The View From Up North -- Why Aren’t There More International Law Firms in Canada?

Canadian columnist Steve Dykstra identifies 6 possible explanations.

Everybody in the Canadian legal profession knows that international firms Baker & McKenzie, Norton Rose and Dentons have set up shop in Canada. Baker & McKenzie has actually been in Toronto since 1962. Norton Rose absorbed the venerable Ogilvy Renault in 2011 before conquering the west by merging with energy powerhouse MacLeod Dixon in 2012. Dentons made its Canadian play in 2013 by merging with another long-established firm, Fraser Milner.

But how many people realize that there are several other prominent U.S./international firms working somewhat under the radar in the Canadian market? Powerhouses like Paul Weiss, Shearman & Sterling and Skadden Arps all have small Canadian offices where they service mostly American clients. Similarly, Dorsey & Whitney, Hodgson Russ, Dickinson Wright, Fragomen, and Clyde and Co. all have small Canadian presences.

By my count, that’s eleven U.S./international firms that have a real footprint in Canada, which leads to this question: why aren’t there more? Canada is a G8 nation with a strong economy. Our citizens are warm and friendly. We wear deodorant. Why have you forsaken us, international law firms?

Here’s what I dug up:

1. Priorities. Like everything else in this world, law firms go where it’s important to their clients and where they can make money. Until fifteen years ago, Canada was never high on the list. First off, Toronto is the centre of the Canadian universe. Calgary is attractive for its oil patch, but Toronto is where the big boys and girls play. Any law firm interested in Canada pretty much has to start with Toronto. Yet, Toronto has always had a well-established legal profession. It is filled with very prominent and prestigious firms like Goodmans and Torys — firms that consider themselves every bit as talented as any international firm.

Thus, international firms have always been able to handle their clients’ Canadian issues via referral to a prominent Canadian firm. Therefore, there has been no real need for international firms to set up shop in Canada in order to take care of their clients.

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What’s changed? I can only speculate. Law firm consolidation is all the rage. Norton Rose and Dentons saw opportunities here and jumped on them. Dickinson Wright picked up a small Canadian firm to establish its Canadian presence. Those deals may be blips or it may be a trend. I don’t think we can say yet. A lot of law firm gurus believe it’s only a matter of time before more international firms come looking for a Canadian greencard. But, as I discuss below, it’s not an easy proposition for U.S./international firms to make real hay in Canada.

2. Pop, Pop, Fizz, Fizz. International firms that cast their gaze longingly toward Canada face a couple of significant hurdles. First off, many of our most prestigious firms are quite large as far as merger targets go. We have around twenty law firms with 200 or more lawyers. Many of our largest firms have offices all over Canada. Gobbling up one of our biggest law firms isn’t like gobbling a handful of Cheetos. It’s a pretty big bite and can give even mega-firms serious indigestion.

Additionally, as I’ve pointed out in the past, for the most part our law firms are not nearly as profitable as the U.S./international powerhouses. Many suitors would see a noticeable drop in their cherished profits per partner upon sucking up a large Canadian law firm. We all know that PPP is akin to a firm’s stock price and they protect it like Fort Knox locks down the gold. Thus, the strategic value of a Canadian merger would have to outweigh the financial impact to the firm’s PPP before a firm would seriously consider vacuuming up a Canadian firm.

Alternatively, the international firm might propose to make the acquisition knowing the combined entity would either have to de-equitize or jettison a number of less-profitable Canadian partners. Hard to imagine they can get much support for a merger on the Canadian side if a number of the low-end partners think it’s going to cost them their jobs or equity status.

3. Accounting. On the accounting front, Canadian law firms are often accrual-based, whereas the international firms are often cash-based. Thus, in order to facilitate a change to a cash-based system, the international firm may have to float sixty to ninety days’ worth of expenses while the Canadian firm makes the switch. That’s part of the indigestion mentioned above.

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4. Referrals. As already noted, one of the reasons international firms haven’t opened up in Canada is because they can service their clients via referral to some terrific Canadian lawyers. That, of course, means a lot of major Canadian partners (i.e., the Gorillas who hold power) make their living off of referrals from their U.S./international counterparts. Thus, let’s take a look a hypothetical partner, Jane. One day Jane is a top dog working for, say, Stikeman Elliott. The next day Stikes merges with, for instance, Latham & Watkins. Now Jane calls up her referral sources at major U.S. law firms to share with them the wonderful merger news. Jane is shocked to find her referral sources are less than enthused. In fact, one or two bluntly tell her that now she’s working for Latham, a major competitor, they cannot send her any more referrals. Jane is no longer a top dog. See Jane cry. Cry, Jane, cry.

You know that partners at any firm that bills a substantial amount of fees on account of U.S. referrals are thinking about how a merger will affect their books of business. I think most of our top Canadian firms would face this impediment. There are a lot of Canadian Janes who would feel their books of business would be threatened by a merger. Of course, the international firm is going to sell lollipops and rainbows about how joining it will more than make up for the lost referrals. Canadian lawyers are both conservative and skittish around lollipops and rainbows.

5. Ego. Many of our best firms see themselves as equal to the best firms in the world. It is hard to imagine they would give up their autonomy to join an international firm unless there are substantial benefits (read: a sizable increase in partner compensation). Additionally, although our firms are large, they are small compared to some of the mega-firms that might be interested in merging. That really leads to a discussion of terminology. Partners at our firms (who think very highly of themselves) would be interested in a “merger.” Realistically, when you have a mega-firm swallowing up, for example, Osler (400 lawyers across Canada), it is probably better termed as an “acquisition” by the mega-firm. You could see how Osler would want to ensure it wouldn’t get lost and forgotten in a mega-firm. You could also imagine that Osler would want near autonomy in Canada and significant and guaranteed representation on the international management committee.

In the end, our major Canadian firms may see themselves as deserving richer deal terms than an international firm may feel is warranted given our firms’ relatively smaller size and weaker contribution to profits.

6. Alternative Strategies. I don’t really know why some of the mega-firms haven’t greenfielded (is that a word?) into Canada. Why not start small by swiping a couple of prestigious practitioners and grow from there?  Given the headaches discussed above for merging with a large Canadian player, a greenfield operation makes more sense. Other than Allen & Overy, which it looks like will open a very small Canadian office shortly, it doesn’t seem to be happening. Maybe because opening an office takes up so much time and energy, starting small and growing isn’t worth the effort.

Or, maybe a greenfield strategy just isn’t sexy or fun. We all love big splashes. We want buzz. We want game-changers. At least, that’s what I want. I don’t want to see a major international firm slip in under cover of night with some two-lawyer micro strategy. I want to see one of our biggest firms change brands.

So, if you’re coming international law firms, don’t show up with a delicate plan. Let’s see you sink your teeth into one of our meatiest firms.

Go Biglaw or go home.

That’s the View From Up North. See you next week.


Steve Dykstra is a Canadian-trained lawyer and legal recruiter. He is the President of Keybridge Legal Recruiting, a boutique recruitment firm that places lawyers in law firms and in-house roles throughout North America. You can contact Steve at steve@keybridgerecruiting.com. You can also read his blog at stevendykstra.wordpress.com, follow him on Twitter (@IMRecruitR), or connect on LinkedIn (ca.linkedin.com/in/stevedykstra/).