Global firms battle in tough Japanese market Author: Published: 1 Jun 2002 In 1964, a government committee recognized that Japan's legal population was "considerably insufficient" and recommended a strategy to improve the situation. For the next 36 years the legal training system remained exactly the same, passing 500 students each year. Twelve years ago the numbers started to rise, at last. The 36-year delay in implementing a strategy has caused a few problems. Japan's legal system has lagged so far behind its economic development that its position is now frighteningly backward. An absurdly elitist bar exam still routinely fails over 90% of students who sit the test each year. Those who do pass have typically failed six times previously, and those that join Tokyo's top law firms have typically failed once or twice before. Despite the exacting standards, Japan's lawyers bengoshi are hardly the envy of the world. Traditionally, Japanese business has operated without lawyers wherever and whenever possible. Lawyers were hardly involved at all in the country's 'miracle' years, and the resulting fall-out has tested Japan's insolvency regime to breaking point there aren't enough judges either. But as cross-border transactions have grown both in number and complexity, lawyers have become increasingly valuable not only to foreign clients entering Japan, but also to the Japanese clients themselves. Tokyo's banking community sets the standard, expecting lawyers to do a great deal more than getting the legal answers right. They are expected to manage transactions, adapt structures, solve problems and generally move a deal forward. Sadly, few people expect Japanese lawyers to do this. Instead, they turn to foreign law firms to bring international standards to bear. Nevertheless, the prestige of working at a local law firm is high and the best bengoshi are still attracted to the big four firms Anderson Mori, Mori Sogo, Nagashima Ohno & Tsunematsu and Nishimura & Partners, plus a couple of the smaller specialist firms such as Mitsui Yasuda Wani & Maeda. "Only a handful of people working in this market are skilled enough to advise on complex international securities deals," says David Wainer, a partner at Allen & Overy. "And very few of those are outside the big four firms." Allen & Overy knows this from bitter experience. In 2001 the firm hired its first bengoshi, or to be correct, the firm established a joint enterprise with the one-man law firm known as Akatsuki International Law Office, staffed by Kaoru Haraguchi. "What we learned was that if you offer full-service you need to make sure that you can actually deliver," says Wainer. "Once we said we had Japanese capability everyone assumed we had full capability, and all of a sudden we were flooded." Haraguchi left to join Orrick Sho Kokusai.
"Looking forward, we have a good relationship with all the major Japanese counsel and we know who the specialists are," says Tom Brown, Allen & Overy's managing partner in Tokyo. "If you look at the other joint ventures and the specialist products we work on, I doubt they have the level of sophistication we would require anyway." Developing, or acquiring, that level of specialization is a problem for the would-be onestop-shop providers. If it could be done, clients would doubtless be the first to cheer. "We are hoping," says Komei Takatsu, a lawyer at Nomura. "Nomura is involved in a great deal of cross-border advice. Japanese firms are helpful to us when we need only Japanese legal advice, but in most cases we need a different view because complicated transactions can involve both foreign law and Japanese law. In these instances, we look to international lawyers with experience in these matters." At the moment though, foreign firms cannot hire bengoshi directly. They can only work together through a joint enterprise law firm, and there seems very little movement towards relaxing these rules. Meanwhile, the Japanese firms are trying to modernize and to move with the times, something that they have been restricted from doing in the past. They are growing. Mostly the firms are doing well on domestic restructuring-related work, but some have merged with smaller, niche practices to give them the skills, specialization and critical mass to manage today's large, complex deals. In January 2000, Nagashima & Ohno and Tsunematsu Yanase & Sekine merged. "Our capital markets practice was not so strong," says Hisashi Hara, managing partner at Nagashima. "Today, securitization work demands that we have a good corporate practice and a strong capital markets practice. The stand-alone firms can no longer cope. Also, for modern M&A transactions we need a strong corporate finance team, which wasn't the case in the past. In this respect our clients' needs are increasing and now we are in a good position to give high quality service in those areas." The firm is considered to be the most internationally-focused of the Tokyo practices. And on November 1 2002 Mori Sogo, the leading domestic firm, will merge with Hamada & Matsumoto, a respected capital markets specialist. In the past, foreign clients and their