- Industry Spotlight
|Philip Mendes da Costa, managing partner with Bereskin & Parr LLP.|
- Law Department Management
When Mark Adams was promoted to the top legal job at AGF Management Ltd. in December, he assumed the reporting line for compliance in the organization. As vice president, general counsel, and corporate secretary, compliance issues now flow through to him. “We haven’t merged legal and compliance in any respect but I am now overseeing compliance as the general counsel,” says Adams. “I am in the camp where I think they need to be distinct for it to really work well together.”
When one thinks of merger and acquisition action in Canadian business, typically it’s the resource sectors, followed by financial services as the heavy hitters with the most going on, even in tough times. According to PricewaterhouseCoopers Canada, mining has become the No. 1 targeted sector in Ontario and British Columbia. But traditional hotbeds of resource activity such as Alberta are starting to see a shift in M&A activity. Where oil and gas deals once represented 80 per cent of the acquisitions in that province, they have declined to represent
50 per cent of the province’s takeover market. By comparison, a PwC report in October noted that M&A activity in Saskatchewan was 23-per-cent higher in 2011 than in 2010. It is home to uranium, potash, and farmland, which is considered to be among the least expensive in the developed world.
Expectations are that deals in the resource sector will continue to dominate the M&A landscape, but it should be no surprise that the food, beverage, and agri-business sector — a relatively unassuming but critical market to the world’s economy — has been evolving towards a global industry with huge potential for big business in the coming years, especially so in emerging markets as the world’s food supply becomes a larger focus. In developing markets such as China and India, population increases and rising incomes are the reasons for their ever-increasing number of consumers buying branded packaged foods.
Food has always been big business here at home. According to the Conference Board of Canada, the food sector represents more than nine per cent of the country’s gross domestic product and 13 per cent of all employment in Canada. It is also the second largest employer in the manufacturing sector.
While uncertainty coming from the European debt crisis remains the biggest potential damper on the year for M&A activity, the credit crisis has taught companies over the last few years to hang on to cash and, overall, heading into 2012 Canadian companies have stronger balance sheets than they did two years ago. All of which means they can afford to be opportunistic in their pursuits. Experts point to a lot of itchy fingers holding on to private equity cash waiting for the right deal. That is definitely the case in the food industry.
Law firms and other business service sectors have been watching the food industry closely for the last few years. Blake Cassels & Graydon LLP formed its food, beverage, and agri-business practice group in 2009 because it was “seeing a lot of deals getting done,” says Michael Stevenson, a partner in Blakes’ M&A and food, beverage, and agri-business practice groups.
Stevenson says most of the parties in the deals done prior to 2009 were represented by regional law firms and the potential for national and international opportunities was identified. “Obviously, food and agri-business is a large part of the Canadian economy. One of the things we have been looking at is that there were 36 deals done in this sector in Canada in 2009, which was a drop from a high of 56 in 2008, but it was up to 45 in 2010 so the numbers are climbing back up after the economic downturn”, says Stevenson. “As a firm we are seeing transactions in this space and we expect to see a lot more in 2012.”
David Woollcombe, a partner in the business law group with McCarthy Tétrault LLP, says the U.S. food market is ripe for consolidation and that could impact Canada positively. “The key thing in that business that may drive M&A is the world is getting smaller, with shrinking distance between producer and consumer — globalization and world population shifts — think of the food business as a long continuum starting with biotech, leading to seed production, leading to crop inputs and that’s where you see some activity in Canada in fertilizer in terms of potash,” explains Woollcombe.
What follows fertilizer is crop production with private farms, the big “protein producers” including pork and beef, and commodities handling companies. From there you get into food processing with companies such as Kraft, and then retail. “We’ve certainly seen M&A in the crop input sector, commodities handling, and in the food producers,” says Woollcombe.
Agrium Inc., a Calgary-based provider of agriculture products, is a company looking to be a global player and it has been seeking out global acquisitions, says Woollcombe. “Canadian companies like Agrium compete on a global basis. They have continued to extend their international reach with deals like the acquisition of the AWB (Australian Wheat Board) in Australia in late 2010. It’s hard not to feel good about a Canadian company whose mantra is feeding a growing world.”
The company is looking for places to manufacture and sell its product at the lowest cost. “Over the last five years North America has become extremely competitive, it has the best potash in Saskatchewan and cheap natural gas which is changing our dynamic. We see as much growth potential in North America as we do outside,” says Leslie O’Donoghue, chief legal officer and senior vice president of business development at Agrium. “The world has changed for us on the manufacturing side in terms of where the next nitrogen or potash facility is going to be. We just announced a $1.5-billion project in Saskatchewan where we’re expanding our potash mine.”
