General trading companies, or sogo shosha, play a unique role in Japan’s economy. As their name implies, they trade, going abroad to acquire literally thousands of different products, these days most notably energy and natural resources, to sell to domestic Japanese industry.
But the sogo shosha are also advisors and partners, leveraging their vast international experience to help other, smaller Japanese companies go overseas, albeit for a price.
In short, the biggest trading companies have their hands in a huge proportion of cross-border deals involving Japanese companies. That makes them fantastic clients for international law firms.
And, sometimes, troublesome interlopers.
“Trading companies are the 800-pound gorillas in the [Japanese] market,” says one Tokyo partner with a U.S. firm. “They exercise a lot of influence over smaller companies, especially manufacturers, because they are seen as having so much overseas experience. It’s hard for any Western lawyer or banker to compete with that influence.”
The sogo shosha do lots of deals on their own. Indeed,
Many of the trading companies, notably Mitsubishi and Sumitomo, are part of larger keiretsu, or business groups of affiliated companies. But they also frequently partner with each other, with foreign partners, or with smaller non-keiretsu Japanese companies with which they may have ties. In April, Itochu took a 4 percent stake in a joint venture led by Japanese snack company Calbee, Inc. to set up production in China. In March, Mitsui announced it would take a 28 percent stake in company set up with Osaka-based Duskin Co. Ltd. to build a cleaning-equipment rental business in South Korea. Last year, Mitsubishi took a 33 percent share in a venture with two Japanese meat processors to expand in China.
The participation in a deal of a trading company, which can leverage existing overseas supplier and client relationships, is a huge source of comfort to the smaller companies which have less experience abroad, says Dale Caldwell, a partner at the Tokyo office of Morrison & Foerster.
“In some cases, it can be the deciding factor in whether the deal goes forward,” he says.
DLA Piper Tokyo partner Koji Ishikawa notes that the trading houses have very sophisticated legal departments and that the businesspeople have far more experience in how to structure and finance cross-border deals than most Japanese companies.
“It is natural that smaller companies would turn to them for advice,” he says.
But some lawyers with Western firms say they would rather provide that advice. “They do often undermine the other advisors, including us and the investment bankers,” says one American law firm partner who has advised Japanese companies partnering with trading companies. “If there is a disagreement, they will say: ‘your lawyers are wrong.’”
Trading houses contacted for this story, including Mitsui and Marubeni, did not respond to requests for comment.
Another U.S. lawyer also says sogo shosha are often given an outsized role in deals. “If there is a trading house on the deal, they do tend to lead in legal negotiations,” he says. “It’s also obvious there are conversations that you’re not privy to between the Japanese parties.”
But while they have a lot of experience, they are not always right, says the American partner who has advised companies dealing with trading companies. “Sometimes, they definitely know what they’re doing and add value,” he says. “But sometimes they come up with half-baked ideas based on what they think they know.”
The partner says trading companies regard Japanese-speaking Western lawyers as a threat to their cozy relationships with smaller Japanese companies. For this reason, he thinks the sogo shosha, which have offices around the world, often prefer to deal with foreign lawyers outside Japan rather than the Tokyo offices of international firms.
One Japanese lawyer, or bengoshi, with an international firm says he sees this behavior as well but thinks it’s more down to the way that sogo shosha executives regard themselves as international elites capable of dealing with London and New York on their own terms. “They really see themselves as the best and the brightest in the Japanese business world.”
They do tend to recruit from the top Japanese universities, says Rupert Burrows, an Ashurst Tokyo partner who was seconded to Sumitomo in the mid-1990s. As is typical in Japan, most of the in-house legal department staffers are typically not bengoshi themselves but many have studied law and a number are qualified in New York.
“The atmosphere is fairly international,” recalls Burrows. “Just about everyone speaks excellent English.”
Secondments of mid-level or senior associates are perhaps the main way international firms build relationships with the trading houses. James Robinson, a partner in the Tokyo office of Herbert Smith, says there is a broad understanding that the longer and more successful the secondment relationship, the more work will flow from the sogo shosha to the firm. But he says the wrong secondee, usually someone too new to the law or too new to Japan, has been known to set relationships back.
“We always send someone who has worked in our Tokyo office,” says Robinson.
Though he sees the potential for tension with foreign lawyers, Robinson says he has yet to experience it himself. He does think firms that are relatively new to dealing with sogo shosha may face more turbulence. “If you’re not used to dealing with them, they may stress-test you a bit,” he says. “At the end of the day, they do listen.”
Those firms that do advise trading houses do not find themselves limited to just one. The Tokyo-based lawyers who spoke to The Asian Lawyer on the record all say they represent several of the sogo shosha or even all of them.
And there is no question that relationships with the trading houses are worth taking a bit of stress. “They are really great clients to have,” says Caldwell. “They’re doing deals all over the place. They’re very sophisticated users of legal services and they need the full range of legal services.”