Roundtable: Canada 2012

Recent statistics show evidence that Canada’s economic growth is slowing. According to Statistics Canada the economy grew by just 0.1 per cent in May 2012 against a predicted 0.2 per cent, meanwhile the Bank of Canada’s governor Mark Carney reduced his growth projection for this year from 2.4 per cent to 2.1 per cent in July. How has the cooling of the economy affected your practice? Have you experienced clients acting more cautiously?

Stephen Halperin: There has unquestionably been a slowdown in significant transactional activity in recent months, which clearly impacts our corporate, capital markets and M&A transactional practices. In Canada at least, I believe this is more pronounced among "financial players" and there continues to be a relatively healthy flow of strategic, synergistic transactions, albeit – with some exceptions – at the smaller, lower-profile end of the spectrum than in prior years.

My anecdotal sense is that there is increased caution among transaction decision-makers. Boards of directors are more engaged with management in the "go/no go" decision, due diligence standards are generally being enhanced; as a result, deals tend to have longer gestation periods, and buyers are much more particular. To a significant degree, this is the natural and predictable consequence of "buyer's market" dynamics, as opposed to multi-bidder, "auction" dynamics that typified prior periods (fuelled largely by the intense involvement of private equity buyers). As a result, in the absence of "deal tension", buyers can afford to be more cautious. Sellers, other than distress sellers with a "high motivation" to transact, are forced to respond to this caution and decide whether they will accept lower pricing, greater conditionality and less execution certainty. All of this inevitably leads to tensions that militate against "easy deal-making".

Jay Swartz: We have seen a high level of uncertainty and caution with respect to capital investments in the Canadian business community. Although most businesses have relatively healthy balance sheets, they are reluctant to make capital expenditures and, as a result, there is a reduced level of investment activity and M&A activity. The uncertainty has also led to an absence of many initial public offerings. Most recently, many resource companies have cancelled or delayed major capital projects. However, the low rate of economic growth has allowed the Bank of Canada to maintain very low interest rates. We have seen a number of corporate issuers taking advantage of these low rates by issuing bonds and other debt instruments for medium and longer terms in order to lock in the rates.

Jon Levin: While the Canadian economy continued, in August, to grow at about 1.8 per cent per annum, which is below its potential, there are positive signs for the economy including modest growth in gross domestic product and raw material prices combined with a narrowing of the federal government's deficit substantially in accordance with previously announced government targets. Although consumer confidence is weak and the current account deficit has been growing, the principal issue for the Canadian legal community is a cooling of demand for natural resources combined with the high Canadian dollar. Natural resource prices plus the high Canadian dollar seem to be inhibiting corporate decision making to some extent and have resulted in less securities and financing work than for similar periods in recent years.

Clients are indeed proceeding cautiously and one might expect that will continue to be the case at least until the US election if not much longer. A lower dollar would clearly benefit exports by manufacturing clients but the US tax and budgetary issues that will become ever more pressing as we approach year end likely ensure that a strong Canadian dollar will continue for some time to come.

The Canadian legal marketplace has undergone considerable transformation in the past few years. There has been consolidation of existing firms, the arrival of international law firms – and now talk of potential mergers with Asian law firms. What impact have these mergers had on the legal marketplace and, indeed, on your own firm? Do you expect to see further ties formed between international law firms and Canadian law firms? Which practice areas, if any, are most coveted?

Jon Levin: To date, the only significant merger involving Canadian and international law firms was the takeover of Ogilvy Renault and MacLeod Dixon by Norton Rose. While there was substantial speculation that a wave of international mergers would follow, that has not yet been the case. Some non-Canadian law firms have set up representative offices in Canada but, unlike Norton Rose, they do not appear to be in Canada in order to practise Canadian law. Accordingly, the impact of foreign mergers with Canadian law firms has not been overly material to date.