Agrium began as a small nitrogen player and as it grew, it grew domestically and into the United States with some major acquisitions over the last few years on the retail side. “We still feel there is lots of room for growth in North America,” says O’Donoghue. “We’re in a fairly volatile time from a macroeconomic perspective with Europe, but when you really look at
our industry and the population increasing while arable land is decreasing, we ultimately think that over the medium term there are lots of opportunities.”
Canadians have a huge advantage in this sector equipped with good governance and strong balance sheets, says O’Donoghue. She notes Agrium is looking abroad over the long term to Asia, Brazil, China, and Indonesia. They are selling some products in those countries through distributors, but it doesn’t have boots on the ground there yet. “If you’re not keeping pace with the growth that is happening outside of North America I think the fear is you’ll be left behind.” But going internationally demands a company look at the challenges of doing business abroad.
Agrium has expanded into Argentina, they also went into Egypt four years ago. “It’s not for the faint of heart but it gets us into Europe. We’re doing it in pieces in that we’re in Western Europe looking to get into central Europe and eastern Europe.
We really feel with our Australian acquisition last year the next phase is really more expansion within that base and then you’re into the Asia-Pacific market.”
Woollcombe adds that Canadian food and agriculture companies are actually doing more business abroad than people may think. “In various industries you often hear that Canadian companies are getting gobbled up and not buying as much outside Canada to the same degree as non-Canadians are buying in Canada. I’m not sure that’s actually true. We see lots of Canadian companies looking to make acquisitions outside of Canada,” he says.
They may not grab huge headlines, but there are large food and agri-business acquisitions being made by Canadian companies. “There are things Canada is known for and it’s not just oil, gas, and mining — food would fall into that as well,” says Kristian Knibutat, Canadian deals leader with PricewaterhouseCoopers Canada in Toronto. “We’ve certainly seen some transactions in the food space that would fit into that category of areas Canada is known for.”
Knibutat has been following the sector for some time now and says there are good opportunities for Canadian companies to do business abroad in India and China, especially in the fundamental areas of assisting in the development of infrastructure for foreign markets, which could be opportunities for Canadian companies. “We believe Canada is well-developed in the agricultural space — it’s part of our heritage and what we’ve built our economy on, and food is becoming a critical issue particularly for emerging markets. It’s a good opportunity for Canadians to take the expertise we have in the agricultural sectors overseas and help those countries as they are developing their agricultural businesses,” he says. “When I was in India the key issue I saw that they have in the food sector is perishability. They have a lot of food supply but a lot of it rots before it gets to the markets it needs to be in.”
Foreign companies are also looking for opportunities to make acquisitions in Canada that will allow them to take something back to their own markets, whether that’s processes or good brands they can leverage.
But while some see Canada as a leader in food production and innovation, it also risks falling behind, according to experts who follow the sector. “I think there are terrific opportunities in the developing economies that we could be taking advantage of to get in early in the market development,” says Ken Smith, associate dean of executive programs and associate professor in the College of Management and Economics at the University of Guelph.
Smith spoke at a conference in Toronto last November called Growth in the Food Industry, hosted by Blakes. He pointed to countries such as India where distribution and logistics systems need to be developed. “We are a significant net seller of corporate assets and to me it’s a shame and a missed opportunity in this business. We have such fantastic resources to seize the opportunity and go to foreign enterprises and we’re not seeing Canadian companies take advantage of international acquisitions. It’s a trend I’d like to see reversed,” says Smith, noting that Wal-Mart is in India developing a retail business. “Given our experience with logistics over long distances and retailing it would seem there would be some opportunities for Canadian companies.”
Countries like China and India have seen a 10-per-cent increase in personal income over the last few years creating a growing desire for protein products. That demand should be fuelling Canadian investment in providing resources such as grain to fulfil those needs. “We have a high opportunity to grow the export market but we’re not doing a good job of this,” says Larry Martin, a senior research fellow with the George Morris Centre, Canada’s only independent agri-food think-tank. “What have we done to get access to the Asian market? Nothing. We don’t have access to markets where meat consumption is growing.”