lawyers have driven the changes, introducing new techniques and strategies. "The competition we feel most keenly is for foreign clients with foreign firms," says Mori Sogo's Masatake Yone. "We'd like them to come to us first, but they want transaction counsel and so approach a US firm and get them to hire a domestic firm." But Japanese clients are now also becoming more sophisticated and even pure domestic work is up to a more international standard. As cross-shareholding patterns break down, Japanese companies are becoming more transparent. So much so that a proxy fight has even broken out between an investment management company and Tokyo Style, a cash-rich clothing company. It is an unprecedented move. Yoshiaki Murakami, founder of M&A Consulting, has been characterized as a populist hero by some and vilified as a corporate raider by the establishment. Either way, he has a point. Tokyo Style, which has a market capitalization of about $900 million, is sitting on nearly $1 billion in cash and securities. Murakami wants to unlock that value by forcing the company to use its excess cash to buy back 10% of its shares, plough back money into investment and issue a healthy dividend. A vote takes place on May 28 to decide the fate of the company. However, for the most part Japanese clients are still not as advanced as their foreign counterparts. "Pure domestic work is up to a more international standard now," says Hara. "But Japanese clients still prefer long-term relationships with a single firm.
Japanese corporates really need lawyer help, but they don't always recognize it. To do that we need more lawyers and to educate our clients." Getting more lawyers, despite the desperate shortage, has not really been a problem for the domestic firms. Many of the Legal Institute graduates want to work at a top Tokyo business firm anyway. But new graduates don't solve immediate problems. For Nagashima and Mori Sogo, mergers have helped add immediate size. Nishimura and Anderson Mori, the two other members of Tokyo's top tier, were rumoured to be in merger talks with each other, though the rumoured discussions are now rumoured to be over. Deals between smaller firms such as Mitsui Yasuda or Asahi Law Office would probably work out better. Joint enterprises What is of benefit to Japanese firms can hinder foreign ones. "Japanese lawyers don't move in the way US and UK lawyers do," says Rob Burley, managing partner at Clifford Chance. Japanese lawyers move in herds. So far Clifford Chance has moved two towards its stable. On May 2001 the firm began the first stage of its joint enterprise by hooking up with Tanaka & Akita. And less than a year later the joint enterprise became Tanaka Akita & Nakagawa when five lawyers joined from Nakagawa & Takashina, a firm that has had a close relationship with Clifford Chance's Paris office for 25 years. As Allen & Overy found, developing in-house capability on the Japanese law side is difficult and only a handful of foreign firms have made serious efforts, or serious headway. "More and more bengoshi are contacting me directly," says Robin Doenicke, of executive search firm East-West Consulting. "But they are very cautious about moving to joint enterprises. If they are going to consider one they want to know who else is there and they want to see that it is well-established." Freshfields Bruckhaus Deringer is prime among the UK firms, but Baker & McKenzie, with Tokyo Aoyama Aoki Law Office, and White & Case, with Kandabashi Law Offices, have the largest joint enterprises. Freshfields is now moving in the same direction as those two firms, with a serious commitment to staffing up its joint enterprise. It already has more bengoshi than foreign lawyers and once Charles Stevens retires in October he will be replaced as managing partner by Naoki Kinami, the office's most senior bengoshi. Some rivals question whether the strategy is sensible. Freshfields is beginning to look like a domestic Japanese firm with a small complement of foreign lawyers. But nobody doubts that Freshfields has the resources to bring in more big-hitting corporate partners from other offices when necessary. In the short term, a bengoshi outfit is more likely to win the confidence of local lawyers, and the firm is keen to point out that Kinami will be assisted by James Lawden. The only other foreign firm with serious plans to develop its own Japanese practice, at the moment, is Morrison & Foerster. Last year Morrison & Foerster established a joint enterprise with one of Tokyo's most respected capital markets bengoshi, Fuyuo Mitomi, a founding partner of Tomotsune Kimura & Mitomi. Despite having such a high-profile figure on-board it has still proven difficult to attract more bengoshi. "Recruiting bengoshi is not easy. It is a very big step for a Japanese lawyer to make the move to an international law firm. Even simple things, such as having to communicate in English on a daily basis, factor into a Japanese lawyer's decision," says Wayne Pittaway, a partner in the office. "Having a lawyer of Mitomi's standing has made it easier for us to attract other quality Japanese lawyers."
