Neil Hodge reports on how Canada's economic recovery is helping its legal profession flex its muscles

Canada's legal services market continues to grow, albeit at a slower pace than in previous years. Lawyers at the country's largest independent firms believe there are three principal factors driving the market: pressure on fees, increased competition and the state of the global economy, especially in regard to commodities prices. 

Steven Smith, partner in the corporate group and head of the UK and Europe sector at Osler Hoskin & Harcourt, says: "The biggest challenge that law firms are facing in Canada is the pressure on fees from clients who simply want more for their money. Reduction in fee income and pressure on prices is making the market more competitive."

Marc-Andre Blanchard, chairman and chief executive of McCarthy Tetrault, comments: "Like other firms, we believe that the legal services market here is very competitive and that the pressure on fees is growing. But we believe that our emphasis on service delivery is helping us retain clients and win new business."

Blanchard adds that client pressure to cap fees has forced the firm to look at ways of being more cost-efficient even though its revenue and market share are growing. In recent years, McCarthy Tetrault has reduced its number of equity partners while retaining the same number of lawyers. "In a competitive market, costs become paramount. If clients are putting pressure on fees, then we have to look at making efficiencies," he says.

Since 2008 Canada's economy has remained strong, though growth may have slowed lately. "Canada's financial services sector was not as badly affected as those in the UK or US, so the fallout did not spread as dramatically to other areas of the economy," explains Blanchard.

"The country has also benefited from its vast reserves of natural resources and minerals, as well as strong interest in its energy sector, ranging from oil and gas to wind and hydro electricity. The recent slowdown in global demand for commodities has started to slow the market a bit, but otherwise Canada's economy is steady."

Southern discomfort?

However, lawyers point out that Canada cannot shield itself from what is happening south of the border. Smith says: "The US is a major source of business for Canadian law firms. We get a lot of referral work from US law firms who want us to do the regulatory, compliance and tax work for US companies that want to come into Canada. It is a significant part of our business. Therefore, if they are no longer making the same level of investment, it definitely has an impact on the amount of work we are doing on their behalf, which obviously hits fee income."

Deal flow has also slowed in the past year, but large transactions are still taking place and the top-rated Seven Sister firms are naturally carving up the spoils. In October Davies Ward Phillips & Vineberg acted on Air Canada's C$1.4bn (£829m) refinancing. 

A month earlier, Torys advised the Canada Pension Plan Investment Board on its joint US$6bn (£3.7bn) acquisition with Ares Management of retailer Neiman Marcus Group. The firm's Canada-based deal volume in the past quarter was roughly C$33bn (£19.5bn) – nearly a third of the market. 

Stikeman Elliott has also been busy, chalking up 61 deals in the most recent quarter; one of the most notable being its role as Canadian counsel to contact lens producer Bausch & Lomb in its US$8.7bn (£5.4bn) acquisition by Quebec-based Valeant Pharmaceuticals International.

McCarthy Tetrault has also seen an uptick in M&A work. The firm is currently representing the Fairfax-led consortium in its attempt to acquire smartphone maker BlackBerry. But Blanchard is uncertain whether this represents a change in the market: "I am not sure if the improvement in deal activity is really a sign that the market is improving, or whether it is more of an indication that deals are being done in the industry areas that we are focusing on. Either way, it's good news for us as we seem to be doing more deal-related work than other firms."

 

 

'Internationalisation' of the local market

Another development that has shaken up the Canadian legal services market is the entrance of international players. In 2011 Canadian firm Ogilvy Renault merged with London-based Norton Rose, resulting in a global network of about 2,500 lawyers and making Norton Rose Fulbright (as it is known today) one of the top 10 law firms in the world by size. 

In addition, Salans, SNR Denton and Canada's Fraser Milner Casgrain went live with their three-way merger to form Dentons in March (though it operates as a Swiss verein).

Lawyers are divided about what these developments mean for the country's legal services market in the long-term. Osler's Smith says that the arrival of Dentons and Norton Rose are the first indications that the Canadian legal services market is being "internationlised". 

"We are waiting to see if these mergers will prove to be successful," he adds. "We have considered merging with an international firm, but at the moment we wish to stay independent." 

However, Blanchard does not believe that more international firms will follow suit and look to enter the Canadian market: "The legal services market is already well-served here by local firms. I can't see international firms having the appetite to really come in."

If the international firms stay away, Canadian lawyers predict a bright 2014. Those practice areas that are commonly regarded as 'safe bets' for the next couple of years include litigation – largely stemming from a rise in shareholder activism cases – and regulatory and compliance work. 

Securitisations and real estate investment trusts have also been a fruitful source of income for several of the country's leading firms, and predictions are they will remain so. But the real potential for growth lies in the country's vast mineral wealth, as national energy and oil and gas projects gather pace, prompting major investments in infrastructure work. The oil sands in Alberta are the world's third largest source of crude reserves and the starting point for the proposed Keystone XL pipeline to the US Gulf Coast.

Canadian firms also believe that they will continue to be the main beneficiaries of the associated work due to their expertise in aboriginal issues. Smith says: "A lot of the infrastructure work associated with energy projects impacts aboriginal land. Canadian firms have the necessary expertise to advise on such issues, so it is highly likely that we will be involved in these projects to some degree from the start."

Brock Gibson, chair of Toronto-based Blake Cassels & Graydon, says that the energy sector is a magnet for law firms for several reasons: "Canada's oil and gas industry is set to continue to attract foreign investment as oil sands are developed and new techniques have been developed to produce non-conventional natural gas and oil. 

"Canada's fantastic natural resources wealth is also driving several large-scale infrastructure and transport projects, which in turn creates the need for legal services."

Obstacles to growth

Yet not all players in the energy sector will be winners, as smaller clients see a slowdown in investor appetite. Gibson continues: "Many junior resource companies have struggled to get access to cash in a period of slower demand for commodities, and this will have an impact on law firms that focus on arranging access to capital markets for companies in these sectors."  

Blanchard agrees: "Specialist law firms have perhaps taken a hit in the past year as the demand for commodities has slowed down, which has had a direct impact on our natural resources and minerals sectors. Firms doing oil and gas work from Calgary, for example, are facing a slowdown as the industry sees a decline in investment." 

Some lawyers also have concerns that foreign investor appetite may wane following some recent decisions by Canada's Government that have effectively barred foreign investors from entering the market. 

On 7 October politicians rejected the proposed acquisition of Manitoba Telecom Service's Allstream business by the Egypt-based investment group Accelero, citing 'national security concerns' under the Investment Canada Act. 

Yet this is not the first time that such concerns have been cited as a hamper to foreign investment in the Canadian telecommunications sector. In June Dutch telecoms company VimpelCom withdrew its offer to buy a controlling stake in WIND Mobile Canada after the Government raised national security as an issue. 

In addition, oil sands deals are being completed at the slowest pace in nine years as politicians' heightened scrutiny of investments by foreign state-owned companies hinders transactions.

"It is in nobody's interests for Canada to be regarded as an unfriendly business environment," says Smith. "Foreign investors want clarity and certainty about whether they can make deals here, and recent Government decisions are affecting that."