One might expect that Canada's attraction to international law firms will in large part be driven by whether there is significant international demand for Canada's natural resources. The current cooling of demand for natural resources will likely slow down the arrival in Canada of a number of international law firms. However, it would seem to be inevitable that they will enter Canada in a meaningful way, if only because of the desire of some firms to be active throughout the G8.

The practice area that is likely to be most coveted is merger and acquisition work; that work tends to throw off substantial ancillary activity, typically in the areas of competition law, foreign investment review, securities law and income tax. As well, Canadian law firms compete very effectively internationally in all areas of natural resources, which will also be an important practice area that will be coveted by international law firms.

Jay Swartz: There is increasing interest from Chinese and other Asian entities in investing in Canada. Similarly, growth in other economies has also led sovereign wealth funds and global corporations to become more interested in Canada. The reverse is also true. Canadian companies and pension funds are making significant investments abroad. These factors have led to an increase in the interaction between Canadian and international law firms and a recognition that certain business opportunities will arise from having relationships with foreign clients and their legal and financial advisers. Most large Canadian law firms are actively seeking these relationships. In some cases, they do that through formal alliances with foreign law firms and, in other cases, by working on relationships with independent law firms. This trend is likely to increase as the market for legal services becomes more global and as Canadian clients need certainty that their needs abroad will be properly serviced.

As an independent law firm with offices in Toronto, Montreal and New York, we continue to develop these international relationships through providing efficient and high-quality legal services which will give foreign law firms and other entities referring business to us a level of confidence that their needs will be well satisfied. We have been more active in raising our visibility outside North America. When seeking out legal services in other jurisdictions, we focus on the quality of the service providers in those jurisdictions and the specific expertise required and do not rely on a single firm or group of relationships; we want to ensure that our clients receive the best possible advice and are not confined to dealing with professionals who merely have a common brand.

As law firms consolidate or form international groups, they will face increasing conflicts. As an independent firm, we have seen an uptick in referral work from our local competitors arising from such conflicts.

Much of the activity to date has arisen from Canadian real estate investment outside of Canada, an area in which we have been particularly active and which involves both real estate and tax expertise. Further, the resources sector has been particularly attractive for strategic investors and this has led to much inbound and outbound legal work for us. Expertise in cross-border financing and cross-border insolvencies is also valued. We also receive numerous inbound referrals to deal with global competition law issues.

Stephen Halperin: From our perspective, the globalisation of legal practice has had limited meaningful impact on the Canadian market at the "top end". I still tend to see the same firms on matters as I did 10, even 20 years ago. We have seen one high-profile trans-border "merger" involving two highly respected Canadian firms, but no follow-ons despite abundant chatter and rumours. I do not anticipate significant cross-jurisdictional merger activity involving top tier Canadian firms, although the opportunities might be compelling for lower-tier players.

As for the arrival of international firms, they have to date very explicitly limited their practices to advising Canadian clients on the foreign firms' domestic law, which has had limited impact on Canadian firms, other than the positive impact of affording us the opportunity to develop complementary working relationships with outstanding non-Canadian firms.

Several leading Canadian firms have established US-law capability in New York, and a few have done so with local law practice in other jurisdictions. I am unable to comment on the impact of those initiatives on those firms.

Finally, I think that, to the extent that major global firms think of Canada, the practice areas that would be most coveted – given the resource-based nature of the Canadian economy – would be natural resources, with a particular emphasis on oil and gas related-activity.

With negotiations between Canada and the EU over comprehensive economic and trade agreement set to be concluded in 2012, what potential impact do you expect this development to have on your practice?

Jay Swartz: Given the economic situation in the EU, we do not expect to see a significant amount of inbound investment activity coming from the EU in the foreseeable future. European banks have reduced their lending in Canada as well and are likely to continue to do so for the foreseeable future. There may be some sales activity as European companies (particularly financial institutions) retreat to their home jurisdictions or try to shore up their balance sheets. However, to the extent that the trade arrangements facilitate cross-border investment, it would be reasonable to assume that certain Canadian investors, particularly pension funds and other private equity firms, will seek investment opportunities in Europe which will lead to legal and tax work for Canadian law firms who assist these investors.

