Chasing revenue overseas

Thinking of opening an office abroad? Chris Perrin examines some of the regulatory and ethical issues that you might face.

At a time when pretty much all firms are expecting revenues from legal services in the UK to remain flat, if not to decline, there is inevitably a temptation to investigate the possibility of earning new income by opening offices abroad. Any such move gives rise to all sorts of operational issues (such as premises, recruitment, technology and so on) and it is not the purpose of this article to consider those. Rather, the purpose is to identify some of the regulatory and ethical issues which might arise and which can so easily be underestimated.

First, it is important to remember that countries with booming economies, and which are therefore most likely to generate the greatest need for legal services (the BRIC countries – Brazil, Russia, India, China), are often beset with restrictive practices. In the case of Brazil, foreign lawyers are prevented from practising Brazilian law, either by employing Brazilian lawyers or by sharing in the profits of a Brazilian firm. In the case of China, foreign lawyers cannot advise on Chinese law. In India, foreign lawyers cannot practise at all, not even foreign law (although strenuous efforts are being made to introduce a more liberal environment). Russia does not bring similar problems, but it does now have greater political risks. Another country removing restrictions is Singapore, which is seeking to capitalise on its potential as a hub for the South-East Asia region. As well as improving the existing regime whereby foreign law firms can form joint ventures with local firms, the authorities are also to issue about five licences to permit foreign firms to practice Singaporean law.

Once you have identified an attractive country where you will be allowed to practise, it is necessary to consider what structure would be most appropriate. The decision is usually driven by local regulatory and tax issues, but there are other factors that need to be taken into account. A branch office of your existing principal partnership might be the easiest option, but you will automatically forego the possibility of any liability firewall between the new office and your main partnership. Equally, if you are an English partnership (and the rest of this article assumes that is the case), rule 15 of the Solicitors Regulation Authority (SRA) Rules extends most of the Solicitors’ Code of Conduct to that branch office, and not just to any English lawyers based there. So far as I am aware, the SRA is the only bar/regulatory authority with such extra-territorial reach and it can have some worrying implications. In particular, you will need to consider how you train non-English lawyers in overseas branches on the SRA Rules, even though it has to be questioned whether the SRA is really in a position to supervise compliance in branch offices around the world.

You might want to grasp any opportunity to achieve limited-liability status for your new office. This is often possible, not only through a branch of an existing LLP but also through a separate local entity. There are, however, a few jurisdictions which do not permit limited liability, including, for instance, Hong Kong. This gives rise to a separate issue: is it fair that most partners in a firm can have the comfort of knowing that their personal assets are safe from creditors of the firm, but that those few who happen to work in an overseas office do not? If this is an issue, there are probably only two ways to solve it.

The first is for your main partnership to give an indemnity to any partner who suffers personal loss at the hands of creditors. Limited-liability status, at least under the English model, does not of course protect the assets of ‘the negligent partner’ and you might therefore want to provide that the indemnity would not operate where the partner has caused the liability. More fundamentally, your partnership may dislike the concept of internal indemnities. If that is the case, the alternative solution is to establish an asset-protection scheme, funded either by set contributions that other partners can be required to provide and/or by insurance, which would pay out to the dependants of a partner whose personal assets had been lost to a creditor.

Conflicts are another issue to consider before expanding overseas. If the acquisition of an existing practice is being considered, it will be necessary to check that your firm and the other business are not acting for conflicting parties on any matter, and that neither firm has confidential information which might be relevant to work being done for another client of the other firm. If you find there is such confidential information held in the overseas firm, the local rules for that firm will probably permit the issue to be managed by an information barrier post acquisition/merger. If the information is held by the English firm (including perhaps by an existing overseas branch office), the position is more difficult. It is likely that SRA Rule 4.05 permits the merged firm to continue to act for the client to whom the information might be relevant, provided a barrier meeting the standards required at common law is erected. But the position is not entirely clear.

A separate issue on conflicts arises if you are expanding into the United States. Since the conflict rules vary from state to state, I will assume the office would be in New York. The conflict rules in New York are such that you will need to check that you are not, outside the US, acting for the counterparty in any litigation being handled by the New York office you plan to merge with. If that was the case, there are two risks. The first is that the client of the New York office might well object to the merged firm acting for its adversary: in New York, this is seen as a conflict. The second is that the client of your firm might be able to apply to court in the US to have your newly acquired New York office disqualified from acting adverse to its interests, on the grounds that its law firm cannot act adverse to it in New York without its consent.

Similar issues arise if the English firm acts for the counterparty on a transaction being handled by what is to be the new New-York office, even if the work is completely unrelated. Once again, the US office will need to get the consent of its client to the firm acting for the counterparty overseas. In addition, your new US colleagues are likely to feel uncomfortable in continuing to act post-merger without the client of the overseas office confirming that it has no objection. In practice, these cases present less of a problem – clients are generally amenable to granting such waivers in the context of transactional work. Often, the greater difficulty is for the US office to convince the English partner that it is necessary for him to approach his client to seek the waiver, simply because the need to do so will seem alien to those used to English/European conflict rules, and the partner will often think the client will be irritated by what might be seen as an unnecessary approach.

The difference in conflict rules from country to country is such that, if you are to expand overseas, you might well conclude that partners cannot be expected to understand the implications in one country of the firm taking on work in another. If that is the case, you are likely to have to centralise conflict checking and decisions on whether a new client and new mandate can be accepted. In some firms, this can be a significant cultural change.

This leads on to one final headache. The ‘know your client’ requirements under anti-money laundering checks vary from country to country, even within the European Union. You will need to decide whether to just apply the approach required in the strictest country to every country in which you operate, which will lead to clients of other offices resenting having to provide information which is not necessarily locally, or whether to apply lesser standards in some countries, in which case you will run into difficulties if the client is later ‘cross-sold’ to other offices in countries with stricter rules. The Netherlands, Italy and Hong Kong are among the countries that have introduced disproportionately onerous requirements.

This article has highlighted just some of the regulatory and ethical issues you will need to consider. There can be a lot to think about, but if the revenues from a new overseas office are very tempting, solutions can generally be found.

Chris Perrin is executive partner and general counsel at Clifford Chance LLP. He can be contacted at chris.perrin@cliffordchance.com