M&A legal advisory services to Japan

Trends and Opportunities

The market

In recent years, Japanese companies have aggressively pursued acquisitions of overseas companies in a bid to be more globally competitive, and to diversify away from the domestic market.

A combination of short-term interest rates in Japan, low domestic growth, high-profitability and record-high company cash reserves [1] have created favourable conditions for Japanese companies to pursue overseas acquisitions. [2]

A 2017 Nikkei Research poll of 245 medium- to large-size Japanese companies found 23 per cent of Japanese companies surveyed intend to use their internal cash reserves to increase cross-border merger and acquisition (M&A) activity. [3]

 Global_deal_flows

(Source: Ministry of Economy, Trade and Industry , March 2018)

Whilst most of Japan’s cross-border acquisitions are in Europe, the United States and Asia, [4] Australia also continues to be a beneficiary of Japanese companies’ expanding global ambitions.

Japan was Australia’s second-largest foreign direct investor (FDI) in 2017, behind the United States, at around A$93 billion – accounting for 11 per cent of total FDI stock in Australia. [5]

Japanese companies are increasingly diversifying their cross-border acquisitions into non-traditional sectors such as renewable energy, information and communications technology, and services. [6] Recent high-profile investments in non-traditional sectors in Australia include: [7]

  • Japan Post’s acquisition of Toll Group for A$6.5 billion
  • Nippon Life’s acquisition of 80 per cent of MLC for A$2.2 billion
  • Daiwa House’s acquisition of Rawson Group (amount not publicly disclosed)
  • Recruit’s acquisition of People Bank and Chandler Macleod for A$360 million
  • Nomura Research Institute’s acquisition of SMS Management and Technology for A$124 million
  • Persol’s acquisition of Programmed Maintenance Services for A$749 million.

top_5_drivers 

(Source: Deloitte and MergeMarket, 2017)

Changes to the corporate governance code in Japan, which requires companies to meet return-on-equity standards, will make increasing M&A activity in Australia attractive to Japanese companies. [8]

These trends are contributing to increasing opportunities for Australian legal services firms.

The Japan-Australian Economic Partnership Agreement (JAEPA) guarantees existing market access for Australian lawyers and ensures Australian law firms can:

  • Form Legal Professional Corporations under Japanese law
  • Take advantage of expedited registration procedures for Australian lawyers residing in Japan and providing Australian and international legal services. [9]

However, such requirements may soon be removed for all foreign-qualified lawyers. Media reports in April 2018 suggest the Japanese Government aims to relax regulations for foreign-qualified lawyers to strengthen Japanese companies’ capacity in international arbitration. [10] The legal amendment is reportedly likely to come into effect by March 2019.

sector_breakdown_japanese

(Source: Deloitte and MergerMarket, 2016)

Competitive environment in Japan

The type of legal services foreign-qualified lawyers and overseas law firms operating in Japan are able to provide is limited by the Ministry of Justice’s Act on Special Measures concerning the Handling of Legal Services by Foreign Lawyers. [11]

Foreign lawyers who do not have Japanese law qualifications require the approval of the Minister of Justice to work in Japan as ‘registered foreign lawyers’. [12] As of 2017, there were 411 registered foreign lawyers in Japan, 27 of whom were qualified in Australia. [13]

Registered foreign lawyers are limited to providing the following legal services in Japan:

  • Advice on the law of countries in which they are qualified
  • International law 
  • Advice on law of third countries (only in cases in which written advice has been obtained from a qualified expert in that country). [14]

The market for legal services in Japan provided to Japanese companies undertaking M&A activity is fragmented and highly competitive. In the first quarter of 2018, 20 legal services firms captured 18.6 per cent market share for the number of deals related to cross-border M&A legal advisory services. [15]

While domestic Japanese legal services firms typically secure a larger number of deals owing to their domestic advantage, on average, foreign legal firms have a larger share of high-value cross-border M&A deals.

top_10_law_firms

(Source: Bloomberg, 2014 , 2015 , 2016 and 2017 )

Market opportunities for Australian law firms

While Japanese investment into Australia is still dominated by the resources and energy sector, where long-term relationships with the same law firms are the norm, corporate Japan’s diversification and growing acquisitions may present new opportunities for Australian law firms in sectors such as:

  • Renewable energy
  • Infrastructure (including public private partnerships and private finance initiatives)
  • Housing
  • Financial services
  • Life sciences
  • Human resources and other business services
  • Retail and e-commerce.

The types of specific legal services Australian law firms have the potential to win new business in Australia for Japanese inbound investment include:

  • Joint ventures and M&A projects
  • Foreign investment regulations
  • Intellectual property
  • Finance and capital markets
  • Employment issues
  • Antitrust
  • Cyber security.

