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BOOK SERIES | Minority Shareholders, Chapter 20: A Contingent Fee Surprise
Takano's plan turns next to how his lawyer should run his law office, generating surprises in Chapter 20 of Shin Ushijima's novel, Minority Shareholders.
In this chapter of Minority Shareholders, I continue the story of Norio Takano. He is not a specific person; he is a character created for my book out of some high rollers who had existed during the bubble period.
As a young lawyer, I witnessed the generation of enormous wealth from scratch. A minority shareholder of a family company brought an action to the court and succeeded in taking hundreds and thousands of yen. I saw it firsthand. Ten years after the bubble popped, I started work related to corporate governance. In this book, my fictional characters tell the story of problems that persist in joint-stock corporations. What is an organization called a company? What if Norio Takano were reborn in this era?
This story is a work of fiction. Any resemblance to actual characters or organizations is entirely coincidental and unintentional. ー Shin Ushijima
Read earlier chapters of the series
CHAPTER 20: A Contingent Fee Surprise
Continuing from Chapter 19: Takano and Ooki were eagerly chatting nose-to-nose across the table as if they were small children who had just procured a new toy that they had never seen before.
Takano suddenly raised his voice in excitement. "I got it! Let's go with 'Association for Family Company Governance'!"
"Terrific name!," said his attorney, Tadashi Ooki. "And that incorporated association will encourage unlisted companies and family companies to introduce governance and help minority shareholders sell their shares. Wow, it's going to be exciting. I can hardly wait to see how it'll come off. As for me, I can make some contribution to the world automatically while practicing law."
"Listen, Ooki, as I told you just before, these days I'm being flooded with phone calls asking me to buy shares. I expect more and more requests to come. I have half a mind to pay money for purchasing their shares. I'm going to buy them for ten years' worth of the total amount of dividends paid per year at a maximum. And I think I can manage to pay for it.
"In due course, the court will get involved and set a higher share price. Then I'll give the difference to the sellers. In any event, I need a lawyer to take care of all the law-related matters. But unfortunately, I don't have enough money to hire a lawyer."
Ooki gave a suspicious look, but Takano did not notice it.
Taking Care of Legal Matters
"I want you to take care of the legal matters, I wouldn't say for nothing, but I want you to wait until I am successful."
"Aw, you want me to work on a contingent fee basis?"
"It happened before. That case, remember? We came off with flying colors, right?"
Years back when Ooki was young, he was asked by an owner of a bankrupt company to collect scattered and lost property. Of course, all the assets of the bankrupt company had been placed under the receivership of a court-appointed administrator.
But the owner wanted Ooki to collect some overseas property, which had slipped through the receivership. What Takano was mentioning was that the owner had beseeched Ooki to work on a contingent fee basis until the case was done. At that time, the owner was only able to pay some money to cover fees arising from research in connection with the request.
When asked, Ooki needed to know the reason why the owner wanted him to work on a contingent fee basis. If he accepted it as a lawyer, it would benefit the client. But above all, he would be able to take on the project of the owner as his own.
Paying for the Work of Lawyers
Ooki's law firm basically charges on an hourly rate basis. If a lawyer works, the hours for which he is engaged in a case are multiplied by the lawyer's respective hourly rate. Of course, the hourly rate varies from lawyer to lawyer. It depends on their experience, knowledge, and above all, the nature of the services rendered to the client.
A business client turns to a lawyer when he faces a matter involving money. producing agreements, buying out a company, making claims for damages, and whatnot, are all money matters. In the case of a lawsuit, if it is successful, the winner gets money. If unsuccessful, the loser gets no money. And in the worst case, they are even forced to pay some money. As a matter of fact, only a few clients can afford to keep paying lawyers at an hourly rate for as long as the lawsuit takes. Regardless of the outcome of the lawsuit, the client has to pay the lawyer's fee on a monthly basis. That is the time charge system.
Working for Clients Who Can't Afford Hourly Fees
How can a lawyer work for those clients who cannot afford to pay a fee at an hourly rate?
A contingent fee arrangement is one of the solutions to this question.
In the United States, when an individual sues a business corporation, it sometimes happens that he does not need to pay a single cent to a lawyer at first. It can be a chink of light at the end of the tunnel for people of limited means.
If the lawyer wins the lawsuit, he takes away 30% to 40% of the recovery as a contingent fee. And if he resorts to conciliation, he can get a certain amount of money with very little effort. So, lawyers are disposed to attempt conciliation proceedings.
What is even worse, there are some lawyers who look around for potential plaintiffs, aiming for conciliation from the beginning.
Ooki's Law Firm Style
Ooki is not that type of lawyer. His law firm only works for business corporations. The hourly rate arrangement is the best for the management of the firm. It is good for their mental health, too.
