Analysis of the Liberalisation of Japan’s Legal System - Implications & New Opportunities in Japan for FLFs

Aug 11, 2011


In spite of whatever political uncertainty Japan may be seen to be experiencing there continues to be a general consensus that a key to stimulating economic growth and revitalising the Japanese economy resides in the continued participation and expansion of Japanese corporations in overseas markets combined with the creation of a Japanese domestic environment that encourages inward foreign direct investment (FDI) from foreign capital interests.

As a result, and for reasons explained further below, the number of cross-border projects and transactions involving Japanese corporations and institutions in overseas markets has continued to increase giving rise to a growth in demands for more complex and sophisticated legal services and expertise pertaining to the local laws and regulations of overseas markets and in some cases consultation in regard to multiple jurisdictions is required. Scale wise, the legal services and expertise in most demand from international law firms involves the areas of cross-border mergers and acquisition (M&A), corporate restructuring, intellectual property rights, the new financial instruments and competition law and privatisation projects.

This article explores the background to the deregulation of Japan’s legal system and outlines the emerging opportunities for foreign law firms (FLFs) to serve clients in Japan.

Japan’s Commitment to Increased Liberalisation
From a global participatory perspective, as a nation with extensive international business interests across the globe, Japan is obliged to act in accordance to the liberalisation and opening of world markets objectives of the World Trade Organisation (WTO). As a member country of the Organisation for Economic Co-operation and Development (OECD), as part of its commitments to the General Agreement on Tariffs and Trade (GATT) Uruguay Round of trade negotiations and under the General Agreement on Trade in Services (GATS), Japan has a responsibility in the promotion of the free flow of capital between borders and to the liberalisation of its own economy. The gradual removal of trade barriers and the liberalisation of its market economy has come to be accepted by Japanese business and the GOJ as imperative to Japan’s ongoing ability to compete internationally and for its future inclusion and prosperity in the global economy and the protectionist and exclusionary policies that characterised the post world war two twentieth century period of economic reconstruction and economic growth are essentially a phenomenon of the past. Additionally, the need to encourage foreign direct investment (FDI) to Japan as a means of stimulating Japan’s economic growth and revitalising its economy is considered a major element to the creation of a prosperous nation and securing its position in the global economy in the long-term.

In acknowledgement of its nation’s enhanced global responsibilities and based on the recognised imperative to facilitate inward trade and investment, the various Japanese governments of the 21st Century have remained committed to the formulation of strategic measures focused on the introduction of legislative reforms and gradual deregulation in order to create a more open economy and a business environment that is attractive and encourages foreign direct investment (FDI).

Inbound & Outbound Trade and Investment
M&A to Japan has increased significantly in recent years and M&A of Japanese companies by foreign capital interest represents an increasing share of inbound investment to Japan with M&A accounting for 18% of its FDI in 2009.
According to Thomson-Reuters deal intelligence as of May 2011 cross-border M&A globally for the year to date 2011 totalled US$399.8 billion up 44% from the previous year. Japan’s Takeda Pharmaceutical US13.9 billion acquisition of Switzerland’s Nycomed represented the second-largest outbound Japanese M&A deal on record behind Japan Tobacco’s US$18.8 billion purchase of the UK’s Gallahar Group in 2006.

Measures to Protect Japanese Business Interests
An important aspect of any nation’s trade and investment development is the assistance provided by a Government to help corporations identify and capitalize on opportunities presented in overseas markets thereby potentially contributing to its nation’s productivity and growth.

The GOJ accepts that it has a level of responsibility to help ensure that the business interests of Japanese corporations engaged in international trade and investment are protected and opportunities not compromised or lost due to factors such as insufficient knowledge, an impeded response time, inadequate local legal representation or poor negotiations stemming from a systemic failure to facilitate the access of key decision makers, most often directors based in Japan, to suitably qualified and experienced international professional services and resources. Moreover, local legal expertise and access to up to date information regarding compliance issues as well as the pending or planned introduction of new regulations, standards or compliance laws that may impact on a business is critical to determining how a corporation responds in the immediate to long-term potentially influencing its competitiveness and survival in the overseas local market, internationally and in its homeland domestic market.
As a result, the benefits of the creation of a liberalised legal system that encourages foreign law firms (FLFs) to invest in Japan through the establishment of a corporations with a permanent foreign lawyer presence in Japan has come to be viewed as integral to addressing the complex needs and providing the particular type of legal expertise required by Japanese corporations engaged in international business transactions and ventures.