The firm hopes to have three bengoshi partners and up to 10 associates by year-end. At the moment there are just two partners and one associate working at the joint enterprise, Ito & Mitomi. Rival firms have pursued local lawyers, too. In December 2001, Jones Day established a joint enterprise with Showa Law Office, a 12-strong team of bengoshi. Since then the firm has added three more bengoshi, bringing the total number of lawyers, both foreign and Japanese, to 21. "I am extremely enthusiastic about this merger," says John Roebuck, managing partner of the Jones Day office. "I believe it will enable us to provide the kinds of legal services necessary to give our multinational corporate clients a significant competitive advantage in the Japanese market." "This merger is equally important to our Japanese clients doing business outside Japan," says Nobutoshi Yamanouchi, the senior partner of Showa Law Office. "They will now be able to draw on the breadth and scope of Jones Day's experience throughout the world." The firm sees particular opportunities for advising Japanese clients investing in China, through its Shanghai office. Perhaps the most surprising of the foreign firms' Tokyo strategies is that of Simmons & Simmons. In September 2001 the English firm opened an office in Tokyo and simultaneously launched a joint venture with TMI Associates, by far the most significant Japanese firm to have formed a joint venture so far. The office began with a small complement of foreign lawyers, led by Riko Beppu, a new partner who moved from the London office. In March it staffed up the foreign side with the establishment of a financial markets practice, led by another new partner Paul Browne, to cash in on Tokyo's buoyant securitization market. "We're relocating our resources because clients have been telling us there is a need for more international specialists in Japan," says London-based finance partner Jeremy Hoyland. "We want to keep existing clients but if we could also get a couple more international investment banks to instruct us it would be great." The firm also hopes the move will further cement its joint venture with TMI. "We want to continue to develop the relationship with TMI and we can provide them with an international capacity for advice on securitization." Meanwhile, Lovells has come along since bringing Tim Lester back to Tokyo last year, to specialize in securitization work. He advised on the largest collateralized debt obligation (CDO) to have been completed in Japan, for BNP Paribas. And the firm has trotted out at least four more CDOs since then. "Our goal was to establish our name and we've done that, in a relatively short time, with some headline deals," says Lester. "It augurs well for us as we continue to grow." Lovells is keen to grow further and would also like to team up with some bengoshi, but has had similar problems to other firms in finding a suitable model. As David Impastato at Milbank puts it: "We have a mandate to double the size of the office, but the problem is how to do it." And he adds: "Staffing is the biggest challenge we face. Do you start with a partner bengoshi and staff up, or an associate bengoshi and staff down? We're keeping our minds open to the possibility of hiring bengoshi as we're not keen to lose our competitive advantage." Milbank, whose practice is largely finance-based in Tokyo, is also uncertain about what is around the corner. "You just don't know who you're going to need next month." US law practices
Some of the UK firms are also developing US capability in Tokyo, where in the past they would have relied on their Hong Kong offices. Allen & Overy and Linklaters both have US partners in Tokyo now. "Japan is so unique in terms of language and culture that flying people in from Hong Kong is not the perfect solution," says Wainer, at Allen & Overy. In May, the firm brought in Piyasena Perera who joined as senior counsel from the California firm, Fenwick & West, to focus on debt capital markets work and M&A. "This is a great move forward for Allen & Overy's US law group, given the importance of US law to increasing numbers of corporate and securities transactions in Japan and the rest of Asia," says Peter Curley, a US partner in Hong Kong. "This puts into position another core building block for Asia on our way to providing an integrated US capability globally." The firm is confident that even just one US lawyer should allow them to pick up work from other US firms in Tokyo, citing last year's offering for Aiful as an example. "Last year we did one