Enter the Foreign Law Firms

I reproduce below my article published on LoyarBurok which is an updated version of my article originally published in the July-September 2013 issue of Malaysian Bar’s Praxis. I set out the new legal framework which will allow foreign lawyers and foreign law firms to practise foreign law in West Malaysia.

Part A. Introduction

The liberalisation of the legal market in West Malaysia to allow for the entry of foreign lawyers has been the subject of discussion stretching as far back as 1999.

The momentum for such liberalisation had picked up pace over recent years as Bank Negara was keen to allow for foreign lawyers and their foreign expertise to enter Malaysia to develop Malaysia into an international Islamic financial hub.

The Legal Profession (Amendment) Act 2012 (“Amendment Act”), which amends the existing Legal Profession Act 1976 (“LPA”), was passed on 13 June 2012. Although it has been gazetted, it has not come into force yet. Once brought into operation, the Amendment Act will insert a new Part IVA into the LPA to allow for foreign law firms and foreign lawyers to practice foreign law in West Malaysia. For ease of reference, the relevant provisions of the LPA I will be referring to will be the sections as amended by the Amendment Act.

This article will briefly analyse the legal framework for the impending liberalisation of the legal market although it will necessarily be confined only to West Malaysia in which the LPA applies.

It would however be useful to first briefly set out a snapshot of the present Malaysian legal market in terms of how foreign law firms already have some form of presence here.

Part B. The Present Legal Market

Baker & Mckenzie has had its member law firm in Malaysia for years now while Trowers & Hamlins opened a non-trading representative office in Kuala Lumpur in July 2012. It was the first foreign firm to obtain such an approval from the Malaysia Investment Development Authority to do so.

Two of Singapore’s largest law firms have also made its Malaysian presence felt relatively recently whereby Rajah & Tann and Allen & Gledhill have links with their associate law firms in Malaysia.

Foreign law firms also regularly advise on Malaysian corporate transactions, where these firms are based offshore in Singapore or in other countries.

The liberalisation as set out in the Amendment Act will provide for more options for foreign law firms and foreign lawyers to practice and advise on foreign law within Malaysia.

Part C. The Three Entry Routes into Malaysia

There will be three entry routes into Malaysia for foreign law firms and foreign lawyers. While the amendments to the LPA sets out the general framework, the specific details on the conditions and criteria for entry will be set out in the rules to be approved by the Bar Council and the Attorney General.

I am made to understand that these rules have been finalised by the Bar Council and they are presently to be approved by the Attorney General. Therefore, the details I highlight in this article are subject to the final approved version of the rules.

C.1 Permitted Practice Areas

Before fleshing out the three entry routes, I will highlight that the common element for all three is that each of these routes will allow a foreign law firm or foreign lawyer to only practise in permitted practice areas (see section 40F(8)(a) of the LPA for International Partnerships, section 40G(7) of the LPA for Qualified Foreign Law Firms and section 40J(2) of the LPA for foreign lawyers).

While the permitted practice areas are not defined in the Amendment Act, the rules to be passed under the LPA will likely define the permitted practice areas as a transaction regulated by Malaysian law and at least one other national law, or a transaction regulated solely by any law other than Malaysian law. In the case of a Qualified Foreign Law Firm, such aspect of work regulated by Malaysian law shall be undertaken in conjunction with a Malaysian lawyer holding a practising certificate.

The permitted practice areas will also specifically exclude areas of work such as:

  1. Constitutional and administrative law;
  2. Conveyancing;
  3. Criminal law;
  4. Family law;
  5. Succession law (including wills, intestacy, probate and administration);
  6. Trust law (where the settlor is an individual);
  7. Retail banking (including corporate or commercial loans to small and medium enterprises);
  8. Registration of patents and trademarks;
  9. Appearing or pleading in any court of justice in Malaysia;
  10. Representing a client in any proceedings instituted in such a court or giving advice (whether or not the main purpose of which is to advise the client on the conduct of such proceedings); and
  11. Appearing in any hearing before a quasi-judicial or regulatory body, authority or tribunal in Malaysia.

From a reading of the definition and the exclusions, the permitted practice areas are defined broadly to allow for foreign law expertise to be brought in to advise on foreign law or elements of foreign law.

There seems to be a specific exclusion on work that deals solely with Malaysian law which would then still be areas within the exclusive domain of Malaysian lawyers. Further, there are ring-fenced areas of work, such as conveyancing and litigation, which are again areas only Malaysian lawyers can practise in.

In allowing for foreign firms and lawyers to practise in the permitted practice areas, there are then three licenses which can be applied for which are set out below.

C.2 Stand-alone model: Qualified Foreign Law Firm

A foreign firm may be licensed to operate in Malaysia as a Qualified Foreign Law Firm (“QFLF”) and under this licence, the QFLF can operate on a stand-alone basis.