In the last year, notable mergers and acquisitions in the food industry in Canada have included Canadian companies selling to foreign buyers. In December 2010, Liberté Inc. of Quebec was purchased by Paris-based Yoplait SAS, the second-largest brand of fresh dairy products in the world. Founded in 1936, Liberté offers more than 100 products, including various types of yogurt, kefir, cheese, sour cream, and tofu distributed in Canada and the northeastern United States. The company posted $175 million in sales in 2009, and had been owned by the U.S-based Swander Pace Capital private equity firm since 2003. “It ticked a lot of boxes that people were looking at in the categories of diet foods, natural foods,” says Valerie Scott, principal with Swander Pace Capital.
Knibutat disagrees that there are more acquisitions of Canadian companies happening than foreign buys being made. “There’s a notion of hollowing out whenever someone buys what is thought to be a gem, but when you consider that since 2008 the ratio of buy/sells into the U.S. has been in favour of Canadian companies buying more companies than U.S. companies have bought as it relates to volume and we’re also seeing the value of Canadian deals exceeding that of the U.S.,” he says.
Across the board, he says Canadian companies tend to acquire abroad more as opposed to other countries’ companies coming here to buy, and there have been a number of large transactions recently in the food industry to prove that. For example, in November 2011 Lunenburg, N.S.-based High Liner Foods Inc. bought Icelandic Group’s U.S. and Asian operations for US$230.6 million, making it the biggest supplier of frozen seafood to North American restaurants, hospitals, and schools. It is also acquiring a plant in China and companies that buy fish from other Asian countries. Another example is Montreal-based cheese manufacturer Saputo Inc., which also made a large acquisition in early 2011 of DCI Cheese Co. of Richfield, Wis. for US$270.5 million. Saputo sells cheese products to more than 40 countries around
“We certainly have a small share of the overall capital global market but we have large pension funds looking to do more in the area of direct investing. They are starting to go abroad more and do more acquisitions and deals,” says Knibutat, who notes there are some large Canadian players such as McCain Foods Ltd., who are not just doing direct acquisitions either — one strategy is to follow the customer. “So for McCain — one of its big customers is McDonald’s for their french fries. They’ve been in places like Russia and China as their customers have gone into those emerging markets as well.”
Even during lean times, the food industry in Canada saw five-per-cent growth last year. Scott says over the last few years, she has seen a lot of resilience within Canadian companies even in
periods of economic slowdown, but cracks are starting to appear in the sector. “The strength of the Canadian dollar is an important trend for buyers and producers in the industry. Commodity prices and how that affects the bounty and profitability of Canadian food companies is also becoming more of an issue than it has been in the past,” she says.
Looking back 10 years, says Scott, buyers were looking at Canadian companies as leaders of private label manufacturers, but what they’re looking at now is Canada as home to innovative manufacturers of premium products. “We’ve moved up the scale to more of a premium product and also seen a lot of strategic acquirers looking to buy companies that are leaders in niche markets.”
An example is Toronto-based artisan bread maker ACE Bakery, which was bought by Weston Foods (Canada) Inc., in November 2010 for $110 million. “These companies have all traded at a very high premium almost reflecting it will be the last time they will be sold because now they are in a big strategic company and no longer a smaller entrepreneurial company,” says Scott.
On the flipside, she says, there have been a number of companies over the last few years that were brought to market but not sold and are coming back again to the market. “In my mind these companies will be sold again because if they aren’t they will be viewed in the market that they are damaged goods and will put lower valuations on the industry.”
Despite the volatility in the equity markets, corporations are sitting on cash reserves looking to enhance their growth strategies, says Marco Galante, principal with the J.H. Chapman Group LLC, an investment bank in the food industry. Overall, he says M&A activity from 2010 to 2011 for Canada and the United States has increased appreciably since 2008. In 2008 and 2009, the number of transactions in the food sector in the U.S. dropped by 50 per cent. However, from 2009 to 2010 it increased by 36 per cent. In the Canadian market between 2008 and 2009 the market dropped by 36 per cent, yet from 2009 to 2010 and into 2011 the increase of activity has been as high as 25 per cent.
“The market is still fairly robust and there is cash at corporate levels and pent-up cash in the private equity area. The combination of that means there are acquirers looking at good opportunities both strategic and non-strategic. But equally, there are fewer sellers coming to market and part of the reason is the sellers are asking if it is the right time to sell today given the environment,” says Galante. While he says there was continued growth of M&A in 2011 in the food sector, one of the constraints is increasing commodity prices and the impact on gross margin and cash flow.
