East side story

Asia as a whole is going through some momentous changes: last year, Singapore allowed foreign firms to form joint ventures with local counterparts to provide domestic advice for the first time; China is overhauling its attitude to outsiders as part of its accession to the World Trade Organisation; and countries previously deemed low money-spinners such as Indonesia, Malaysia and Thailand, are throwing up a host of meaty restructuring deals as the region pushes its way out of recession. Asian practices are now just that – interlinked offices peddling their one-stop shop message.

But in geographical, economic and industrial terms, Japan sits above the rest of Asia. Its economy has been stagnating for the last 10 years, and it is only in the last few months that it has started moving. The country may currently be grappling with a host of political and financial problems, but it has nevertheless prompted a kick-start for its economy. Inward investment is up, securitisation is taking off and corporate is going through a resurgence. In part, this has been due to a relaxation in company laws, but it is also due to the realisation that globalisation and liberalisation are the best ways forward.

Yet as the economy gets moving, the legal market is still fighting its own internal battles. Most significantly there is a dire shortage of bengoshi (senior local lawyers). Training is a long, intensive and difficult process: last year, only 994 applicants passed the final bar exam. There are 8,580 lawyers in Tokyo out of a total of 18,243 throughout the whole of Japan. Put this into context – compare it with, for example, the 80,000-odd lawyers in the UK – and it is a pitiful amount of lawyers for such an important economy.

And out of this, only a handful are capable of providing international advice. Tony Grundy, Linklaters & Alliance’s Tokyo head, estimates that there are only around 100 suitably experienced bengoshi. One of the main problems is language – with the bar exams taking up so much of their time, it is little wonder that learning English is way down the list of potential bengoshi’s priorities. Also, until fairly recently, Japanese lawyers served only Japanese clients, eliminating the need to speak English.

The authorities are aware of the problem and are duly increasing the permitted number of bengoshi candidates. Grundy, though, nevertheless claims that the authorities are being shortsighted. “The number [of bengoshi] was fewer than 100 a few years ago, and will go up to 2,000 in the next couple of years. So the authorities think they’ve addressed concerns,” he says. “Bear in mind, though, that a third will not go into private practice but will become public servants, judges and so on. Lawyers also need to be fluent in English if they’re going to advise on international transactions. It will be a minimum of 10 years before these people are able to contribute sensibly on major international transactions.”

But the number of bengoshi is only the tip of the iceberg for the Japanese legal profession. Some clients are forcing changes through a growing global position, others are keeping one foot in the past by sticking rigidly to the old culture. Everybody talks about credibility in front of clients – getting it, using it – almost as if the rigid confines of Japanese respect-based etiquette have rubbed off on international firms and pervaded their strategies.

The economy may have only recently started moving, but a number of major Western players and investment banks have been in Japan for some time. Banks with Tokyo operations include Citibank, Morgan Stanley, Merrill Lynch, Dresdner Kleinwort Benson and HSBC, to name but a few. Coupled with this, there are some massive Japanese clients – Mitsubishi and Japan Telecom, for example – that are concentrating on their Western activities and attracting inward investment (see deals box, page 26).

And yet the investment banks are creating another set of problems altogether for the legal market. In-house, previously seen as an also-ran to partnership (and even more so in the elitist world of the bengoshi) is becoming increasingly more respectful. Just under a year ago, Hisao Hirose, one of the most senior partners at White & Case’s associated firm Kandabashi Law Offices, left to become general counsel at Citibank (The Lawyer, 22 May 2000).

His move is part of a general influx of lawyers into banks. Frustrated at the lack of lawyers who can provide domestic advice and also have international experience and expertise, many banks are beginning to build up teams of transactional lawyers and to take the work in-house.

Grundy says: “When Goldman Sachs wants to execute a transaction, it wants to be able to do it as it would in New York. But the advisers are simply not available. They all say how frustrated they are that they have to plead with lawyers to take on the work. It’s a quite extraordinary state of affairs.”

About a decade ago, many of the Japanese institutions did the bulk of their work in-house, using external lawyers as and when they were needed. But the concept of bringing a number of fully qualified bengoshi in-house to provide advice on transactions is new, and it is one that is gaining steam, particularly as private practice conducts its own personal wars.

Yet Grundy remains confident that the threat can be managed, in the short-term at least. “The investment banks have had no choice but to hire bengoshi,” he explains. “They’re building transactional capabilities, but there are limitations to what they can do because the flow of transactions isn’t steady, so the banks are unable to overstock.”