It is expected that up to five QFLF licences will be granted and where this policy was emphasised during the debate on the Legal Profession (Amendment) Bill 2012 where it was stated that: “Sehubungan dengan itu, profesion undang-undang di Malaysia akan diliberalisasikan bagi membolehkan lima firma guaman antarabangsa terulung yang mempunyai kepakaran dalam bidang kewangan Islam antarabangsa menjalankan amalan mereka di Malaysia.

Based on the Bar Council’s recommendations, the foreign lawyers in the QFLF will have to be resident in Malaysia for 182 days, and not less than 30% of the lawyers in the QFLF would have to be Malaysian lawyers.

It is important to note however that Malaysian lawyers who work in the QFLF would have to give up their practising certificate (see section 40G(8) of the LPA which states that a “Malaysian lawyer employed in a qualified foreign law firm shall be disqualified from obtaining a practicing certificate under Part III”).

So the QFLF, even when advising on a transaction involving elements of both foreign law and Malaysian law, would not be able to practice Malaysian law and would have to instruct external practising Malaysian lawyers.

C.3 Joint Venture Model: International Partnership

The International Partnership (“IP”) is a joint venture between the foreign law firm and the Malaysian law firm.

The permissible equity ownership and voting rights of the foreign law firm in the IP shall be determined by the Selection Committee [see section 40F(9) of the LPA] and the recommendations made by the Bar Council are that the Malaysian law firm should not have less than 60% and the foreign law firm no more than 40% of the equity and voting rights and of the total number of lawyers in the IP.

Both the foreign firm and the Malaysian firm in a proposed IP would have to demonstrate that they have the relevant legal expertise and experience in the permitted practice areas. It seems that the IP will not require specific expertise in international Islamic finance unlike in the case of a QFLF.

The IP will be entitled to bill its clients as a single law firm [see section 40F(8)(b) of the LPA] as well as recover costs and retain payments in respect of practicing in the permitted practice areas [see section 40F(8)(c) of the LPA].

Under this route, it appears that there will be a separate entity in the form of an IP, and with a Malaysian lawyer being both part of its Malaysian law firm as well as part of the IP entity.

C.4 Foreign Lawyers

Individual foreign lawyers will also be allowed to be employed by a Malaysian law firm to practise in the permitted practice areas. It has been recommended by the Bar Council that the number of foreign lawyers employed by a Malaysian law firm shall not be more than 30% of the total number of lawyers in that firm.

All individual foreign lawyers working in a QFLF, IP or Malaysian law firm will have to register as a foreign lawyer under the LPA.  The registration of a foreign lawyer shall be in respect of a calendar year and may be renewed annually.

Part D. Application for Licenses and Regulation

An application for a license for the QFLF, IP or foreign lawyer will have to be made to the Bar Council. The new legislation provides for the establishment of a Selection Committee to make recommendations to the Bar Council for the granting of such licenses.

The Selection Committee will be co-chaired by the Attorney General and the President of the Malaysian Bar, and the other members would be a person to be appointed by the Attorney General from the public sector and two members of the Malaysian Bar practising in the permitted practice areas relevant to the applications.

It is expected that there will be annual reporting and accounting requirements in respect of QFLFs and IPs, and annual performance reporting in respect of foreign lawyers employed by Malaysian law firms.

All QFLFs, IPs and foreign lawyers shall comply with the same rules and regulations applicable to Malaysian lawyers relating to professional conduct and ethics and therefore also subject to, for the purposes of disciplinary actions, the control of the Disciplinary Board.

Part E. Prohibition against “fly-in fly-out”?

The Amendment Act inserted a new section 37(2A) into the LPA which makes it an offence for any unauthorised person to do or solicit the right to do any act which is customarily within the function of an advocate and solicitor, including the provision of legal advice (whether Malaysian or otherwise). This provision would appear to prevent foreign lawyers (who are not licensed under the LPA) from flying in and out of the Malaysia to provide advice and to carry out any work relating to Malaysian law or even foreign law.

This may be too wide a prohibition and this provision had attracted some criticism, especially with regard to restricting foreign lawyers from advising or acting in international arbitrations in Malaysia. Under the present law, there is no restriction against foreign lawyers acting in arbitrations in Malaysia (see the High Court case of Zublin Muhibbah Joint Venture v Government of Malaysia [1990] 3 MLJ 125 which was upheld by the Supreme Court).

Two Bills were passed by the Dewan Rakyat on 24 September 2013 to relax this restriction imposed under section 37(2A) of the LPA.  The new subsections 37(2A) and (2B) to be inserted into the LPA would have two main effects. Firstly, a foreign lawyer will be able to enter Malaysia to advise or consult with a client on any matter pertaining to foreign law provided that the accumulated period of stay will not exceed 60 days in a calendar year and that immigration authorisation has been obtained.