On the dollar side, Knibutat agrees a strong Canadian dollar does increase the costs of inputs, which can put downward pressure on profitability. “It really depends on the nature of the underlying business and where they are getting their inputs. The positive side of the Canadian dollar is it gives you more purchasing power and puts you in a fairly attractive position to be an acquirer,” says Knubitat, who adds that when the dollar goes above parity there is a strong correlation with deals that get done. “Canadian companies are doing a good job targeting, and when the dollar goes above parity it allows them to close the price gaps between buyer and seller, which allows them to close the deal.”
The Canadian Pension Plan Investment Board has also been building its interest in the food sector, demonstrating that it is seen as a strategic investment area, says Knibutat. The deregulation of the Canadian Wheat Board could also be a catalyst for deals, he adds.
The federal government has said it will move forward with a proposed deregulation of grain marketing in Canada. With a targeted implementation date of August 2012, the change would give western Canadian farmers the ability to sell their wheat and barley to whomever they choose. Currently, farmers are required to sell directly to the CWB, which, in turn, sells to the market. Last year, the CWB posted $5.1 billion in sales.
At the end of the day, all M&A activity in 2012 will ultimately depend on how buyers and sellers view the overall health of the market. “The fundamentals are there to do deals, but the risk is that the global economy is still uncertain enough and negative views are still being expressed by the central banks and various governments that it will have a depressive impact on activity for a little while. We need some more clarity and stability but the food sector will continue to be one that is interesting and attractive overall,” Knibutat says. “It will come, but right now I think it will be far more opportunistic a play for people because of the other macro factors impacting things.”When one thinks of merger and acquisition action in Canadian business, typically it’s the resource sectors, followed by financial services as the heavy hitters with the most going on, even in tough times. According to PricewaterhouseCoopers Canada, mining has become the No. 1 targeted sector in Ontario and British Columbia. But traditional hotbeds of resource activity such as Alberta are starting to see a shift in M&A activity. Where oil and gas deals once represented 80 per cent of the acquisitions in that province, they have declined to represent 50 per cent of the province’s takeover market. By comparison, a PwC report in October noted that M&A activity in Saskatchewan was 23-per-cent higher in 2011 than in 2010. It is home to uranium, potash, and farmland, which is considered to be among the least expensive in the developed world.
When condo historians look back on the early 21st century, they may identify 2011 as the year Toronto’s love affair with the glass tower began to sour.
The summer was punctuated with incidents of falling glass from high-rise balconies shattering in the downtown streets, and the year ended with some developers and engineers voicing their concerns about the long-term durability and energy efficiency of buildings whose primary protection from the elements is a wall of double-glazed glass.
“Obviously, developers are very concerned, particularly when you look at the number of condos that have gone up, and are still going up using glass,” says Leor Margulies, a partner at Robins Appleby & Taub LLP, who is also a member of the executive at the Building Industry and Land Development Association.
He says it’s essential developers get engaged when potential issues come up.
“It’s tough, because the industry wants to make money, and on the other hand it has to be socially responsible, and I think it is. They’re actually really innovative and a lot of the buildings that are being built go well above the building code,” Margulies says.“It’s not for the industry to set the standards. It’s for the industry to work with the regulators to improve standards, which is constantly happening. But if there’s a problem, then the industry and government will sit down as they always do and try to find a realistic solution.”
Sally Thompson, an engineer with Toronto-based Halsall Associates, conducts reserve fund studies for condominiums, calculating the amount of money they need to set aside for future repairs and maintenance. She says window walls can be a significant source of major projects, typically accounting for around 20 per cent of condo owners’ reserve fund contributions.
In the early years after construction, she says the quality of the sealing job between slabs of glass can make a big difference. Once the building is complete, the original seal becomes inaccessible and the joints have to be resealed from the outside. In the first decade, some buildings get away with repairs to a few localized leaks, but one seven-year-old condominium she has done work for is spending around $500,000 to seal up joints on its tower. “With glass, there are so many joints to seal up that those projects become pretty significant. Some of these buildings need seven to 20 kilometres of caulking on a single tower,” Thompson says. “In a perfect world, no cladding should need that major of a repair after five or 10 years. If you bought a brick building or a pre-cast concrete building you wouldn’t expect it.”
