Breaking the ice
31 January 2011 | By James Swift
Canada’s law firms have so far avoided the temptations of globalisation. Will Norton Rose’s merger with Ogilvy spark a new interest in the market?
They say the reason law firms are so inefficiently run and yet so profitable is that they only have to compete against other law firms,” says Jordan Furlong, a partner at law firm consultancy Edge International. “Well, you can take that a step further with Canadian law firms because they’ve only ever had to compete against other Canadian firms.”
Canada’s law firms have always been something of an unknown quantity internationally. In many ways this is a strange state of affairs given that Canada has a sophisticated legal market, an abundance of natural resources and relies on international trade for a big chunk of its economy (30 per cent of GDP in 2009).
But the end of 2010 and beginning of 2011 saw a number of Canadian firms embark on a global push. First, Ogilvy Renault announced it would merge with Norton Rose in June 2011. Now when you fly into Toronto or Montreal’s airports or catch a basketball or ice hockey game at Toronto’s Air Canada Centre you can expect to be greeted by large banners announcing the merger, and how Ogilvy is ’crossing continents’.
Then, in October 2010 and January 2011, Gowlings and Heenan Blaikie opened offices in London and Paris respectively, launching with high-profile partner hires.
All three moves were significant in themselves, but whether Norton Rose’s entry into Canada represents a watershed moment for the market, or Gowlings’ and Heenan Blaikie’s expansions mark the beginning of another trend, is unclear.
One thing is certain: lawyers are talking about Canada more than ever before.
Canada has typically been a jurisdiction where law firms have kept themselves to themselves. Excluding representative offices, few Canadian players have made a concerted effort to expand internationally or conquer new markets.
There are exceptions, of course. Torys and Osler Hoskin & Harcourt made serious efforts in New York, while in 2007 Fasken Martineau merged with UK life sciences specialist Stringer Saul. But these kinds of moves have been few and far between, and the novelty of Fasken’s move was reflected in commentators’ consternation.
“On the surface it doesn’t make sense,” said consultant Alan Hodgart at the time. “Why would a Canadian firm want something so small and specialist in London? And what’s in it for Stringer Saul? I can’t believe they would have that many clients in Canada.”
“Perhaps there’s a reason why there hasn’t been a UK-Canadian merger before,” added one lawyer.
Likewise, few foreign players have made an effort to open an office in Canada. Skadden Arps Slate Meagher & Flom has an office in Toronto, but it is small and covers only US law.
A big part of the reason why so few foreign firms have tried to open in Canada is that the country is so vast. Its four distinct markets vary wildly, from the financial centre in Toronto to the mining region of Calgary. Canada’s bar rules have not helped the situation. Indeed, its stance on foreign lawyers and law firms has, some argue, left the country open to accusations of protectionism.
One argument is that this attitude has helped foster a cosy environment for domestic lawyers, which by shielding them from the cutthroat practices seen in more open markets, has hindered the development of the profession.
“It’s a very domestic law market here. The legal community in Canada is collegial and while that’s good in terms of civility, there’s a certain amount of gentility - firms will only push against each other so hard,” says Furlong.
Whether Norton Rose’s entry into Canada through its merger with Ogilvy will change this is a matter of debate.
“I may be in the minority but I think this will be a watershed moment,” says Furlong. “We’ll see it as a dividing line. About 20 years ago the Supreme Court of Canada issued a ruling on mobility rights which allowed interprovincial law firms to flourish and that was a watershed moment for the market. I think this will be seen in the same way. The main reason is that I don’t think Norton Rose will be the last global firm to come to Canada. We’ll see more international firms come in and be more aggressive and savvy about business. They’ll be better capitalised too, especially after the ABS [alternative business structure] laws kick in.”
Partners at Canada’s top firms are more reserved in their analysis of the merger’s impact.
“I don’t think it’s a watershed moment,” says Blake Cassels & Graydon chair Brock Gibson. “You need to recognise that an awful lot of domestic Canadian clients either raise capital in Canada or go to New York, and most of them will have relationships with US law firms, so north to south traffic is well-established. The second reason is that in Canada, you need to be a strong player both in Calgary and nationally.”
