Biz Lunch (#10 October 2017)

Full International Role

The stable and certainly comfortable business environment in Canada boosts its business opportunities. After a series of mega-mergers across the globe, the legal market of Canada has been empowered with big international players. Tom Houston, partner of Dentons office in Ottawa, shared his views on the market landscape and the evolving needs of clients to play an international role.

How would you comment on the current situation on the legal market in Canada? What is the balance of power between international law firms present here like Dentons, for example, and local firms?

Tom Houston: We have a number of very good law firms in Canada and some of them, like Dentons and Norton Rose Fulbright, are international firms. Baker McKenzie does not have a big presence in Canada, but they are here as well. We also have a number of very strong domestic firms that are primarily headquartered in Toronto. They do a significant amount of M&A work and high-end corporate work in Canada. And we have a number of regional firms that are present in only one city or region of Canada, and we have boutique firms. So, probably not unlike any other country. But in terms of the balance of power if you will, both Dentons and Norton Rose Fulbright combined with large Canadian firms to start off. In Canada our firm used to be called Fraser Milner Casgrain (FMC). The firm has been around since 1839. I have personally been a partner of this law firm for 39 years. I started in our Toronto office and then moved to Ottawa in 1985 to open this office.

But I would say that the two main international law firms in Canada, namely Dentons and Norton Rose Fulbright, both inherited very strong firms to start with and they continue to grow.

We also have strong law firms in Canada that have a few foreign offices but decided not to take on a full international role. They picked their places. For example, some of them have offices in London, some in Beijing and some in the United States.

What about Salans? Did they have an office in Canada before this global merger?

T. H.: No, they did not, nor did the other combination partner, SNR Denton.

It is very interesting because some law firms complain of integration costs that they face in terms of merger processes.

T. H.: There is no doubt that there are integration costs. The chair of our firm, Joe Andrew, who is based in Washington, said: You cant sell what you dont know. So in other words, its important that you get to know your partners around the world, so you can develop a relationship with them. Weve had four global partners meetings since our initial combination and in each one, partners continue to develop relationships so they are comfortable referring work to the other regions, and will receive inter-regional referrals back. So, the cost of holding a global partners meeting is obviously another cost of integration, but the feeling is that those costs are outweighed by the benefits.

By way of continuation of your answer. How would you describe the benefits of the recent global merger mania and the leading role of Dentons in this area?

T. H.: The reason we decided as a firm to combine with Dentons is that we saw Canadian companies increasingly doing business around the world, and we wanted to be able to follow our clients in terms of the deals they are doing. So this allows us to continue to represent our clients on matters outside Canada. As an example, we were recently asked to do a proposal on carrying out an acquisition for a US company of a Canadian company that has operations in Italy. The fact that we have offices in Italy was a factor for that client in retaining us.

That is one part and the other part is inbound work. By creating a single firm, you are more likely to receive work coming into Canada. What we ideally would like to do is receive referrals of work from around the world.

Dentons started its global initiative for local law firms to join its international referrals network. Are you already feeling any benefits from this initiative in Canada?

T. H.: We probably havent seen any specific benefits in Canada at this point. However, it makes it easier to identify referral sources where we, at Dentons, arent able to do the work.

What practice areas are in demand right now? Do you see significant changes in transactional activity and on the litigation front?

T. H.: Its hard to make broad-based comments. Id say we are in a reasonably stable state. I think law firms are facing challenges at the present time, because many clients decide to do more work in-house. There is broadly-based declining demand for legal services around the world. We are certainly aware of that, which is why we take certain initiatives in other areas.

But there still is reasonable demand for transactional work. I would say that last year we were hurt by low energy prices. That hit the activity levels in Alberta, which is the main energy area in Canada. Environmental issues continue to hurt our energy sector in terms of pipelines being built in the United States, and also a pipeline to British Columbia so that we are able to export oil and gas around the world.

Other areas are quite strong. Technology is quite strong. For example, in the Ottawa area, a western suburb called Kanata is a big technology centre here. There is demand for litigation and it is ongoing.

Another area of importance is infrastructure, where Canada has a leading role in what we call PPP or public-private partnerships. Weve done a number of those involving bridges, highways and hospitals. This type of work is important and the Canadian Government earmarks a lot of money or these sorts of infrastructure projects.

What about industries in Canada?