At Earth Development, which bills itself as a socially responsible property developer, the company steers clear of glass walls, because of concerns over building performance.“We’re not anti-glass, we’re anti-all glass. It’s overkill to do floor-to-ceiling glass; you just lose so much energy,” says principal Mark Johnson. His colleague David House says there are ways to get a glass look by simply covering a better insulated pre-cast concrete wall with an outer layer of glass, but developers tend to be more attracted to the cheaper option of a glass wall.“We want to believe it works. The market likes it, it’s kind of cool to look at, it’s cost-effective, and none of us are really forced to measure energy, so it doesn’t really matter. But if people buying condos or leasing office space were the ones building the building, I don’t think they would be interested in all-glass buildings. As soon as you figure out this will double or triple your energy bill, you’d think it was nuts,” he says. “Some day, given our litigious society, I think someone will figure out this doesn’t work and want to talk about how to get some compensation somewhere.”
Mark Arnold of Gardiner Miller Arnold LLP has represented a number of condo corporations in disputes with developers, including unit owners at Harry Stinson’s landmark downtown Toronto 1 King West development in a long-running dispute involving various alleged deficiencies. “One portion of it was similar to what you have with glass falling from balconies, because there were parts of the exterior cladding on the building that started falling off. We had to prove why it fell off and to what extent the builder had investigated from an engineering standpoint.”
The case eventually settled with a global settlement before trial, making conclusions difficult to draw, but Arnold says cases like the Supreme Court of Canada’s 1995 decision in Winnipeg Condominium Corp. No. 36 v. Bird Construction Co. make it possible to go after builders many years after completion. In that case, the condominium corporation was able to recover its costs for repairing dangerous defects caused by negligent design and construction 15 years after the building was substantially complete. Unit owners had to pay to replace the entire cladding after discovering the problem when a large section fell nine floors to the ground.
One problem Arnold frequently runs into with developer lawsuits is finding a source of money so he can enforce any judgment. “By the time the lawsuit raises its head, the builder-developer may have gone or the company is left as a shell,” he says.
But that doesn’t stop him from pursuing the matter if there’s a case to be made for developer liability. One case he’s currently working on involves a condominium corporation left with $500,000 worth of repairs to bring the project up to code. “The developer is saying they’re not going to fix it, and there’s no money left to fix it, so don’t bother us,” Arnold says. “So I have sued personally the developer’s sole director, officer, and shareholder, trying to pierce through the company veil to get to the warm body, and he doesn’t like it very much.”
Margulies is keen to stress that buildings with alleged glass problems have been meeting the Ontario Building Code, and says the falling balcony episode provides a textbook example for the way developers and the authorities should react when issues arise. In a November report, Toronto’s city council recommended emergency amendments to the province’s building code after investigating six buildings at four sites affected by falling glass from balconies. Those included the Festival Tower at the TIFF Bell Lightbox and a number of buildings owned by Lanterra Developments. By the time the report came out, Lanterra had already announced plans to replace tempered glass on its balconies with laminated glass. The process for making the less expensive tempered glass involves putting stress into the glass, which means that it breaks into small pieces when it fails. Laminated glass, on the other hand, does not shatter, meaning it is more likely to stay in place when it does crack. “Our first priority is the safety of the public and our residents,” said Lanterra in a statement in August when the change was announced.
Margulies says the Building Industry and Land Development Association’s members were immediately involved with the city to find out why glass was falling and what should be done about it. “You can only build in terms of standards that are set, so if there’s something wrong with the standards or one of the products, then it has to be determined and the builders will work with it,” he says. “The code is always being upgraded and we work closely with the building code commission.”
In addition to strict code compliance, Margulies says developers need to go back to basics to minimize risks, spending time vetting consultants, subcontractors, and suppliers.
“My grandmother used to say she couldn’t afford to buy cheap shoes. Yes, developers are always looking for the best price for profit, but they’re also looking to build a good product, and the builders that use the right consultants, and maybe spend a little more on the right product are hopefully less likely to encounter problems,” he says. “My big builders are very cognizant of ensuring that they don’t end up in lawsuits because of poor design or poor products. They want to have a product they can rely on when they go to the market again. If there are problems happening, that gets out.”
When problems do arise, as they inevitably will, many will be covered by the Ontario New Home Warranties Plan Act, which imposes mandatory seven-year warranties on new homes in the province. The act is administered by the Tarion Warranty Corp., and Margulies says developers’ behaviour in the process can have an impact. “If you’re going to be in business, things will happen. You can’t avoid it. If you build a 60-storey building, there will be deficiencies and issues, but I think the solid builders step up to the plate. They don’t wait for Tarion to come in; they deal with these issues. That’s what separates out the good builders. Once they’re in the business for the long term, reputation means a lot.”
