Japanese M&A: Defending home turf

Author: | Published: 1 Dec 2006
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In March this year, telecommunications corporation SoftBank acquired mobile phone provider Vodafone's Japanese branch for $15.1billion. Understandably, it took the limelight and column inches within Japan's M&A market. But the SoftBank deal represented more than mere good publicity and huge fees. It highlighted changes in both the financial and legal M&A market.

For foreign law firms, the decades-long effort to exploit the country's tightly protected legal services market was rewarded with the mandate. Lovells acted for SoftBank, Linklaters acted for Vodafone. Lovells got the business from a long running relationship with SoftBank; but Linklaters' won the mandate largely because of 2005's integration with Japanese firm, Mitsui Yasuda Wani & Maeda. The integration had facilitated an influx of bengoshi (Japan qualified lawyers) into Linklaters, and thus enabled the firm to handle the Japanese, as well as US and English legal issues of the deal in-house.

Two few lawyers

While the two firm's method of winning work differed, they are facing the same problem: Japan's M&A market is growing, but the availability of Japanese lawyers is not. Encouraged by the country's economic recovery and its government's positive law changes, foreign investors are starting to gather. With both international and local firms scrabbling to recruit, the legal situation in Japan's M&A market is a volatile one.

Outbound acquisitions by Japanese companies have been roundly impressive in the past twelve months. Domestic companies announced $17.5 billion worth of overseas acquisitions – nearly three times the level of transactions in the opposite direction. But while the financial press has been squealing about hostile takeovers and poison pills, the law firms have had more pressing concerns, a lack of quality lawyers.

These concerns were highlighted on May 1 2006, when the majority of the provisions in the country's far reaching commercial law came into effect and opened up M&A in Japan. Designed to encourage both foreign and domestic acquisitions, the rules contained a few provisions that are opening doors for investors and consequently driving work for law firms.

Tim Lester, Lovells

Having only come during May this year, the effects of these reforms are just beginning to be felt. While there is not a great amount of domestic opposition at the moment, the reforms should increase friendly takeovers and, in the long run, more hostile activity as well. "The changes will hopefully increase profitability of domestic companies, and thus spur on foreign interest [which will start as friendly takeovers]. Over time this will probably shift into more hostile takeovers," says Tim Lester, partner at Lovells in Tokyo.

If the M&A regulations kick-start activity as expected, they will exacerbate the situation for law firms in Japan. The problem is simple: there are just not enough quality Japanese speaking lawyers in Japan. "Finding good people is very hard. Europe is booming, and it is very tight here," says Lester. To complicate things further, the law changed in April 2005 to give foreign firms permission to establish offices in Japan that could consist of both domestic and foreign lawyers, giving them more freedom to practice and expand within Japan. The new rules mean that foreign law firms can now stand alone in Japan, with Japanese lawyers providing legal advice on Japanese law and foreign lawyers providing advice on foreign law under the same roof.

Linklaters, which became the first foreign law firm in Japan to operate without amendment to its internationally recognized name, has taken advantage of the rule changes and others are hoping to follow. But another approach of international firms, and one that has been favoured by US firm Simpson Thacher & Bartlett, is to carry on practicing its own law and run deals on an ad hoc basis with Japanese law firms. Lovells is also dabbling with such a process. "It works on a transaction by transaction basis. It's hard to tie yourself to one law firm," says Lester. There are, he says, 30-40 lawyers in the biggest firms in Japan, and five to 10 in the smaller ones. "This isn't enough for large M&A."

Japanese in the ascendancy

And local firms are still getting the mandates. Japanese firms expect record profits this year. Indeed, in April this year, Nishimura & Partners and Asahi Koma Law Offices agreed to merge and will become Japan's biggest law firm. It will create a legal powerhouse in Japan with 350 lawyers. This fact is not lost on international firms, who are aware of the discrepancy between demand and supply of local lawyers, and the doubling up of domestic firms. "On the international side it's hard to find people with the right language qualifications," says Alan Cannon, partner at Simpson Thatcher & Bartlett, Tokyo.

Although, as Cannon says, there is a need for international experience (the merger between The Bank of Tokyo-Mitsubishi and UFJ Bank needed two US counsel for the US listings), local law firms will remain central. And Japanese firms, aware of the opening M&A floodgates, are recruiting local bengoshi as well as doubling up. Daniel Hounslow, attorney at Clifford Chance, was recently quoted as saying that when he asked a leading Japanese partner why he was hiring so many junior lawyers, he replied: "because of you lot." When Hounslow pressed him, he said they were trying to grow themselves large enough to prevent the international firms "swallowing them up."

Up until now, growth has been fairly pedestrian. The new regulations have taken time to settle. "Their intention is to provide a clear framework. But it may be unhelpful at the moment because things are changing and people are trying to keep up with the new regulations," says Cannon. Yet firms are already preparing for the deluge. The signs are clear: a reviving economy, an inviting government with inviting regulations, and a nascent private equity market. But with the absence of bengoshi, the question is, when the mandates do come, which firms will be better prepared? TY