A matter of size

Mergers are changing the legal profession

BARBARA WICKENS November 6 1989

A matter of size

Mergers are changing the legal profession

BARBARA WICKENS November 6 1989

A matter of size


Mergers are changing the legal profession

After five months of courtship, the marriage announcement came as no surprise. Still, when the partners of two Toronto legal firms. Fasken &

Calvin and Campbell Godfrey & Lewtas, announced last month that they would merge on Nov. 1, the Canadian legal community took notice. The two firms, which in their merged form will be known as Fasken Campbell Godfrey, were already big firms on their own. Fasken & Calvin had 122 lawyers on its staff, and Campbell Godfrey & Lewtas employed 105 lawyers. Counting the 129 lawyers from Fasken & Calvin’s Quebec affiliate, Martineau Walker, the new firm has 356 lawyers, making it Canada’s largest. Even if the associates in the separately run Quebec operation are not counted, Fasken Campbell Godfrey will be among the country’s five largest law firms. Said Walter Palmer, chairman of Campbell Godfrey's merger committee: “The law has become more complex. Together, we complement each other’s areas of expertise.”

The Fasken Campbell merger is the latest in a trend towards ever-larger law firms that is gathering momentum in Canada—and which

legal experts say is changing the shape of the Canadian legal profession. Most of the growth has come through mergers and acquisitions.

Others have formed links with firms in other provinces to work on cases that cross provincial boundaries.

In the process, interprovincial firms with offices in several cities are emerging as new national powerhouses, while other Canadian firms are beginning to establish an international presence. As a result of the trend towards larger law firms, about 3,000 lawyers—or eight per cent of the nation’s more than 37,000 practising lawyers— now work for the country’s 20 largest firms. Some legal

analysts have even suggested

that midsize firms could disappear. Some critics object that mergers can lead law firms into conflict of interest, and they say that bigness does not necessarily make law firms better. Still, with the richest corporations as their clients, the largest law firms have the prestige and the financial power to keep on expanding. While Toronto’s big Bay Street law firms

remain among the largest in Canada, the trend toward bigness is affecting all of Canada’s regions. Stewart MacKeen & Covert, a 55lawyer Halifax law firm, announced in July that it had reached an agreement in principle to merge with McKelvey, Macaulay, Machum of Saint John, N.B., making it the largest firm in the Atlantic region, with more than 85 lawyers. Ottawa-based Gowling & Henderson, with 185 lawyers, merged in July with Toronto’s Strathy, Archibald & Seagram to form the 222lawyer firm of Gowling, Strathy & Henderson. Toronto-based McCarthy & McCarthy is currently Canada’s largest law firm, with a total of 335 lawyers, following mergers in February with the Vancouver firm of Shrum, Liddle & Hebenton and with Calgary’s Black & Co. in April. In Calgary, Fenerty Robertson Fraser & Hatch, with 82 lawyers, announced earlier this month that it had formed an association with the seventh-largest firm in the United States, Houston-based Fulbright and Jaworski, with 600 lawyers. Fenerty partner Francis Saville said that the relationship with the American firm, formed specifically to assist clients on both sides of the border in energy matters, is a

first for a Canadian firm. Still, others predict that the trend will continue because of free trade. Indeed, the Philadelphia-based firm Pepper, Hamilton & Scheetz announced on Oct. 20 that Allan Gotlieb, the former ambassador of Canada to the United States, will become an adviser in their Washington, D.C., office on trade-related issues.

The Fasken Campbell merger is unusual in that it is a marriage of equals. According to Jack Kaufman, president of Hildebrandt Inc., a Somerville, N.J.-based legal management consulting firm that specializes in mergers, acquisitions and planning for law firms, most legal mergers are really acquisitions of smaller firms

by larger ones. Said Kaufman, whose company has been involved in at least 15 mergers: “If there have been any similar mergers they have been few and far between.”

Spokesmen for some of the big new law firms insist that the trend towards larger companies is occurring partly because of pressure exerted by corporate clients who are themselves involved in mergers and acquisitions with oth£ er firms. Arthur Scace, mang aging partner at McCarthy & 1 McCarthy, said that many £ corporate clients want a sin% gle law firm that can handle 1 all their legal transactions “ across Canada. Added Scace: “You want to be of a certain critical size to be able to do

the big deals and more than one deal at a time.” Scace said that sometimes more than 30 lawyers, including specialists in litigation, tax law, securities and real estate, can be involved simultaneously in a major corporate takeover. Hugh Cowan, a partner with Gowling, Strathy & Henderson, said that being large enables a firm to offer a full range of legal services. Said

Cowan: “You can have experts that you can’t afford to have on staff at a smaller firm.” Said Palmer of Campbell Godfrey: “As Canadian companies are expanding, we’ve got to parallel their growth.”