Margulies says concerns over the long-term viability of glass-walled condos have been overblown, and Denise Lash, who chairs the condominium practice at Heenan Blaikie LLP in Toronto, says consumers may be unduly deterred by the idea of disposable glass-walled buildings. Experts are working on improvements to insulation in glass wall systems, while other wall systems are not perfect, she says. “Although the window-wall systems may not last as long, if you get problems with pre-cast concrete, you could have a very expensive overhaul 40 years down the road, that’s going to cost more than it would to do the ongoing frequent maintenance of window wall systems,” Lash says.
In addition, she says reserve
fund requirements should help condos foresee potential issues and plan for dealing with them many years down the road. “Engineers will come in and assess the life expectancy of all these major components, which includes the window wall system, and they’ll come up with projections over a 30-year period of how much to contribute to reserve fund every year,” Lash says.
Even so, condo owners do not always react well when handed the burden of repairs or replacements through maintenance fee boosts or special assessments, and developers are frequently targeted in lawsuits. In Toronto, Concord Adex has faced more than one action from condominium corporations at its CityPlace development near the city’s waterfront, while failing floor-to-ceiling windows are at the heart of a suit involving Vancouver’s landmark Wall Centre. Some condo owners in the 10-year-old building were hit with special assessments of more than $100,000 to repair an allegedly deficient sealing job that allows air and moisture in through cracks. The total repair bill is estimated at $7 million, according to a CBC report.
Vancouver and B.C. are no strangers to condo lawsuits. The province’s “leaky condo crisis” reached a peak in the 1990s as the region’s damp coastal climate, combined with inadequate construction, left some developers, engineers, and architects in legal hot water. A 1998 commission of inquiry led by former premier Dave Barrett laid into developers, engineers, architects, municipalities, and regulators for their roles in the debacle, which affected thousands of homes and resulted in repairs in the billions of dollars.
Some of the original cases are still crawling through the courts, and the
episode has cast a shadow over the condo market in B.C., constraining growth while other real estate sectors boomed.
Although Toronto’s condo market shows no signs of stagnation, it may be in developers’ long-term interests to address concerns about glass condos. James Balderson, who runs B.C.’s Coalition of Leaky Condo Owners, says consumer confidence in condos has been permanently shaken on the West Coast, and he expects other regions to follow in the future. “Here, anybody with a brain is well aware of the leaky condo mess,” he says. “People are waking up all over the country to leaky rotten condos. This will be a problem long in the revelation, and it might go on for years and years as it did here.”
Stricter requirements in the new Ontario Building Code may force the hands of some developers in that province. As of Jan. 1, 2012, all high-rise buildings must come in 25 per cent above the Model National Energy Code for Buildings for energy efficiency, a previously voluntary standard. “If people actually comply with it, then that should inherently reduce the amount of glass you can put on a wall, because compliance is going to be a huge challenge with floor-to-ceiling glass,” Halsall’s Thompson says.
Lash doesn’t see a shift entirely away from glass in the near future because developers are guided by consumer demand for glass buildings that deliver affordability. Thompson would like to see an energy-labelling system for buildings. “Only then will we see the truth about how these buildings are actually performing. You’d get some competition suddenly, because builders will want to build something that gets a better label.”
|Illustration: Joel Kimmel|
- Industry Spotlight
For many retailers already established in Quebec, as well as those looking to set up shop in the province, a new campaign to ensure that outside store signage complies with the Charter of the French Language is leading to questions about what is ultimately best for their brand.
Concerned by a fresh upsurge of multinational retailers coming into Quebec and using trademarks exclusively in other languages, the Office québécois de la langue française has made the issue a priority, kicking off a campaign last November aimed at urging companies to comply with language requirements with respect to signage.
“The legal requirement is that a descriptor has to be added to a trademark,” says Louise Marchand, president and chief executive of the Office québécois de la langue française who spoke to Canadian Lawyer InHouse in an interview conducted in French and translated into English.
Although one of the Charter’s regulations says a trademark can be used in a language other than French on public signs unless a French version has been registered, the Office explains that if that trademark in another language is used as a business name, companies have to add a French descriptor or slogan to explain the activities of that business.
Without naming names of companies who it says don’t comply, one example of a retailer that does, says Marchand, is optical company New Look EyeWear, which in Quebec uses the name Lunetterie New Look, adding a description in French to its brand name.