Secondly, foreign lawyers advising or rendering any other assistance in arbitrations, or who appear as counsel or arbitrators in arbitrations in Malaysia, will be permitted to enter the country at any time and with no limit on the duration of their stay.

Part F. What Does the Future Hold?

It will be difficult to predict what the future holds in terms of the entry of foreign firms and whatever challenges the legal market will face. I list out some observations as I try to hazard a guess as to what may be expected and some of the challenges that may come along.

F.1 Competition for High-End Corporate Work

As seen from the Amendment Act, the liberalisation of the Malaysian legal market is gradual and with the primary areas of practice for the QFLPs and IPs being that of foreign law albeit within the physical territory of Malaysia.

While the QFLPs must demonstrate an expertise in international Islamic finance work, it is unlikely that the licensed foreign firms will wish to practice exclusively in the Islamic finance practice area. It is unlikely to be commercially attractive to do so and this has been highlighted years ago. So the licensed foreign firms, whether in the form of a QFLP or IP, will likely want to compete for work in the higher-end corporate practice areas. This may then impact the larger local firms as well as the boutique firms which are already competing in these areas. A higher level of competition will be to the benefit of the clients giving them more choice while also ensuring that the Malaysian firms raise their game to compete.

F.2 Ring-fenced areas: Protection for Local Law Firms

It was common throughout the debates leading to the Amendment Act and of the two recent Bills on 24 September 2013 to hear certain quarters advising caution in that liberalisation must not lead to local law firms being cast aside.

I believe that with the present restrictions built into the permitted practice areas, a majority of law firms and lawyers will not find that their work is being taken away by foreign law firms. So for instance, litigation, whether it is civil or criminal work, conveyancing and banking will still be in the exclusive domain of local lawyers.

The local law firms which already regularly work with foreign lawyers to advise or to act in matters involving elements of Malaysian and foreign law may however feel the impact. Our foreign counterparts who used to be our instructing solicitors or who were working in the same cross-border team of lawyers as us, may now have a Malaysian presence and would be competing directly with us for such work.

F.3 Knowledge Sharing

In terms of knowledge transfer, whereby the experience and expertise of the foreign firms entering Malaysia will be shared with the Malaysian firms, it can be seen how the Amendment Act and the eventual rules are intended to promote such a transfer.

QFLFs can primarily only advise on matters on foreign law but will have to employ at least 30% of Malaysian lawyers. QFLFs would still have to engage external practising Malaysian lawyers to advise on any matters concerning Malaysian law.

The joint venture model of the IP would also allow the Malaysian law firm partner to benefit from knowledge transfer.

F.4 Is this Attractive Enough?

There may be questions as to whether this proposed framework will be sufficient to attract foreign firms to enter Malaysia. It does appear to have generated some interest in the UK already.

The foreign firms would not be able to draw on their non-practising Malaysian lawyers (in a QFLP) or their Malaysian partners (in a IP) to advise on a matter dealing solely with Malaysian law, even if it were to arise in a specific permitted area such as a merger or an acquisition. Hence, the foreign firm would not be able to market themselves as a seamless provider of legal services for cross-border financial work.

The foreign law firms may then have to decide between the present existing system of maintaining associate or members firms in Malaysia and being able to advise on Malaysian law (and thus market themselves as being able to provide such seamless cross-border service) or the new system of limiting themselves into QFLPs or IPs.

On the joint venture IP model, the similar joint law venture scheme in Singapore was of limited success and with substantial revamps that have been carried out over the years. It remains to be seen whether Malaysia’s IP scheme will enjoy better success.

I am also not sure how comfortably the foreign lawyers and foreign law firms will fit into the present disciplinary regulations which were drafted to specifically govern the conduct of advocates and solicitors of the High Court of Malaya and had not taken into account foreign lawyers. How will our rules and restrictions, for instance on publicity or on websites, impact on foreign law firms if they practise in Malaysia?

Part G. Conclusion

The balancing act to be struck is that of liberalising the Malaysian legal market to allow for the entry of foreign firms while also managing the liberalisation plan to give Malaysian firms time to mature and develop with the market. While on the one hand liberalisation can promote healthy competition and bring in legal expertise, the impending liberalisation will be gradual and can be tailored to fit the situation as the market evolves.

It will be interesting to see the changes and the developments that occur once this framework is brought into operation.

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2 thoughts on “Enter the Foreign Law Firms

  1. Pingback: Speaking at the Forum on Liberalisation of the Legal Profession | Of Counsel

  2. Pingback: Enter the Foreign Law Firms « eLawyer Law Blog Forum

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