Until recently, there were legal constraints that limited the expansion of Canadian law firms. But several bitterly contested legal battles have established the right of Canadian law firm to operate across provincial borders. A key case developed when McCarthy & McCar-

thy formed Black & Co. as a satellite firm in Calgary in 1981. The Law Society of Alberta promptly enacted rules that effectively banned the Toronto firm from operating in the province through its associate firm. McCarthy challenged the law society’s right to ban the Toronto firm.

After a series of lower-court decisions, the Supreme Court of Canada ruled in May that the law society’s rules violated the Canadian Charter of Rights and Freedoms, because Canadian citizens must be free to earn a living in any province. Now, provincial law associations say that they are in favor of interprovincial firms. Said Sylviane Borenstein, vice-president of the Bar of the Province of Quebec, which is currently amending its bylaws to allow

interprovincial firms to operate in Quebec: “We are 100 per cent behind it.”

As the big law firms grow bigger, some observers have suggested that midsize firms may be squeezed out of the marketplace, because they are too large for small clients but too small for the blue-chip corporate client. Said Calgary’s Saville: “The big work will go to the big firms.” Said Stephen Mabey, director of finance and administration for Halifax’s Stewart MacKeen & Covert: “The era of the gener-

alist is not dead, but it’s difficult, in my opinion, for middle-size firms who aren’t specialized to maintain their spot in the marketplace.” For his part, J. J. Camp, a civil litigation lawyer at Ladner Downs, a 105-lawyer Vancouver firm, said that he does not foresee the legal landscape changing radically, because there is still a wide variety of clients needing a range of legal services. Said Camp: “I think there is room for competent small firms, competent middle-sized firms and competent large firms.” Still, some lawyers argue that the trend towards bigger law firms may damage the legal profession in other ways. Some lawyers fear that as law firms get larger, companies based in Central Canada will drain the most lucra-

tive and challenging legal work away from the regions. “Until recently, you’ve had to hire B.C. lawyers to do work in B.C.,” said Jack Giles, a Vancouver lawyer who works for the 60-lawyer Farris, Baughan, Wills & Murphy. “But it’s much easier to do the work in Toronto. That’s the centre of corporate life. Our young lawyers will have to go to Toronto or pasture.” But Camp, for one, said that expected the reverse will also happen because the best lawyers go where the best work is. He added, “You get clients who say, ‘Look, I want lawyer X to handle my business, whether it’s here in Vancouver Calgary or Toronto.’ ”

Other lawyers say that serious conflicts interest can arise when companies merge and find that the newly merged firm is representing both sides in a legal issue. At other times, newly merged firms find they are representing rival interests that do not want to be represented by the same law firm. When Gowling Henderson, which represented the Canadian Medical Protective Association, a doctors’ selfinsurance organization, merged with Strathy, Archibald & Seagram, a Strathy lawyer left the firm so that she could continue to represent the Ontario College of Physicians and Surgeons, medical disciplinary body. In either case, legal ethics dictate that the law firm give up one its clients.

Some critics even question whether giant law firms make sense financially. Harold Elliott, who became a partner with the 75-lawyer Toronto firm of Shibley, Righton & McCutcheon in 1987, after leaving a smaller, 11lawyer firm, said that some law firms become more expensive to run as they become larger. Said Elliott: “You end up with more committees, and bigger committees, to run the firm. The committees are usually comprised of the senior partners, which means they cost more lawyers’ time. Committees can become an albatross around the neck of effective management.” Ronald Pink and Raymond Larkin, who run the seven-lawyer Halifax firm of PinkLarkin, are former members of the HalifaxTruro firm, Patterson Kitz. The two broke away when their successful labor practice at the firm ran into conflicts with the firm’s corporate and commercial clients. Larkin said the two men appreciate the quality of life more these days at their small firm. Said Larkin: “We designed an environment that fits the style of our practice. We’re all happier now.”

Still, legal experts say that many Canadian law firms are likely to keep on getting bigger. Indeed, Hildebrandt’s Kaufman predicted that some Canadian firms may approach the 500lawyer mark by 1995. But he said that he does not envisage them becoming as big as some U.S. firms, which have more than 1,000 lawyers. Gowling’s Cowan said that within five years, two or three genuinely national firms will probably emerge with offices in every province. By then, the law firms’ partners and their clients will be able to judge for themselves whether bigger is really better.