International law firms in Japan might have taken a big hit over the past two years when their Japanese clients, cowed by COVID, put outbound M&A deals on hold and plunged Japan’s outbound M&A activity to its lowest level in 20 years. 

Instead, many of those firms shifted gears along with their clients. And even as COVID fears subside, this change has given them new avenues for growth.

While outbound M&A work—the bread and butter of many international firms—dried up, law firms seized on opportunities that arose with an uptick in inbound investments by private equity firms and tech companies, with the divestiture of non-core assets by Japanese corporates, and with an increase in cross-border antitrust filings. For many, the silver lining of COVID has been a broadening of their offerings in Japan. 

Firms such as Herbert Smith Freehills, Skadden, Arps, Slate, Meagher & Flom and K&L Gates, which built up practices in Tokyo advising Japanese companies on outbound M&A transactions, saw their Japanese clients suspend their overseas M&A plans—hesitant to pursue them because Japanese corporates generally prefer to do face-to-face meetings and onsite due diligence—activities that have been almost impossible over the past two years.

In 2021, publicly listed Japanese companies were involved in just 160 cross-border M&A deals—an 18.4% drop from the 196 cross-border transactions recorded in 2019, the year before the pandemic started, according to Tokyo-based consulting firm Strike Company Ltd. 

But in place of doing outbound mergers and acquisitions, many Japanese corporations focused on divesting nonperforming assets. 

Their outside counsel jumped in. 

“We have advised a Japanese trading company that has traditionally acquired assets rather than selling them, on divesting its nonperforming assets these last two years,” said Graeme Preston, the head of corporate for Asia at Herbert Smith Freehills, who is based in Tokyo. 

The firm got the mandate for those deals largely because it already had a trusting, working relationship with the company, Preston said. 

Skadden, too, which has historically acted for Japanese companies buying foreign assets, is now playing a different role.

“These days, we are representing Japanese sellers of foreign assets. Outbound purchase deals used to be much larger than sale transactions, but the latter has become bigger now,” said Mitsuhiro Kamiya, head of Skadden’s Tokyo office. 

Kamiya advised Japanese electronics giant Olympus Corp. on the sale of one of its subsidiaries, Olympus Systems Corp., to Accenture in a high-profile divestment deal that closed in 2021.

Capital Markets, Restructuring and Inbound Investments

Some firms have applied their expertise in capital markets. Skadden’s Kamiya said his firm has been advising on global debt and equity offerings by Japanese corporates, which have been forced to raise funds outside of Japan to cushion the financial impact of the COVID pandemic. In 2021, Skadden acted on a number of such offerings by Japanese conglomerates, including Sumitomo Life Insurance and Mitsubishi Corp. 

K&L Gates, meanwhile, has been busy handling the restructuring of leases in the aviation space, where it represents clients who are primarily lease-arrangers and equity investors, and also working on airline insolvency matters.

“We have dealt with a lot more restructuring of leases than in the past because certain lessees couldn’t pay and a lot of airlines faced difficulty,” said the firm’s Tokyo managing partner, Ryan Dwyer. 

Compared to Japanese corporates, overseas private equity firms have been relatively undeterred by the pandemic and have been snatching up undervalued assets in Japan. The inbound M&A drive has presented itself as a main source of revenue for some international law firms.

Morrison & Foerster, for example, said it advised on two major inbound acquisitions by British private equity firm CVC Capital Partners in 2021.  

But it’s not just private equity doing the investing in Japan. Big Tech, which is no longer able to easily invest in China, has been expanding aggressively in Japan in recent years, according to Kenneth Siegel, managing partner of Morrison & Foerster’s Tokyo office. 

This influx of foreign direct investment has coincided with a tightening of antitrust regulations in Japan. As is the case in many countries, Japan’s antitrust regulatory authority over the past few years has stepped up investigations of foreign companies investing in Japan and has introduced stricter regulatory requirements in order to protect national security under the country’s revised foreign exchange and trade regime. This has, according to Siegel, raised compliance challenges for foreign investors to an unseen level. 

“We are seeing much more consultation required around inbound tender offers and acquisitions or investments than we have historically,” said Siegel, who noted that this has become another important offering by the firm’s M&A practice in Japan.

Dispute Resolution and Intellectual Property

While inbound investments and antitrust filings have become two main sources of revenue for many international firms during the outbound M&A drought, some lawyers point to growing activity in areas such as cross-border dispute resolution and intellectual property.      

K&L Gates boosted its global IP and Tokyo-based capabilities through the hiring of partner Mitsuhiro Imamura in July of last year. With Imamura on board, the firm can now undertake patent prosecution in Japan—a market that is driven by R&D, technology and innovation, with some of the highest volumes of patent filings per annum, according to Dwyer.

Meanwhile, U.S.-based Orrick Herrington & Sutcliffe’s Tokyo office has been occupied by an influx of new cases involving cross-border arbitration by its Japanese clients since COVID. With the option of online court proceedings, many Japanese corporates, who were previously hesitant to seek arbitration to settle cross-border commercial disputes due to high costs, have been increasingly resorting to dispute resolution procedures since COVID started, according to Shinsuke Yakura, head of the firm’s Tokyo office and of the complex litigation and dispute resolution group in Japan.

As a result of the pandemic, many Japanese companies, famously averse to litigation, have been locked in disputes with their foreign counterparts over issues relating to payment defaults and failed product deliveries, Yakura said. 

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