“It’s too early to tell,” says David Chaikof, a corporate partner at Torys. “I have a lot of respect for the firm, but I don’t think there’ll be a short-term impact. Shearman & Sterling’s and Skadden’s entrance into Canada prompted talk at the time about whether it was a game changer, but we didn’t see a herd of other US firms coming in.”
The main reason for the subdued reception from managing partners is that Ogilvy is not one of Canada’s traditional top-tier firms, the so-called ’seven sisters’. Nor, they argue, are Canada’s top firms likely to have much interest in following in Ogilvy’s footsteps. The seven sisters are known for having sophisticated referral networks and merging with a global firm only puts these at risk.
“My sense is that top firms in Canada are not that interested,” says Furlong. “They think that their position is pretty secure, and that they don’t have a lot to gain by a merger. Some even think it could be unique to Ogilvy because of the firm’s client roster - it has a lot of multijurisdictional clients such as Royal Bank of Canada and Bombardier.”
The prospect of the loss of referrals is certainly a salient factor for senior partners, at least at two of the seven sisters firms.
“It’s a big ask for a big Canadian firm to do any kind of global merger because a big part of our resumé is derived from referrals,” says managing partner of McCarthy Tétrault’s London office Robert Brant. “You have to be willing to bet that what you’ll gain will make up for what you’re going to lose - and it’s a lot easier to quantify what you’re going to lose.”
“A significant proportion of our work is generated from referrals,” says Stikeman Elliott chair Pierre Raymond. “Most of the top-tier firms are in a similar situation, and it’s difficult for us to consider something like a merger because it would cut us off from a substantial part of the referrals that we’ve spent the past 40 years developing.”
Ogilvy managing partner John Coleman believes that focusing only on referrals misses the point. He is adamant the merger will not cost his firm its referral network - at least, not all of it.
“If you’re looking at a merger as a preferred referral agreement, then it’s wrong,” he says. “The service we’re offering is huge and we’re looking at it to compete in a global sense. Also, we did look at referrals and we won’t lose all of them, just those coming from international and globally active firms.”
Coleman cites the world’s increasing trend for globalisation as one of the drivers for merging.
“It’s not a secret that the legal world is changing,” he says. “Globalisation’s had a huge impact on economies around the world. If you look at the Canadian economy it’s mainly growing from external investment. Our clients have either gone global or have global aspirations, and now the majority of their legal spend is outside Canada. Clients such as Bombardier are saying to us that it’s great we have representatives in other jurisdictions but that they need a legal team on the ground, not just some people waving a Canadian flag. I just saw the future coming.”
Although partners at the top firms insist that they have little to gain from transatlantic mergers - at least until a firm such as Allen & Overy or Freshfields Bruckhaus Deringer shows an interest - few expect Ogilvy and Norton Rose to be the last to try it.
“Outside of Canada’s magic circle equivalent we will see more mergers,” says Brant.
Macleod Dixon is named by a few lawyers as one of the most suitable targets for a merger with a UK or US player. The 250-lawyer firm is already one of the most international in Canada, with offices in Moscow, Almaty, Caracas, Bogotá and Rio de Janeiro, as well as Toronto and Calgary.
Its expansive presence is an attraction in itself, but also, because the firm practises local law in all the jurisdictions in which it is based, it is less reliant on referrals. Managing partner Bill Tuer says he can see why people would think the firm could be a merger target, but it has no immediate plans to go looking for a suitor.
“Like most Canadian firms, we’re evaluating things,” says Tuer. “We’re not committed one way or the other, for or against a merger.”
No other UK or US firm has so far owned up to having designs on a Canadian law firm, and some would argue that Norton Rose merged with Ogilvy more as a precursor to a US merger than out of a desire for a Canadian presence.
But the word from lawyers in the market is that other UK firms are circling. “We’ve been approached by a number of firms but they were not magic circle so we weren’t interested,” says one partner at a seven sisters firm.