Ooki's law firm has more than eighty lawyers and close to two hundred people including other staff members. If the clients paid fees on an hourly charge basis without fail every month, Ooki's law firm would earn more than ￥500 million. But unfortunately, only a part of the clients pay all the fees calculated on an hourly basis.
A huge amount of money is withdrawn from the bank account held by the law firm every month. There is no way for an individual to pay it. Ooki sometimes talks to the partners as if he is joking. "Rent doesn't wait. Our employees cannot sustain their livelihoods without money to be paid on a fixed date. So, they are paid first, and equity partners share the remainder, but sometimes we have no profit, or even worse, we have a deficit."
Equity Partners in the Entrepreneurial Role
Equity partners are those who fund the firm, and out of twenty-seven partners, only eight are equity partners in Ooki's law firm. It is similar to a shareholder in a joint-stock corporation. Some partners have funded the firm, some have not. If the firm makes a profit after all the payments, it is shared among the equity partners, that is, a distribution of profits according to a predetermined rate. The more profit the firm receives, the more distribution a partner is able to enjoy.
Truth be told, the firm has never experienced "no profit" or deficit. Never once. There are some equity partners who enjoy an annual receipt of more than ￥100 million. Most are well off. But as an entrepreneur, Ooki feels a strong tension at all times. Who could guarantee their income a year later? No one could! After all, they have nothing firm to sustain their business into the future.
Recommending Contingent Fees to Clients
Ooki does not hesitate to recommend his clients alternative fee arrangements other than the hourly rate basis if it would better suit his clients. He usually recommends retainer fees and contingent fees.
Depending on the case, there are some clients who cannot afford to pay retainer fees and can only opt for contingent fee arrangements. Such clients usually do not have cash on hand even though they claim to have a significant asset that can be cashed in. It can be too risky a job for Ooki's firm.
The firm is obligated to keep paying salaries to the lawyers and staff members every month. But under a contingent fee arrangement, the money does not come in until the case is done. To be exact, the money is paid to the firm only when the case is successfully settled.
But, once the case is successfully settled, the firm receives a huge amount of contingent fees. And for the client who is exempted from even a single penny of retainer fees, it can be the best solution, too.
There is another reason why Ooki agrees to contingent fee arrangements. Ooki psyches himself up for successful results. He enjoys thrills throughout the process. If he loses the case, no payment is made. On the contrary, he has to shoulder all the costs, including fees for young lawyers and salaries for the staff members.
But under a contingent fee arrangement, Ooki can control the costs at will. He does his best not to cause any trouble for his clients. He and the equity partners take all the responsibilities. If there is a favorable result, the client is very pleased, and Ooki and the partners can receive a large amount of contingent fees.
Focusing on the Quality of the Job
Ooki does thorough research and discusses matters to the bitter end. He builds up rock-solid theories, accounts for human empathy, and sets a powerful lineup to attain success. He loves such proceedings. And he does not care about time or cost. What he is concerned with is only the quality of the job.
He is always telling his young lawyers, "The task you're tackling now represents the condensation of the timeline of human history. Previously, there was no notion of real estate in the world. The ground existed. No, there was not even a notion for what the ground was or a word for it.
But 10,000 years ago, agriculture started and changed everything. People started marking their own territories, which was the origin of the legal concept of real estate. In the course of time, they started trading the rights to it. Renting and lending it, and going so far as to securitize it.
And when they have conflicts relating to their real estate, they turn to lawyers. They ask lawyers to make contracts in order to prevent conflicts from happening. Conflicts and prevention of conflicts are the same. The bottom line is, only lawyers can legally interpret what is happening in the world and find solutions to problems arising from that.
Conversely, lawyers cannot recognize that the real estate was a place where people might have had a childhood romance or held immense sentimental value. The land for geologists and the real estate for lawyers are different. It's the same ground, yet it holds completely different meanings to them. And it sometimes happens that lawyers deal with cases that require the expertise of geologists.
It's All Connected
Law is the same as words. It is linked to everything, crouching in front of you, waiting for you to touch it. It is visible to those who study it, but invisible to those who don't. Those lawyers who cannot see it live with a happy-go-lucky attitude. It's "suiseimushi" ('酔生夢死') (passing your time slumbering away as if you were drunk). Sorry, Chinese proverbs are lost on you young guys nowadays, aren't they?"
The reason why the owner of the bankrupt company made the suggestion sounded plausible. Previously he had money. But once he was ousted from the company, he lived a life as if he were scooping water from the container in which water had once pooled.
As the head of a big company, he was desensitized to earning profits and watching expenses flow out as costs. But, once the company went bankrupt, he could only watch his money moving out. A pond, no matter how big it may be, will drain if you scoop water out of it every day. It is difficult and unbearable for people to watch the process throughout.