Australian law firms already operating in, or embedded within Asian markets, and which offer expertise and bespoke services, are also well-positioned to capture opportunities in M&A-related advisory legal services listed above.

Singapore is home to the largest number of regional headquarters for Japanese companies in the Asia-Pacific, and increasingly, where decision-making for business investments into the region are being made independent of their Japan-based headquarters. [16]

Singapore therefore offers good potential for Australian law firms to build relationships with a growing number of major Japanese companies based there. [17]

Australian law firms can increase their potential to capture Japanese M&A-related opportunities by adopting strategies that include:

  1. Maintaining an ongoing presence in Japan to contest M&A opportunities. The majority of foreign law firms that have successfully won M&A deals in Japan have an office there.
  2. Forming a joint venture (JV) with a Japanese law firm where establishing a stand-alone office in Japan is not a viable option. Setting up a ‘Legal Professional Corporation’ [18] and partnering with a domestic Japanese law firm allows for costs to be shared and helps the Australian business gain access to the network of contacts held by the JV partner.
  3. Building long-term relationships with Japanese local law firms and lawyers through secondments of lawyers from Australia to Japan. Secondments offer opportunities to assess first-hand the potential to capitalise on M&A-related advisory work while also building networks of contacts with potential partner law firms in Japan and corporates pursuing cross-border M&As.
  4. Forming relationships with investment banks and advisory groups that are active in taking deals to major Japanese companies and to act as their legal advisors.
  5. Applying to register with the Japan External Trade Organisation’s (JETRO) office in Sydney as an approved referral service provider. JETRO plays an important role providing assistance to Japanese companies expanding into, and investing in Australia. Being an approved referral service provider can raise the profile of Australian law firms directly to Japanese companies. [19]

Market challenges

To gain access to potential Japanese investor companies in non-traditional sectors in Australia, having a presence in Japan is critical to identifying potential clients, servicing and maintaining those relationships and pursuing additional business opportunities.

Decision-makers in Japan expect to have ready face-to-face access to their legal experts. Possessing a high degree of Japanese language skills and cultural understanding is highly valued when dealing directly with clients in Japan.

______________________________

[1] Nikko Asset Management, Japan Equity Outlook: “Investing in Japan vs. investing in Japanese companies”, 19 September 2017.

[2] Business Journal, キリン、武田薬品 海外M&Aブームで「大金をドブに捨てる」日本企業, 27 April 2017.

[3] Reuters, Japan's cash-rich companies ready to spend more on M&A, not wages: Reuters poll, 13 November 2017.

[4] United Nations Conference on Trade and Development, Global Investment Prospects and Trends, 2017 and The Bank of Tokyo-Mitsubishi UJ, Overview of the German Economy and Japanese Investment Trends, 21 November 2017.

[5] Australian Bureau of Statistics, Cat. No. 5352.0 – International Investment Position, Australia: Supplementary Statistics , 2017 (released 9 May 2018),

[6] Baker McKenzie, Cross-border M&A Index Q1, 2017

[7] See press releases for Japan PostNippon LifeDaiwa HouseRecruitNomura Research Institute and Persol.

[8] Nomura, Japanese cross-border M&A takes off, January 2018.

[9] DFAT, Factsheet: Trade in Services and Investment, September 2017.

[10] Nikkei Shimbun, 外国法対応の弁護士増加へ 企業間の国際紛争解決,  20 April 2018.

[11] Ministry of Justice, Act on Special Measures concerning the Handling of Legal Services by Foreign Lawyers, 1 April 2016.

[12] Details available at the Japan Federation of Bar Association homepage.

[13] Japan Federation of Bar Association, White Paper, 2017.

[14] Ministry of Justice, Outline of the system of Gaikokuho-Jimu-Bengoshi/GJB (Registered Foreign Lawyer), n.d.

[15] Bloomberg, 日本 M&A マーケットレビュー アドバイザー・ランキング, 2018.

[16] JETRO, アジア太平洋地域における日本企業の地域統括機能調査報告書, March 2016.

[17] Teikoku Databank, 特別企画: ASEAN 進出企業実態調査, 17 May 2016.

[18] See Japan Federation of Bar Associations for details.

[19] For details on how to register as an approved referral service provider, contact JETRO at their general enquiries email.

[20] Australasian Lawyer, How the new AU and Japan EPA may lead to multi-qualified lawyers , 18 July 2014.

[21] Ministry of Justice, Functions of Gaikokuho-Jimu-Bengoshi , n.d. See also, Gaikokuho-Jimu-Bengoshi (“Gaiben”, Registered Foreign Lawyers) for further details.

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