of the most significant equity deals even without a US practice on the ground in Tokyo and in a slow market," says Wainer. "The US firms have been here a long time and are well entrenched; but they don't have that many people here actually. They quickly get to the point where they have to fly people in. We feel that with a limited investment in top quality US lawyers, such as Piyasena Perera, we can credibly compete with the major US firms here." Linklaters recruited Mark Hunsaker from Sullivan & Cromwell late last year, the firm's first US appointment since Terence Kyle took over as managing partner for the Americas in September. "As more Japanese companies comply with international standards of accounting and disclosure it will become easier for them to list in New York and London, with the increased investor awareness and M&A opportunities that follow," says Tony Grundy, managing partner of the office. "Only 13 Japanese firms have listed on the NYSE over the past 30 years, however, some 15 firms are preparing to list." The firm's strategy on the Japanese side seems to be one of riding out present market uncertainty, comfortable with its present position. "If we can identify Japanese lawyers or firms who have the right skill set and strategic focus, we'd like to explore the possibility of a joint enterprise," says Grundy. "But if we can't we still have excellent relationships with the leading Japanese firms." Linklaters and other English firms are doing reasonably well with convertible issues, and changes to the Commercial Code should make that product even more Eurocentric in future, so their share of that market is secure. Also, almost every firm in Japan gets a piece of the securitization market, with a host of deals waiting in the pipeline. Meanwhile, the Wall Street practices are waiting expectantly for some privatization work, though they are by no means solely dependant on equity offerings private equity, joint ventures and M&A are all important areas too. The railway operators JR East and JR West are due to be privatized this year, and hopes remain for offerings from Japan Tobacco and NTT. Davis Polk & Wardwell, Simpson Thacher & Bartlett and Sullivan & Cromwell will expect to get that work, though Mitomi at Morrison & Foerster is also likely to be involved on the Japanese side. Those firms were involved in almost all the major US securities offerings last year: Dentsu, Nomura Research, Fujisawa Pharmaceutical, NTT DoCoMo and Fuji Television among them well over $10 billion of issuance in total.
Shearman & Sterling is also now upping the ante in Tokyo, with a role on the Advantest listing and a new hire joining the office, Masahisa Ikeda. "Although we have been wellrecognized for our Asian practice, the market where we have not traditionally been preeminent is Tokyo," says David Deck, the office's managing partner. "Masahisa should be a good fit for our capital markets practice and his addition will help us get to where we want to be. We see competition from both the Wall Street firms and the British firms, but no firm has cornered the market in the area of capital markets, so we feel that anyone is capable of establishing a strong presence so long as they retain their commitment and focus. One thing that is lacking among our rivals is the ability to do issuer representations you need a bilingual office to do that." Mostly, the New York firms do have language abilities, if not native speakers. Sullivan & Cromwell, in fact, has a joint venture with two bengoshi, Izumi Akai and Takashi Shimokado. For the most part the prime New York firms are modestly staffed, but their senior lawyers are experienced, averaging about 10 years in the Tokyo market. Certainly, David Sneider, at Simpson Thacher, Ted Paradise, at Davis Polk, and Akai, at Sullivan, all have at least 10 years in the city. Just as importantly, their track record, between them, includes almost every major US securities offering and M&A deal ever completed in Tokyo. You need more than a bilingual office to break that kind of dominance. Still, Shearman certainly has more than a bilingual office. Its role advising Advantest on its upgrade to an SEC listing, the Renault-Nissan strategic alliance and its role on the Toyota offering before that, have set Shearman on its way. And, as Grundy notes, there are plenty more Japanese companies waiting to list in New York once the market regains its composure. Whether there is enough work for all the firms that are now developing US law practices remains to be seen. Law firm mergers With Linklaters