“We think that it is very important that we send a very clear signal that the law has to apply and that large companies who use their trademark as a name comply with the law,” says Marchand. While the campaign is driven by the arrival of more “big-box” retailers, the requirement applies to all businesses.
But rather than a question of companies failing to abide by the legal requirements of the Charter or being dismissive of cultural issues, Kelly Moffatt, head of the marketing and distribution practice group at Osler Hoskin & Harcourt LLP, says many retailers already thought they were working within the Charter’s legal framework. “A lot of the retailers, certainly clients I deal with, are good corporate citizens, and they say, ‘this is the law, this is what the Charter says, and this is what the Charter requires and this is what we have been doing and we continue to do,’” she says.
“There [have] not been any recent changes to the Charter, so we’re dealing with the same legislation and regulations that we’ve been dealing with in Quebec for quite some time,” she adds.
With the new campaign, the Office, she says, is taking a trademark analysis approach, saying that when you put that company sign on the outside of a store, it is not being used as a trademark, but as a trade name.
From the retailer perspective, they say they are not putting their firm name (a numbered company, for example) on their stores, but rather using a trademark to identify their products and services and distinguish them from other retailers down the street, she says.
“A trademark under the Trade-marks Act is used with services if you display it or use it in the performance or the advertisement of your services,” explains Moffatt.
“It’s not surprising that most
retailers felt that the use of their trademark on signs outside their storefronts was fully permitted under the Charter. Especially since — you have to understand that it’s not because you put a trademark on a sign that happens to be in front of a store that it is no longer a trademark and in particular, their corporate name or the company name of many businesses is very different from their trademark,” says Christine Carron, a senior partner in the Montreal office of Norton Rose LLP.
In many jurisdictions, she says, retailers are permitted to use trademarks in their native language without restriction. “In a market that’s increasingly globalized, it’s a bit difficult to maintain marks that are different from country to country,” adds Carron.
The signage issue is not a new one in the province. Mark Power, an assistant professor at the University of Ottawa Faculty of Law, focusing on constitutional law and language rights, says the generation of cases in this area from the 1980s and early 1990s, such as the 1988 Supreme Court of Canada decision in Ford v. Quebec (Attorney General), were essentially testing whether it was legally possible to regulate the language of signs.
“Whereas, perhaps it seems like now, there’s more of an effort on the part of the Office to insist on implementing the requirements that nobody seems to be really challenging anymore as being illegal,” he says.
More recent litigation on the issue, says Stéphane Teasdale, chair of the National Franchise and Distribution Group at Fraser Milner Casgrain LLP, resulted in the courts saying that the exception in the regulation can apply to a well-established name, even if it’s not registered. Indeed, Moffatt says the concept of what constitutes a recognized trademark is defined under the federal Trade-marks Act, where even non-registered trademarks can have recognized trademark rights.
The result of the campaign so far
has been a relative flurry of activity since mid-2011 for companies responding to correspondence from the Office, engaging in discussions with organizations like the Retail Council of Canada and waiting to see what the campaign brings, explains Moffatt.
When contacted for its views on the campaign, the Retail Council of Canada said it “has no comment at this time.”
Essentially, says Moffatt, the decision to add a descriptor is a branding and marketing issue, rather than a legal issue, raising the question of the power of a company’s brand and who is the custodian of many retailers’ most important asset.
“I think it’s an issue of those specific retailers being in control of their brand and if they make a business decision of ‘I want to have a French version of my name,’ so like a Shoppers Drug Mart in Quebec is Pharmaprix,” she adds.
The challenge companies face now is to either work with the Office and try to comply with a policy that the courts have not yet enforced, or take a more challenging position, making them possibly subject to fines, says Teasdale.
There are arguments to be made on both sides, say lawyers. For some companies, there is an advantage to adapting their brand for the market, but for others, the brand speaks for itself and adding a descriptor could lessen its impact. “The brand is the brand and if I were a company and I thought that adding a French description would diminish the brand or affect the brand in a negative way, I would probably not want to do anything,” says Teasdale.
But from a strictly marketing point of view, he says, a case could be made that it’s a good thing that companies are trying to adapt. “It’s just another demonstration, when a foreign company comes into a market like Quebec, they have to adapt their concept, whether it’s signage, whether it’s product line, whether it’s appearance of the store, layout of the store, advertising, whatever it is, they generally try to adapt to the market so that it’s appealing to the consumers in that market,” he says.