Background to the Evolution of Japan’s Legal System
From 1949 to 1955, foreign lawyers could maintain offices in Japan, serve both Japanese and foreign clients and handle cases involving foreigners without being citizens of Japan and without a reciprocity agreement with that lawyer’s home country. Until the introduction in 1987 of the foreign lawyer law, Gaikoku Bengoshi ni Yoru Horitsu Jimu no Toriatsukai ni Kansuru Tokubetsu SochiHo 66, (Special Measures Law Concerning the Handling of Legal Business by Foreign Lawyers, (Law No. 66 of 1986) (herein referred to as the Foreign Lawyer Law ), the main legislation governing the activities of foreign lawyers and FLFs operating in Japan, the Japanese legal sector had been completely closed to foreign lawyers since 1955. In spite of several amendments to the law by the Japanese Ministry of Justice (MOJ) to supposedly encourage the establishment of FLFs in Japan the liberalisation of Japan’s legal sector has been a slowly evolving process. The 1994 introduction of a system known as Gaigokuho-Jinni-Bengoshi (GJB) allowing bengoshi and gaiben to form a specific joint enterprises and share profits for example attracted only a handful of foreign law firms due to its systemic restrictive conditions and it was not until 2005 that Japan began to see a significant increase in the presence of foreign lawyers.

Historical Domestic Opposition to Foreign Lawyers
One explanation for the perpetuation of Japan’s exclusionary legal system nature and the stagnation in the process of allowing foreign lawyers greater access to the Japan markets is based on socio-economic and cultural protectionist arguments popularly advocated in the past by members of the Japanese legal profession, the (MOJ) and Nichibeiren who strongly opposed granting permission for foreign attorneys to practice in Japan contending that the typical ‘aggressive’ approach of foreign law firms, particularly litigation oriented Americans, would directly conflict with their country’s unique legal culture that values a conciliatory legal approach to conflict resolution with a priority on compromise or reaching a harmonious mutual understanding rather than litigation and settling disputes through the court system. Another concern of MOJ and Nichibeiren was that Japanese lawyers, already in short supply due largely to the difficulty in qualifying for a license to practice law, would be lured away by the tendency of FLFs to offer higher salaries and other attractive incentives in order to attract and retain the best pool of talent.

Impact of Globalisation on Japan’s Legal System
Overtime however, mounting pressure from abroad and the socio-economic realities of globalisation combined with the GOJs commitment to creating a domestic environment that is more favourable and attractive to foreign business participation and investment has come to supersede opposing domestic forces. Moreover, as the number of Japanese firms engaged in cross-border business ventures and M&A involving foreign companies continues to increase the internationally focused legal requirements of Japanese corporations and institutions have become more complex and specialized requiring expertise from lawyers who have first-hand local experience and legal expertise in the respective overseas location.

M&A Japan Market
The limited number of Japanese lawyers licensed to practice in Japan who are considered sufficiently experienced and qualified to provide such consultation has forced Japanese clients to seek legal consultation and support from foreign lawyers.

Imperative Need for liberalization of Japan’s legal system
The need for improved access to the international legal expertise and capabilities of foreign lawyers by Japanese corporations and in recognition of the important role played by international law firms in fostering while protecting the business interests of Japanese corporations and institutions involved in overseas business has been a driving force behind the introduction of key legislative reform in Japan in April 2005 and 2010.
Acceptance that the liberalisation of Japan’s legal system would be a much faster process and more effective approach for granting Japanese corporations greater accessibility to experienced foreign lawyers working for international law firms and supported by a team of legal professionals who are often capable of providing legal expertise across multiple-jurisdictions than waiting for the number of Japanese lawyers (bengoshi) with an equitable level of overseas experience and training to grow sufficiently enough to respond to the level of demand for foreign law expertise by Japanese corporations in the 21st Century.

The Introduction of the Most Recent Key Legislative Reforms – 2005 & 2010
In July 2003 the MOJ announced plans to enact legislation effective from April 2005 that would allow registered FLFs (gaiben) to enter full partnerships with Japanese firms (domestic law firms – DLFs) and significantly eased restrictions on partnerships’ areas of practice. Although still only allowing Japanese lawyers to practice Japanese domestic law Gaikokuho Jimu Bengoshi (a foreign lawyer qualified under Japanese law) and gaiben were allowed to hire bengoshi (a lawyer qualified under Japanese law). Also, importantly, under the new legislation partner firms were permitted to share a unified name.
“Several major international law firms immediately took advantage of this liberalization in order to provide more seamless and comprehensive service to their clients. Other international law firms chose not to fully merge with Japanese law firms, opting instead to remain in “joint venture” arrangements with Japanese firms or with individual Japanese bengoshi. Still other international law firms with a presence in Japan have decided to remain independent.’

