more intense given the string of verein-based tie-ups since 2009. Hard and fast rules are elusive. In reality some – notably Hogan Lovells and in recent years DLA Piper – operate as a single institution. But with some other firms, discerning the nature of the merger, sorry ‘combination’ – the word increasingly bandied around to reconcile these conflicting realities – is a challenge.

This was perhaps most memorably highlighted last year when Norton Rose Fulbright defended itself in the US on claims of a conflict of interest by basically arguing it was separate to another part of itself.

But, of course, Dentons has just taken this approach to a new level with its tie-up with China’s largest firm by fee-earners, Dacheng. The numbers are striking, with the union forging a 6,600-lawyer practice, the largest in the world on that measure, with well over half of them coming from the Chinese partner.

But the dynamics look hard to manage. Dentons currently generates around $1.3bn in revenue against nearly $400m at its China partner; there is still no sign that China will support corporate legal services on any kind of globally acceptable margin. Clearly, these numbers are never going to get anywhere near alignment. Ever. And even if foreign advisers could practise Chinese law and there wasn’t a stream of regulatory and operational complications with the deal, never before has anyone attempted to put together two major firms (or four technically) operating on such fundamentally different economics.

Which brings up the issue of how substantively you can combine with a Chinese practice growing at such a staggering speed as Dacheng. How integrated is it even with itself – given the breakneck speed that it has been adding lawyers in recent years? Even the most progressive Chinese law firms have a reputation for operating like barristers sets – growth at that rate looks unmanageable in any conventional sense. Less than a year ago, as a 3,000-lawyer practice, Dacheng was reported as saying it had stopped focusing on growth and consolidation in favour of quality. Yet since then it has apparently added over 1,000 more lawyers. And given the experience of King & Wood Mallesons, presumably Dentons will have to wall off its IT systems from its Chinese suitor.

Does that make the deal a poor one? To be fair, it’s tough to know the appropriate yardstick. I will do the pair the charity of discounting for now some of the more surreally hyperbolic statements the firms made announcing the deal. Dentons has made a big claim of being a different kind of global law firm – the current deal is certainly audacious and may well signal the evolution of a different kind of legal firm/professional services giant operating on a different model to that yet seen. If so, we’ll have to come up with some new terminology. But until then, the world’s (sort of) largest law firm has a lot to prove.