The Sun Rises

Are the walls around the Japanese legal market finally coming down? Next month the Japanese government will announce whether foreign law firms can hire Japanese lawyers (bengoshi). The move, part of a broader justice reform effort, would abolish strict rules governing foreign firms' practice in Japan. The prevailing view is that change will be incremental -- but enough to fuel a competitive legal market that's already heating up.

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Are the walls around the Japanese legal market finally coming down for Western firms? Next month the Japanese government will announce whether foreign law firms will be allowed to hire Japanese lawyers (bengoshi). The move, part of a broader justice reform effort, would abolish the strict rules governing foreign firms’ practice in Japan — rules that until now have limited foreign lawyers to working on a set number of deals or parts of deals within highly regulated joint ventures with Japanese-owned firms. U.S. and U.K. law firms, their clients, and their governments are all pushing hard for fully liberalizing the rules. The changes would lead American and British firms to jump into the market, with a lateral hiring spree and a rush to merge with Japan’s much smaller but comparably profitable domestic firms. This would all come at a time of great commercial opportunity, where troubled Japanese industries are eager for advisers with keener financial and legal sophistication and resources. So what are the odds of an overnight transformation of the Japanese market? Not great. Local opposition — based on the universal impulse to repel competitors and the Japanese suspicion of foreigners entering its isolated business community — is probably too stiff. But, unlike past reform efforts that went nowhere, this one is likely to yield at least incremental changes — and fuel a competitive legal market that’s already heating up. Significant reforms are critical to Western lawyers and their clients. “If this train leaves, there won’t be another one for five or six years, and this third-rate legal market will live on in Japan for another decade,” says Charles Stevens, managing partner of Freshfields’ Tokyo office and head of the Foreign Lawyers Association of Japan. In a nation obsessed with face and formality, such blunt talk hasn’t won many local friends. But the fact is that, by Western standards, even Japan’s top firms are too small, and the overall shortage of lawyers in Japan is too acute, for Japanese businesses to get the restructuring help that they need. Japan’s largest firm, Nagashima Ohno Tsunematsu, has just 144 lawyers. For now, Japanese businesses rely on a mix of domestic and foreign firms to get deals done. Due diligence gets short shrift because of the limitations — practical or regulatory — burdening both kinds of law firms. Deals that get done have been known to implode later because of unforeseen problems — problems that Westerners think their brand of know-how could have prevented, if only they were freer to use it. If the rules were to change, lawyers on both sides of the issue predict that foreign firms would swiftly start merging with the Japanese. In the meantime, several Japanese firms have arranged local mergers. Nagashima Ohno became the largest domestic firm through a merger in 2000 with Tsunematsu Yanase & Sekine. Mori Sogo is finalizing its own deal with Hamada & Matsumoto to create a 140-lawyer firm. And in July, Asahi Law Offices announced that in October it will merge with Komatsu, Koma & Nishikawa, forming a 100-lawyer firm. Western firms are on the move, too, even in advance of knowing how much, if at all, the rules may change. Firms that are rapidly expanding include New York-based Cleary, Gottlieb Steen & Hamilton; Jones, Day, Reavis & Pogue; and San Francisco’s Morrison & Foerster and Orrick, Herrington & Sutcliffe. Last year Orrick hired securitization expert Kaoru Haraguchi from New York’s Allen & Overy. And it recently made real estate partner Dennis Martin head of its Tokyo office, with San Francisco of counsel James Tervo moving to Tokyo to lead the real estate practice in Japan. Among the English firms, Simmons & Simmons stepped up its presence with the surprise announcement last September that it was forming a joint venture with 12-partner TMI Associates. Western firms getting into the Japanese market early will have a clear advantage over firms that have so far failed to acquire local law capability. Laggards include Allen & Overy, whose joint venture collapsed last year when it lost Haraguchi, and Linklaters, which also has no local law capability. Behind the campaign to abolish joint ventures and open the market more widely to foreign firms is the Japanese government’s effort to reform its arbitration and civil litigation systems. Details of the legislation are due to be revealed in October, for submission to the next ordinary session of the Diet in January. Foreign law firms aren’t being demure in their support for the changes, and they have been aided by the U.S. and U.K. embassies, along with the European Union delegation and American Chamber of Commerce in Japan. Clients are being heard, too. Prominent figures from major corporations and investment houses like General Electric Co., Morgan Stanley and Itochu Corp. are part of the lobbying effort. Vicki Beyer, an in-house lawyer at Morgan Stanley and member of the government commission that is studying the reforms, is one such client. But even she is prepared to accept that “the Japanese legal profession is just not ready for complete freedom of association yet.” That’s the prevailing view — that incremental change is more likely than a radical shift. What shape would such reforms take? The government could simply relax the rules surrounding joint ventures, to allow foreign lawyers and bengoshi to work more closely together. The joint venture system would remain intact and firms would not yet be able to blend their finances. The changes also might involve some tinkering in the joint venture structure to allow qualified foreign lawyers to advise on more types of deals and on a larger portion of deals with an international element. Or they might go even further and allow qualified foreign lawyers to employ bengoshi, but only within an independent office. Under this scenario, bengoshi would still be excluded from any international partnership. In the meantime, the demand for increasingly sophisticated legal services continues to grow. All the more reason for protectionists to dread the inevitable influx of foreigners, or as one protectionist calls it, “the McDonald’s franchising of legal services.” The comparison is not exactly apt, but it’s worth noting that the land of the Bento box is now also one of the planet’s largest markets for McDonald’s. Related chart: Who Has a Head Start Saira Zaki is a free-lance writer in Tokyo.

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