One way of meeting this challenge is to give the client a one-stop shop, capable of providing both local and international law. This can be achieved through a joint venture (tokutei kyodo jigyo) with a local firm and is the only way in which international firms can provide domestic advice. Several players already have joint ventures, and Clifford Chance began 2001 by forming its own alliance with Tanaka & Akita (The Lawyer, 19 February).

Rob Burley, Clifford Chance’s Tokyo head, says of the decision: “We try to be a local firm wherever we are. There’s the general globalisation argument and the pressures that are in the marketplace in all industries; then there’s the competitive pressure – a number of our competitors have joint ventures.”

But the most important reasoning was to keep the clients happy. As Burley concedes: “It’s not particularly convincing if you go to Morgan Stanley and say, ’Give us your M&A work – we can handle it with just the one Japanese lawyer.’”

Yet not everyone feels that joint ventures are the best solution. Some pour scorn on those local firms that have aligned themselves with international firms, claiming that the best bengoshi are still fiercely independent. A range of organisations, including the American Chamber of Commerce in Japan (ACCJ) and the Foreign Lawyers Association of Japan (FLAJ), have been vocal in their disapproval of the joint venture system.

The FLAJ, for example, recently went as far as to argue that the system was simply not working. It cited the few numbers of international firms that have formed joint ventures, the miniscule amount of bengoshi involved in the alliances, and recruitment problems.

Lovells does not have a Japanese capability, and Marc Bartel, the Asia regional manager for the firm, refuses to be rushed into one. While he concedes that a domestic capability is important, he also says: “There’s the danger of the Clifford Chance syndrome – if they do something, we have to do it. If it means doing A or B, then so will we, but only if it’s good for us.”

Steve Lewis, Herbert Smith’s Tokyo partner in charge, goes one step further, arguing that a joint venture can actually be a hindrance. “It doesn’t really add much at the moment. It just means the guys are in the same office. You’re also restricted as to the lawyers you can use,” he says.

Like Lovells, Linklaters refuses to be rushed into Japanese capability, particularly if it means having to compromise on standards. Although it has set itself the target of being able to provide Japanese legal advice by May 2000, Grundy adds: “Our strategy is now quite focused on premium work for premium clients. That means the top-end interesting work, which we get to charge good legal fees on. We have to ask ourselves, ’Would the lawyers we can attract now satisfy our clients and the work we want to do?’ And the answer so far has been no on both counts.”

The term “good legal fees” is a particularly pertinent one in Japan. This is not, as Freshfields Bruckhaus Deringer’s Asia managing partner Ruth Markland puts it, a market where “you can pop in and within six months be making oodles of money”.

Japan is an incredibly expensive market for international firms to establish themselves in. Start-up costs are understood to run from 500,000 to 1m, and there have been casualties along the way. One notable casualty was Slaughter and May, which shut its operation in 1995. All the firms claim that their offices are profitable, but then they would, wouldn’t they? It also, as Markland adds, has to be part of a long-term strategy if the operation is going to work.

Japan is a contradiction – the world’s second most sophisticated economy yet in legal terms, on many levels, an emerging market. International lawyers have it all to contend with: a heavily etiquette-based way of doing business, protectionist bengoshi, authorities that are apparently blind to the problems of international lawyers, the rise of in-house transactional teams at their most important bank clients, and huge costs.

The entire market lags woefully behind Europe and the US. Partnership, for example, is still very much as it used to be in German firms or still is in UK barristers’ chambers. Bartel says: “For the bengoshi, it’s difficult to understand what partnership is. They’re very much standalone operations – they share costs but don’t split the profits. It’s still a profession where you build your own reputation, your own clients and your own business.”

Which, frankly, is a wholly outdated notion in such an advanced economy. Yet the international firms are still pushing on and trying to build some form of Japanese capability. After all, how can any international network, let alone an Asian one, be credible if it does not have an operation in such an important economy?

The firms that are already there are boosting their presences, be it through adding more lawyers, refocusing practice areas or seeking out local capability. And the new entries keep coming. US firm Hogan & Hartson, for example, made its first foray into Asia last year by opening in Tokyo (The Lawyer, 26 June 2000). On the UK side of things, Simmons & Simmons, no doubt fuelled by the continuing success of its Hong Kong office, is understood to be looking to establish some form of Japanese operation by the end of this year.

Because this is the point. In a land of such huge potential, and exactly because of such promising contradictions, get it right and every international lawyer will want to be turning Japanese. n