and others waiting on a change to the joint enterprise regulations and the UK Law Society, among others, putting pressure on the Federation of Bar Associations to relax the rules, many are expecting that changes could take place within a couple of years. There is certainly no prospect that anything is likely to happen at the moment as the larger Japanese firms are all doing well and are growing rapidly. "The big four are now quite comfortable and they're growing rapidly," says Michael Hancock, managing partner at Lovells. "An enormous gap is opening up between them and the middleranking firms now." So, the big firms feel no need to team up with a foreign firm while in a position of strength, though the idea of doing so while in a position of weakness can hardly be their strategy either. Nishimura for one is "optimistic about competition with the joint enterprises". Some suspect that the firm is the least likely to merge. "Nishimura has become quite aggressive of late," says one foreign lawyer in Tokyo. "I have even noticed them trying to take a lead in managing transactions." Anderson Mori is in favour of changing the rules. "Some people want more liberalization to the joint enterprise model," says Kenichi Nakano. "We have an office in China, and there's no joint venture system there so we sympathize with the foreign firms." But the firm does not plan to merge even in the event that the rules are relaxed. "We have sufficient new lawyers each year, so we don't have a need for that," says Nakano. "We have maintained an independent principle we want to work with the best firms on a
case-by-case basis. I don't think our clients care very much. There is no serious discussion about an alliance." Nagashima Ohno and Mori Sogo, on the other hand, are certainly positioning themselves well and, should they eventually decide to consider the idea of alliances, will be attractive outfits for the international networks, such as Clifford Chance and Linklaters. Some have suggested that the quest for size among the Japanese firms is a defensive move, but when one considers the Clifford Chance/Rogers & Wells merger it becomes clear that size is but a small obstacle. A firm of 150 lawyers in the world's second-largest economy is hardly too big for any of the globalizing firms. Hideo Norikoshi, a lawyer at Linklaters and a member of the committee considering reform proposals, suspects that change could be little more than two years away. The Japanese firms, most of which accept that change must eventually happen, favour the Singapore model. To them, the Singaporean firms have managed to maintain their autonomy while at the same time being able to offer their associates overseas experience at top firms in London and New York. It is an attractive proposition for the Japanese firms, jealous of their franchise and keen to maintain their autonomy. As ever, merging two partnerships would also cause headaches. "In Japan it is easier to make partner, and at least 50% of lawyers could do so," says Hara at Nagashima. Recent changes that allow Japanese firms to incorporate will also open the possibility of branch offices and, therefore, mergers between Tokyo firms and firms in the Kansai region, centred around Osaka. Oh-Ebashi is the favoured target among the Osaka firms, and firms that are particularly interested in getting bigger Nishimura for one may well be interested in teaming up. Foreign lawyers were disappointed to realize that the professional corporation would not be available to them. If foreign lawyers were disappointed, the UK Law Society was incensed. "Japan has a shortage of lawyers," said David McIntosh, president of the UK Law Society. "Even through increased recruitment it will take 10 years before the shortfall is reduced. Deals have been delayed and investors are put off because they are not confident in due diligence procedures. International firms can help solve this without damaging local lawyers." Banging and shouting is perhaps the least likely method to prevail in this argument. A new law school system will be introduced in 2004, which it is hoped will solve the problems of under-supply. However, so far the reaction has been lukewarm. Japan is very good at importing US systems, legal or otherwise, but has history of implementing them very differently. The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our terms and conditions and privacy policy before using the site. All material subject to strictly enforced copyright laws. 2014 Euromoney Institutional Investor PLC. For help please see our FAQ.