He was scared of what would happen to him in the future. The thought of it gave him pins and needles. The bankruptcy receiver was also aiming for the assets of the owner. What came across his mind was only bad outcomes.
Foresight or Luck?
Sadly, we humans tend to be affected by what we imagine and act accordingly. That was the reason why Ooki agreed to the contingent fee arrangement when asked by the owner. Ooki thought that with luck, the owner would be able to take back control of the overseas subsidiary with a market capitalization of ¥10 billion. Under the law at the time, it was out of the control of the receiver.
It did not take much time before Ooki and the owner agreed that the owner would pay Ooki 10% of the assets of the subsidiary as remuneration when it was successfully reclaimed. Ooki also thought that, if he was successful in regaining control of the subsidiary, he would be able to have the subsidiary, not the owner as an individual, pay the contingent fee. He was enthusiastic about undertaking this project with all of his energy at a cost of ¥300 million.
Cases that Muster 'Nerve'
Three hundred million yen divided by thirty thousand yen (a lawyer's hourly rate) was equal to 10,000 hours. He thought that if each of the five lawyers on the team could spend 2,000 hours on the case over one year it would be equal to 10,000 hours and that, in theory, it should be settled in one year. But it could be that the case took more than a year.
Even if he incurred higher costs at the beginning, he knew from experience that it would settle at a fixed cruising speed. The way he handles cases has assured him of income a whole lot higher than the average lawyer receives. The lawyers in Ooki's firm have also benefitted from that. But Ooki is always one to determine how to go about solving cases.
There are some cases that ordinary lawyers cannot win. But Ooki can win, working in a team. Such cases that are hard to win muster Ooki's nerve.
There are some clients who are involved in difficult matters but cannot turn to a lawyer on a time-charge basis. Taking care of such clients has exalted Ooki's soul. He despises those lawyers who take pride in the number of cases they have won. If they pass up difficult ones and only deal with easy cases, their winning percentage naturally increases. It's like an eighteen-year-old person solving questions on the junior high school entrance examination.
Winning and Losing
When he wins a case, Ooki makes big money; when he loses, there is no remuneration. But working hard throughout the case will eventually pay off.
The lawyers in the law firm are given a chance to study every day while being paid a handsome paycheck. And the fruit of their studies will penetrate into their brains and bodies. The next chance will inevitably come. And on that occasion, they will have a head start.
Objectively speaking, if Ooki agrees to work on contingent fee arrangements, it means that he has to take financial risks latent in lawsuits. Ordinary lawyers would never do such a thing. They would never take chances. Therefore, they can give fair and unbiased legal advice to their clients because they are independent and unconstrained.
Many lawyers in the world think that way. Ooki can understand this; he thinks it may be right and does so in many cases.
Even so, Ooki sometimes feels an urge to work on his own project.
Leveraging the History of Friends
It was Takano that had introduced Ooki to the owner of the bankrupt company. And Takano knew that Ooki had been successful in the case and received a high remuneration. However, he did not know the exact amount of money Ooki had received.
Takano understood that Ooki was more pleased with the fact that his foresight in the case had been proved right and that the successful result had been accomplished through the efforts of the lawyers and staff members of the firm than with the fact that the firm had earned a lot of money. That was the kind of man Ooki was—very decent.
At work, Ooki acted as if he were possessed by a demon, but as an individual, he was a man of heart devoting himself to growing plants and vegetables on the balcony of his condominium. He first took an interest in it when he went to see "bonsai" with a lawyer at a law firm where he worked as a legal trainee. By the time he became a lawyer, he had already developed a passion for growing variegated rohdeas.
"It was epoch-making that you had successfully solved the case. So this time, please help me with another epoch-making project." Takano placed both hands on the table and politely lowered his head ー in slow motion.
"Look, Takano. This time I cannot make that decision on my own. The firm has grown bigger, and has its own will as an establishment. It's the same as a business corporation. I'll talk to the partners. I think I can persuade them, but it's not me that makes the final decision," Ooki said in a contained but confident voice.
Continues in: Minority Shareholders, Chapter 21: The Price of Sentimental Value
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Minority Shareholders is a work of fiction and any similarity to real characters, companies and cases is purely coincidental and unintentional. Sign up to join our mailing list and look for the next chapter every Saturday on JAPAN Forward.
Author: Shin Ushijima
The founding partner of Ushijima & Partners, lawyer Shin Ushijima has an enormous wealth of experience in international transactions, mergers, and acquisitions, dispute resolution, system development, anti-monopoly law, labor, and tax law. Concurrently, he heads an NPO called the "Japan Corporate Governance Network." And in his leisure moments, he writes fiction. Additional details on Shin Ushijima's career, awards, publications, and more are available at his website: Ushijima & Partners, Attorneys-at-Law.
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