A&O must make the most of its long-awaited Japanese entry

As wish lists go, a local law capability for its Japanese office has been right up there for Allen & Overy (A&O) for quite some time.

While magic circle rivals Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters had all signed up bengoshi (Japanese lawyers) as full-time fee-earners since 2001, A&O had been limited to practising English and US law.

So it was with more than the usual oneupmanship that occurs when one magic circle partner transfers to a rival that A&O reported it would be launching a Japanese law capability for the first time with the hire of Freshfields partner Nobuo Nakata, together with partner Osamu Ito from local firm Asahi Koma (The Lawyer, 8 December 2006). As of 12 March, A&O Japan will call itself Allen & Overy Gaikokuho Kyodo Jigyo Horitsu Jimusho.

The name change accompanies an office management rejig, with the youthful Aled Davies now managing partner of the Japan office and Nakata leading the Japanese law operations (www.thelawyer.com, 12 March). Former office managing partner and legacy Loeff Claeys Verbeke lawyer Cees Vellekoop will retire.

More cynical magic circle rivals have dismissed the moves as mere catch-up, while kinder former partners have described it as “a step in the right direction”.

The latter is certainly true. This time last year the future of the office was hanging in the balance, with the management contemplating the axing of A&O’s Japan operations.

So it must be heartening for the firm’s 20-odd lawyers based in Japan that, as a result of a wholesale strategic review, as first revealed by The Lawyer (26 June 2006), management instead opted to invest heavily through hiring bengoshi, enabling the firm to compete on a level playing field with its rivals.

Davies said: “With the boom in M&A and other financing activity in Japan, we understand that the ability to apply international legal techniques to transactions in Japan is essential to ensuring the successful implementation of complex transactions.”

It was only seven months ago that Japan’s first-ever hostile takeover took place between one Nikkei 225 company and another, with Oji Paper’s £730m acquisition of Hokuetsu Paper Mills in August 2006.

And Japanese companies are rediscovering a taste for foreign acquisitions, such as Freshfields client Japan Tobacco’s £7.5bn bid for the UK’s Gallaher Group last December.

It was a previous lack of M&A activity that many firms cited as one of the reasons that Japan is such a hard market in which to turn a profit for Western firms. Moreover, lucrative litigation is a cultural taboo in Japan.

Also playing a part are high overheads (typical commercial floorspace in Tokyo goes for an average of ¥13,000 (£57.26) per tsubo (3.3m sq)) paired against a legal market used to cheap billing rates.

A senior partner at a magic circle firm says: “Japan has got used to crap service at a crap rate. It’s difficult to overcome that culture. But Japan is a unique place: it’s an immature legal market in a country with a very mature economy. There are great opportunities to be had.”

Costs are also dictated by a simple supply and demand dilemma in the legal market: bengoshi are extremely hard to come by and therefore can demand high salaries. There are only roughly 20,000 bengoshi to go around.
Which goes some way to explaining how even the behemoth global firms still run a tight ship in Japan. A&O is still only half the size of its rivals in Tokyo at 22 lawyers, compared with 44 at Clifford Chance and 40 at Freshfields.

Linklaters is by far and away the lead firm in terms of headcount with 60 lawyers, mainly because it was quick to merge with Mitsui Yasuda Wani & Maeda once the market was liberalised in 2005. Echoes of this are perhaps seen in Linklaters’ strategy in the Indian market, with its referral relationship with Thawar Thakore & Associates.

A&O is not alone in finding Japan tricky. It is no secret that Freshfields’ restructuring effort was targeting Paris and Japan, and that Nakata was a victim of that restructuring, but Freshfields maintains that Japan is still of vital strategic importance to the firm no matter what its profitability (negligible, by all accounts) because of key clients’ interest in the region. Private equity clients such as Kohlberg Kravis Roberts are particularly interested in Japan at the moment because of an anticipated restructuring boom.

And while Freshfields can boast decent Japanese corporate names such as Japan Tobacco, A&O as yet is acting mainly for Western banks in Japan. Not that there is anything wrong with that, but with Japanese companies becoming increasingly active it would be a shame, now that it has the capability, to let Japanese work go to its rivals.