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China’s Legal Sector and Corporate/M&A (PRC Firms): The Impact and Opportunities of COVID-19

The coronavirus pandemic has greatly impacted the world’s economy. The legal profession, as a service industry closely tied with social and economic development, is not immune to COVID-19’s impact.

Almost all kinds of clients have been tightening up their legal budgets and reducing outsourcing work; however, practices including litigation, bankruptcy and labour mandates are on the rise, illustrating the different impact on different legal practices and teams. This sudden change of external environment requires law firms to respond quickly by making full use of information technology, pro-actively transforming and upgrading firms’ management and business development to find "opportunities" in the "crisis".

At the beginning of the outbreak of the epidemic, businesses faced unprecedented kind and volume of labour and employment issues, such as wages of employees before normal work/service was resumed, and layoff in the epidemic, leading to a surge in demand for employment legal advice. Corporate/Commercial mandates also cover issues relating to telecommuting and flexible working hours as well as employees sharing.

Later when the virus was contained well domestically, the businesses’ legal demand shifted to issues concerning resuming work and manufacturing. Those businesses who struggled had to go through enterprise reshuffling or transformation to survive – that created new growth point for legal services.

M&A Activities Beyond Expectation 

Merger and acquisition activities that were slowed at the beginning of the pandemic have been booming, much to many people’s surprise. There are a couple of reasons for that.

Lower Company Valuation – Businesses that face cash flow pressure but still have a sustainable business model in the long run are quality investing targets in the M&A market. The disruption caused by the pandemic poses challenges for some businesses but opportunities for others. For those deep-pocketed enterprises who are brave enough to defy the downturn, it is undoubtedly the best time to find deals with reasonable prices, because overall company valuation in the market has become lower.

Diversification – Enterprises which only have a single business are vulnerable if their industry is hit by a black swan event such as the coronavirus pandemic this time. Exploring M&A and restructuring opportunities can help enterprises to reasonably diversify their businesses and operations to increase their chance to weather the storm and improve their ability to mitigate risks.

Impact on Different Industries 

The whole aviation industry struggled in the pandemic with a drastic drop in demand for passenger air transport due to containment and quarantine measures, especially for international flights. China’s domestic aviation travel was partly resumed under the national policy of “converting civilian passenger planes into cargo planes”, which to some extent limited further the financial loss that the industry suffered. It later started to recover when domestic passenger flights were largely restored, though a full turnaround is yet to be seen. As carriers have been financially weakened and worked to restructure their debt obligations, aircraft leasing and the financial leasing matters have been active, so have M&A transactions involving small and medium-sized airlines.

In contrast to the aviation industry, some other industries have managed to grow. The pharmaceuticals, life sciences and healthcare sectors have attracted a high level of interest from investors, particularly since the start of the pandemic. M&A deal activity in this sphere is running high. Medtech companies producing COVID-19 related supplies such as testing kits and PPEs and pharmaceutical companies that develop vaccines and treatments are in demand. It can be forecast that mergers and acquisitions in China’s and the global healthcare industry will continue to present opportunities in the foreseeable future.

Online education/learning has been another sector that has grown well during the pandemic. It has risen fast thanks to the digital transformation of education and is bound to flourish. Accordingly, legal services regarding commercial and e-commerce law, internet law, and investment and operation in this sphere have seen an uptake.

ODI, Overseas M&A and Issuance 

It is noteworthy that many of China’s outbound M&A and overseas issuances projects have been suspended because of tightening scrutiny on national security grounds and increasingly strict restrictions imposed by the EU, the US and other areas on investment and acquisitions by foreign investors. One example for the more stringent overseas regulatory regimes is the enactment of Holding Foreign Companies Accountable Act (HFCAA), a law newly passed by the US House of Representatives. This regulatory requirement has a huge impact on foreign/Chinese public companies listed in the US and those who plan to get listed there, as they may face imminent risk of delisting if they fail to comply.

Impact on Legal Profession by Work Type and Tech

A type of internet-based and tech-driven future law firm, which digitalises legal service and adopts legal tech, even AI, in its operation and offerings, had been discussed a lot in legal circles over the last few years up to the pandemic and quite a few law firms have been experimenting and embracing legal tech in their own organisations.

The unexpected pandemic has forced law firms to provide advice to clients in a much more flexible and agile manner, fostering new work type and giving technology further room to develop. For instance, the telework model has been widely adopted by Chinese firms during the lockdown and lawyers become accustomed to the use of technologies in things such as virtual court hearings.

None of us knows whether this trend will continue once the coronavirus is tamed, but it has in fact paced up the legal profession’s adoption of technologies, and the way law firms operate may have changed forever.

The COVID-19 crisis, along with other international trade and cross-border challenges, has put a lot of pressure and uncertainty on businesses and legal services in China. Nevertheless, there are positives in some sectors and some legal practices. Law firms must be as adaptive, innovative, and hard-working as ever to find and grab opportunities in this challenging time. Looking onwards, with China’s economy stabilising and steadily recovering, we have the very reason to hope for the best for the development of the legal sector.