Next to the reforms introduced in 2005, the most important progress in the liberalisation of Japan’s legal sector followed the official April 1, 2010 announcement of further legislative amendments permitting FLFs to incorporate as a Law Corporation (“GJB”) in their own right thereby allowing FLFs to operate from their own office in Japan. FLFs operating in partnership with a domestic Japanese bengoshi lawyer (“GKJ”) were also permitted to form Law Corporations. The other major recent announcement by the MOJ is a planned amendment, expected to be passed by the Diet in 2012, allowing Law Corporations to operate multiple offices.

Implications of Liberalisation & New Opportunities in Japan for FLFs
An article published by Asian Business Legal Online notes that the presence of FLFs in Japan has resulted in the reshaping Japan’s legal sector with improved standards and a new approach to the provision of legal services to business in Japan. Domestic law firms (DLFs) are observed has having only strengthened with the Japanese ‘Big Four’ Anderson Mori & Tomotsune, Mori Hamada & Matsumoto, Nagashima Ohno & Tsunemarsu and Nishimura & Asahi growing from ‘modest-sized firms to legal leviathans, casting a shadow over the legal market.’

In line with the increased presence of leading international FLFs is a notable shift in the volume share of cross-border transaction related legal work that Japanese clients are demanding from DLFs toward domestic work as Japanese corporations increasingly seek counsel from the international FLF they consider best able to represent their interests in particular overseas jurisdictions. This increased preference to retain the services of FLFs for cross-border M&A projects and transactional work is highlighted in the AJB’s “Japan 2009” assessment report by the comments of Nagashima Ohno & Tsunematsu chairman Hisashi Hara estimating that while cross border transactions represented about 80% of his firm’s legal work in the 1980s, today, 70% of the work handled by Japan’s top DLFs is domestic work ‘with FLFs attracting the lion’s share of it owing largely to their international clientele’.

The ALB report also anticipate an eminent change in the ‘cooperative consensus that has so far typified the relationship between DLFs and FLFs’ and increased competition as DLFs strive to win back a greater share of the lucrative cross-border transactional and M&A related work. The departure from Allen&Overy of M&A specialist partner with legal experience in multi-jurisdictions throughout Asia, Piyasena Perea to join Anderson Mori & Tomotsune as a special foreign counsel is sign that already Japan’s largest law firms are taking steps to improve their resource capacity in order to handle the extremely lucrative outbound M&A business of Japanese clients.

Japanese companies M&A interest in Australia
In recent years the main focus of Japanese M&A in Australia has been the energy and resource, agribusiness and property sectors have been the main interests.
According to RECOF, from January-November 2010 the total value of M&A deals involving Japanese companies was ¥6.16 trillion and Japanese M&A directed at foreign companies amounted to 3.43 trillion yen during the same period, accounting for 55.7 percent of the total. Australia has long been a popular destination for Japanese M&A and under the legal advisory of leading Australian law firm, Blake Dawson, the acquisition of the outstanding 53.87% ownership of Lion Nathan by Kirin Holdings, the second-largest beverage company in Japan, in October 2009. The transaction was valued at AU$3.3 billion ($2.9 billion) and has been noted as ‘as the largest investment by a Japanese company in Australia’ .

Japan as a Market for Australian Law Firms
To date, leading Australian law firm Blake Dawson is the only Australian law firm to take advantage of the corporation law and open an office in Tokyo with other leading Australian law firms opting to serve Japan related business through their partnership or alliance relationship with a Japanese DLF. With particular focus on handling outbound work from Japan into Australia with sector focuses on natural resources, financial services and consumer products Blake Dawson has been actively servicing Japanese clients for more than 15 years of experience and a network of relationships with Japanese businesses . Committed to fully servicing client needs and expanding its practice Blake Dawson became the first Australian law firm to secure a license to practice and establish an on-the-ground operation in Japan when it opened an office in Tokyo on April 1 2010.

Partner Natsuko Ogawa comments on Blake Dawson’s commitment to serving Japanese clientele, "Our new Tokyo office will offer our Japanese clients a richer service offering through an on-the-ground presence, bringing an even greater focus and depth to these relationships while opening up new opportunities for the firm and our legal staff with an interest in Japan."
Final Comment

Clearly the main benefit in having permanent representation in Japan is the ability to service and foster existing client relationship while nurturing new prospects. Experience has shown that investment in a direct presence in Japan can potentially open further doors to foreign law firms seeking to pursue additional business opportunities both within Japan and other parts of Asia. When considering the needs of Japanese clients it should be remembered that the key decision makers driving a particular cross border business venture are, in most cases based in Japan, and having access to locally based legal expertise who can meet regularly face to face without time constrictions is often a key contributing factor to the final decision by a Japanese corporation to engage a particular provider of professional services.

*Note:The views expressed in this article are those of the author and do not necessarily reflect the views of JETRO.