T. H.: Canada is a very big country. Thats a challenge we face here.

If we look at the regions across Canada, Alberta and Western Canada as a whole tends to be the energy area with oil and gas as the main industry, along with big-size farming and the fertilizer industry. Moving towards Ontario where we are, we have a strong automobile plant base with many US, Korean and Japanese manufacturers. There are also plants in Ontario, as well as many big-parts manufacturers based in Quebec. Vancouver is very strong in technology as well in terms of number of software companies and entertainment-related ones. Toronto has also been strong in technology but right now is becoming a world leader in artificial intelligence and machine learning. Montreal is an entertainment software-related centre. Eastern Canada is not as strong economically. It is more based on tourism and some energy. In terms of all these trends we really have to keep breaking Canada down into its different provinces because they are focused on different things.

How do the policies of American President Donald Trump affect Canadian business and, consequently, legal services?

T. H.: I would say they have not had any negative effects on us so far.

Some Americans are probably looking at Canada quite favorably now because we have a more stable environment. As you may well know, NAFTA negotiations restarted recently. Part of the problem that we have with the current US administration is that many mixed signals have been sent out, so its hard to say what they want to do. At one point they say they want to quit NAFTA, and now they say they want to massively change it. We just have to wait and see. But I think they realized that, in fact, Trump is misinformed on trade because he thinks trade hurts the US, though in fact trade helps the US. Mexico is different and Canada is, in many ways, similar to the United States. We have a little different structure here, which is more socialized in Canada than in the US. We have a public healthcare system and similar things. So there are different costs associated with that than in the US. But its not like low wage jobs in Canada are similar to those they have in Mexico. I dont think that Canada poses the same threats to the US as Mexico does.

Its very interesting watching whats going on in the US. Im sure that it is the case for the rest of the world too.

The Free Trade Agreement between Canada and Ukraine, which was signed last year, came into force recently. Do you see any interest on the part of your clients towards Ukrainian jurisdictions?

T. H.: Its hard for me to say as we have 500 lawyers in Canada. I would not say that we do a lot work with Ukraine.

Just in preparation for this interview I made a few enquiries. I talked to one of my trade partners in our Toronto office, and he reminded me that we hosted an event there on trade between Canada and Ukraine. My colleague gave me some statistics from a Government of Canada website. Just as a matter of interest, in 2016 Canada exported USD 265 million worth of goods to Ukraine, and total exports in 2016 were USD 516 billion, so there is not a huge amount of trade between our countries. Interestingly, the main product that we export to Ukraine is bituminous coal, which came to USD 146 million of that USD 265 million. And the next was fish, followed by aircraft. We have a large airplane manufacturer called Bombardier.

We imported USD 107 million worth of goods in 2016. The main import was USD 26 million worth of soya beans from Ukraine. Canada and the US are by far the largest trading partners.

What is your forecast for the development of the global legal market? There are a lot of mergers, acquisitions, lots of news from the IT sector and introduction of different IT technologies on the legal market. What is your opinion?

T. H.: Internationally, I think many large international mergers have probably taken place. I dont think we will see the same pace of mergers.

Well see consolidation on local markets. Firms which are not small boutiques are trying to achieve economy of scale, so we may see more domestic mergers.

In terms of the Canadian market, we continue to see opportunities in technology and the Government is very supportive in innovation. So we would like to continue to be seen as a centre of innovation. We do a lot of work with Silicon Valley in California. There are lots of US-based companies that think Canada is a very attractive place to hire engineers and do lots of product development work.

How is Dentons implementing technical innovations in its operational activities? What about the trend of introducing artificial intelligence and automation?

T. H.: We are active in this area. I think you may be familiar with Nextlaw Labs. Its a fund the firm developed to invest in technologies that are innovative for the legal industry. So we have invested in a few Canadian companies as well as in a number of international companies.

One company weve invested in is called ROSS Intelligence. They are one of the companies at the forefront of artificial intelligence in terms of legal research and legal advice, and were initially focused on the area of bankruptcy. The idea is that work is now done by a computer that was historically done by a lawyer.

That will be one of the areas where artificial intelligence is actually doing the legal analysis.

The other thing weve developed is a document automation tool, so we started doing a lot more of that in terms of automatically generating documents. For instance, my own practice is in the technology field, so I do a lot of work for start-ups and venture capital.

With documents becoming more standardized, weve created standard templates for venture capital financing. And we also have document automation ready for those documents that implement transactions share provisions, subscription agreement, shareholder agreement, etc.

In this way we are trying to become more efficient and cost-effective so that many early-stage companies can save money.

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