There can be no doubt that interest in Canada has shot up in the past two years.
“I remember attending a conference a few years back when the question was asked why there were practically no US firms or global firms that had set foot in Canada,” says Heenan Blaikie co-managing partner Guy Tremblay. “US firms always said, ’why should we open an office when we have lots of firms we can send work to and who reciprocate?’ But now things have changed. What’s driving the world economy is the thirst of emerging markets for resources and Canada has a lot of those.”
“First, Canada is a stable political environment,” says Fasken managing partner David Corbett. “Also, our banking sector weathered the financial crisis well so we’ve great stability there too. Third, Canada has tremendous natural resources, whether it’s potash, uranium, diamonds, oil, gas or water: Canada has it all. And the commodities sector, with the expansion in China and other emerging markets, looks attractive at the moment.
“The last factor is that Canada has a sophisticated legal market. We saw, when the US needed to expand and couldn’t find enough lawyers for growth - and the same happened in London - that Canada was their first port of call to try to poach lawyers. It’s a common-law jurisdiction and Canadian lawyers fit in nicely with the partnership at US and UK firms.”
Canada’s heightened profile in the international arena is not limited to mergers. Two firms have branched out with foreign offices. Last October Gowlings went on a UK partner raid, hiring lawyers from Simmons & Simmons, Norton Rose and British Energy to fuel its burgeoning energy practice, while in January Heenan Blaikie expanded drastically in Paris, taking a 13-lawyer team from Norton Rose. In both cases, the firms managed to lure good partners from established practices.
“The interesting thing is where Heenan Blaikie and Gowlings got their lawyers from,” says one lawyer. “They got a lot of lawyers from serious firms. They showed that a Canadian firm could make a tempting offer.”
The importance of emerging markets’ need for natural resources cannot be understated in explaining these firms’ strategies or Canada’s increasing relevance in international deals. Anglo-Australian mining company BHP Billiton’s failed $39bn (£24.4bn) hostile takeover bid for Canada’s Potash Corporation of Saskatchewan was one of the biggest talking points of last year. And it is no coincidence that Gowlings’ and Heenan Blaikie’s recent office expansions, two of the most ambitious ever undertaken by Canadian firms, both centred on energy.
“Our move was basically driven by the work we were doing in Africa,” says chair of Gowlings’ international group David McFadden, who adds that the firm has no intention of merging. “We realised that we couldn’t feasibly service work in Africa from Toronto or Calgary, so the move to London made sense. We’re not setting up a Canadian outpost with Canadian lawyers who are trying to get familiar with London - Gowlings in London is a UK firm.
“We’re looking at Asia for the future but we also think there’s a lot of potential in Europe, particularly in the nuclear space. If you look at the demand for energy and infrastructure in Europe, the opportunities are huge and the demand for legal services will be high. The demand for technology will also be there for the next few decades.”
To Asia and beyond
Heenan Blaikie’s strategy in Paris is similar. The firm plans to use its new office and the experience of the former Norton Rose lawyers to access the West African market.
“Commercial law in West Africa is almost the same as in France,” says Tremblay. “So to adapt a deal from a French
model to Africa is not too complicated a task. It’s the same as what the US does when dealing in Canada. That was the reason behind our huge expansion in Paris. Now we are head-to-head with Fasken, who seem to have the same business and are driven by resources.”
As with Ogilvy’s merger, there seems to be little interest from the seven sisters in following in Gowlings’ or Heenan Blaikie’s footsteps and expanding internationally. After all, referral networks have served them pretty well so far. But further expansion from those just outside Canada’s magic circle is not beyond the bounds of possibility.
Regardless of how they go about it, all the signs point to Canadian firms’ increased participation in the global fray. Even if we do not see another merger, expect to see a lot more of Canadian firms.
“Our seventh prime minister Wilfrid Laurier said the 20th century would belong to Canada,” says Coleman. “It’s a bit late but I think there’s a new respect for Canada and its role.”