Stephen Halperin: My sense is that any Canada/EU trade arrangements would have a neutral to slightly positive impact on our (highly transactional) practice, with no significant "needle movement" in either direction. We have historically represented several major European entities in significant Canadian M&A activity. To the extent that commercial free trade results in more Canadian opportunities being on European radar screens, that would on balance likely be a positive for our practice. One potential negative for Canadian transactional law firms would be the reciprocal, should Canadian M&A and similar activity proliferate in the EU, as there would likely be a limited role for Canadian counsel on those deals.

Jon Levin: Even if these negotiations are successfully concluded, it is unlikely that they will have a material impact on Canadian legal practice, at least until the European economy reverts to a healthier level and demonstrates real economic growth. Given the issues with the euro, that is not likely to happen for some time. One cannot help but wonder whether business dealings between Canada and China will be more relevant to Canadian lawyers in the next few years than trade with the EU. However, a number of Canadian firms have established London and Paris offices and should be well positioned when Europe finally rebounds.

What would you describe as the main challenge facing lawyers in Canada – practical, legal or political – in 2012?

Stephen Halperin: It is trite to say that the major challenges we face are the health of the economy, the migration of significant activity away from firms to increasingly able in-house corporate legal departments, and increased fee pressures that result from these factors. However, I believe that these challenges are less pronounced at the high end of Canadian corporate practice.

We have, to a greater or lesser degree, come to terms with our inability to compete efficiently for routine and "commodity" legal work. The major challenge we face is the pursuit, recruitment and retention of top-tier talent that will allow firms to differentiate themselves and attract high value clients and matters. Obviously, we will all only be as successful as our clients but it starts and ends with the quality of our lawyers.
All of the other challenges will work themselves out in the long term if we are successful in the talent wars.

Economic and capital markets slowdowns, combined with widespread consolidation among Canadian businesses (the result of the last "merger wave" of 2004–2007) have resulted in a contraction of opportunities in the high end legal market, but this has not been accompanied by a corresponding contraction in the number (and size) of firms competing for those opportunities. This has resulted, to some extent, in irrational price competition, adding to the pressure on top firms to differentiate on the basis of quality and a truly value-added service offering. The challenge in this regard also includes embracing alternative pricing models that work for both the firms and their clients and are note merely code for "fee cutting".

Jay Swartz: The demand for legal services is directly tied to economic activity in Canada and elsewhere. As the economy remains relatively stagnant, it is likely that the demand for legal services in the business sector will be somewhat reduced in comparison to other years.

We will continue to see demands for greater efficiency in the provision of legal services from our clients as they are under cost pressures internally. This is a trend that will not likely reverse itself even when the economy improves.

The results of the Quebec provincial election could impact investment and business activity in Quebec.

Jon Levin: Canada is fundamentally a trading nation. It has a government that is anxious to maximise international trade opportunities. It has a highly sophisticated, effective and modern legal system. It has a very well-educated and capable workforce. It has immigration policies that tend to make it a more attractive jurisdiction for foreigners to target when setting up a new business as compared with Canada's largest trading partner, the United States. It has the benefit of a North American free trade agreement. It is a good place to carry on business. All of these things should be helpful to Canadian lawyers who I expect will be spending substantial time assisting international companies that wish to come to Canada to take advantage of what it has to offer.

As well, there exist opportunities for Canadian businesses internationally, and those opportunities should create Canadian legal work. However, the practical realities of the economic marketplace, especially internationally, tend to limit the export of capital either by foreign companies to Canada or by Canadian companies abroad. As a result, Canada may be seen to be over-lawyered, especially given the large number of takeovers of substantial Canadian companies that have occurred in recent years, particularly by non-Canadian companies. Inevitably, the impact on the Canadian legal profession of practising in a mature legal market will be rationalisation, except to the extent Canadian lawyers are successful in pursuing international opportunities.