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Special report: Canada – The long trail
4 August 2014 | By Lucy Burton
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A&O is the first magic circle firm to tiptoe into Canada but despite the strong economy, there is good reason why local players are not expecting a stampede
When Allen & Overy’s (A&O) Casablanca founding partner François Duquette voiced his intention to return to Canada nine months ago the firm was left in a pickle. Here was a partner who had spearheaded A&O’s foray into Africa and helped launch its base in Abu Dhabi, but Duquette’s home country was not in the firm’s sights.
In fact its board had rejected the idea of a Canadian launch back in 2011, when partners chose instead to focus their efforts on Australia. At the time, sources told The Lawyer that there was one loophole – if an “inexpensive” opportunity presented itself, a launch in the country could go ahead.
If ever there was going to be such an opportunity, Duquette – asking for just one mid-level associate, a member of support staff and a few desks – was surely it. His was a
low-risk, low-cost offer, and by June the firm’s management board had agreed to launch a satellite office in Toronto.
It makes sense. Canada’s abundance of natural resources makes it highly attractive to investors and, in turn, a lucrative market for lawyers. By agreeing to a small outpost, A&O gets to keep one of its most senior partners while dipping a toe into a new jurisdiction.
But the move draws attention to the lack of merger talks that have gone on between global giants and Canadian firms in recent years. Even the magic circle firm has made a point of quietly slipping into the country, keen not to make a fuss.
“We really don’t want to break the balance in the market,” Duquette insists, emphasising that the base will provide only English law, focused on outbound investment.
But if no fuss, why open in Canada at all?
“The purpose is to seed the network,” Duquette says, adding that the firm chose Toronto because of its proximity to existing clients. “There’s some low-hanging fruit here – a number of Canadian clients who previously invested in the US are now interested in more remote countries – Africa and the Middle East, for example.”
Local firms say they do not expect to see a swarm of international outfits come in as a result of A&O’s move, although rumours continue to churn. DLA Piper is the latest to hover, coming close to entering the market back in February, when it entered talks to hire up to 70 lawyers from collapsed firm Heenan Blaikie.
When those talks buckled, there were surprisingly few sighs of relief. Despite DLA Piper being a global behemoth, local partners point out that Canadian firms have a tight grip on their relationships with Canadian clients and do not generally regard the big international players as a major threat.
“There will always be people trying to get into the Canadian legal market, but the ‘Seven Sisters’ will maintain their position,” notes one Toronto-based managing partner, referring to Blake Cassels & Graydon, Davies Ward Phillips & Vineberg, Goodmans, McCarthy Tétrault, Osler Hoskin & Harcourt, Stikeman Elliott and Torys. “Canadian clients in jurisdictions all over the world may also favour international firms, because they want their lawyer with them wherever they are.”
Canadian telecoms company BlackBerry, for example, turned to both Skadden Arps Slate Meagher & Flom and Torys for advice on the review of its business last year.
The Seven Sisters rule
Sources at international firms admit that, although the economy is strong, Canada is an overlawyered market. And the workload is not growing either – last year the volume of deals involving a Canadian target fell to its lowest level since 2009, from 2,378 to 1,690, according to Thomson Reuters data. Statistics support the dominance of the Seven Sisters. Based on the number of M&A deals done in Canada in 2014, the top 10 firms on the list include six of those seven and one international firm, Norton Rose Fulbright (see Firm ranking by deal value, below).
Duquette agrees that any rush into Canada is “very unlikely” – while the A&O Canada office might look to expand in three years’ time, he says he is aware that the country already has strong local firms with deep, longstanding relationships.
The Heenan collapse
But that does not mean these firms are indestructible. In February the country faced its largest law firm collapse, with Montreal-based employment specialist Heenan Blaikie agreeing to dissolve.
“Heenan’s collapse was a sobering reminder that law firms are fragile,” comments Stikeman chair William Braithwaite. “All of us [in Canada] looked at our firms to satisfy ourselves there wasn’t a risk of that happening.”
Like nearly every firm in the country, Stikeman is understood to have been in talks with some of Heenan Blaikie’s 500 partners following the collapse, but could not find the right fit.
Dentons Canada took on most, adding 46 Heenan lawyers to its Montreal, Toronto and Calgary offices after poaching Canada’s former prime minister Jean Chrétien from the firm.
“Some fims really went after Heenan’s employment lawyers – this is a good area in Canada so [Heenan’s collapse] was a good opportunity,” points out one partner at an international firm in Canada. “However, the hires aren’t likely to change the market. I don’t think Dentons’ hires have changed the perception of the firm over here.”
Despite obvious financial pressures and a drop in work, what else went wrong at 40-year-old Heenan?
When asked how the firm was seen by others, one senior partner criticised it for not being unified, growing more in Montreal and Toronto, and appointing no single managing partner for Canada.
“That tells you a lot when you drill down,” he closes.
But it would be unfair to say that Heenan has been the only firm to face pressure.
“The legal market has been effectively flat over the past two or three years, which obviously then puts pressure on us,” says Norton Rose Fulbright Canada managing partner John Coleman. “Clients are ahead of the game in driving efficiencies in their own businesses and the expectation is that law firms get with the programme. The old model is done – it’s a new world order in the legal business. It’s not enough to offer a discount, you need a differentiator.”
There is no rule as to what that differentiator should be but there are some trends emerging. One is Toronto firms’ growing interest in opening up in the west. Last year the population of Canada hit 35 million, with the 1.2 per cent annual increase following a consistent trend over the past five years. The increase in population is mainly evident in the western part of the country.
“Vancouver is becoming a big interest,” notes Braithwaite. “The work is all energy-driven. There’s a lot of interest in liquefied natural gas (LNG) and energy in the region is buoyant right now.”
Indeed, the British Columbia government predicts the LNG industry could add as much as $1trn to the province’s cumulative GDP by 2046.
“LNG projects are so big they need legal teams that include regulatory, finance, taxation, aboriginal, labour, commercial, IP, international trade and other areas of the law,” emphasises a Norton Rose spokesperson.
So maybe the investment stampede will arrive after all.