However, one consideration for retailers, explains Teasdale, is that if they add a descriptor in French to a registered trademark, then they have to re-register the trademark to make sure it is protected. If not, he says, you jeopardize that registered trademark.
Depending on the retailer and the strength of their brand and business objectives, adding a descriptor could possibly be a positive step, but ultimately represents a blurring of the line between what the legal requirements are and what an individual company’s marketing decisions are, says Moffatt.
Teasdale says he has already had questions from clients regarding the campaign, but at this stage, companies are reflecting on what they plan to do, and possibly looking at market studies. The answer to these questions, he says, is “what’s best for your brand?”
“I suspect that what you will be seeing in the next year are companies that are making some changes and others that are just staying the same. But right now, I don’t think anybody’s running to change their name,” he says.
From the Office’s perspective, it says it is looking for results based on awareness and co-operation, rather than legal penalties. Organizations with more than 50 employees are required to register with the Office, where an adviser works with the company to determine which measures it needs to carry out to comply with the Charter, under what it says is a reasonable timeline. The Office has also been meeting with chambers of commerce and other business associations on the issue. As a last resort, fines of $1,500 to $20,000 could be levied against companies for a first infraction.
“In some ways, perhaps it’s a less expensive strategy and perhaps a more socially cohesive strategy to warn before things are built, than to run after people after the fact, in order to implement the Act,” says Power.
Ultimately, says Moffatt, it is perhaps the legislation that needs to adapt. “If the current legislation, which is meant to protect these unique cultural issues and language issues, is insufficient, the appropriate approach is to deal with the legislator and have amendments made to the legislation or the regs,” she says.
“Things have changed since the ’70s with this legislation and we need to regroup, revisit, and revise, and I think retailers would be probably receptive to that,” she adds.
- Law Department Management
A mechanic pushes his invoice across the table: it’s $1,000 over the original estimate. Sure, it’s for extra work discovered during the course of the tune-up, but the larger bill wasn’t pre-approved.
Question: how do you suppose the car owner reacts? Ask Howie Wong, general counsel for the Toronto Community Housing Corp., whose outside law firm bills regularly mushroom beyond original budgets. Law firms “just don’t get it,” he says, adding that in “frustration,” he developed an internal administrative position to deal with monitoring and tracking the firms’ budgets.
Wong predicts that change may be coming, pointing to what he sees as the law firms’ main competition — in-house counsel themselves, rather than other firms, due to an upswing in the hiring of internal legal muscle. The shift to a bulkier stable of in-house lawyers to do the lifting could trigger positive developments in the current way bills are handled by outside firms, he says.
Wong adds that another emerging trend could also be an answer: lawyers putting out boutique shingles at reduced rates. “Outside law firms are pricing themselves out of the market. It’s not affordable anymore and we have to find options. I have a budget, too. I can’t accept hourly rates that keep going up and up.”
He thinks law firms don’t seem to understand “that when they commit to a fee budget they should not exceed it without speaking to us. They should perform to the fee budget they gave us; it’s that simple.”
Or, at least keep an eye on the budget and when it gets to a red zone, make contact, he says. “They never, ever do that,” notes Wong, adding the root problem is firms are “still wedded to the hourly rate . . . and when they go over the hours they are not willing to eat the difference and they keep coming back for more and more and more.”
Wong says another billing burr is that “partners don’t manage the file from a financial perspective, they mange it legally, and while most of them do a good job as lawyers, they don’t from a business perspective.”
Gawain Smart, Oxford Properties Group’s vice president legal, says while generally, “law firms are great partners and we wouldn’t be able to get anything done without their able help,” it would be forward-thinking if they’d take a look at what he sees as a hitch in their billing practices: integration. He says many firms have various practice areas that have different lawyers all billing separately, and not necessarily knowing what the others are charging.
“When you get the bills back you add them all up and say, ‘That doesn’t make sense given what we thought it would cost.’ So I think law firms need to better co-ordinate internally in terms of how the bills are sent to clients and how the time is managed,” he says.
Smart says law firms may not be as efficient as they should be in terms of who does the work, particularly with smaller practice areas where you don’t have the same number of associates. “You find partners are working on things like resolutions when they should not be. It’s quite costly when someone is charging $800 an hour to do a resolution. That is an extreme case, but (firms) need to do a better job in terms of their hierarchy and how they get the work accomplished.”
There are solutions for managing the billing issue with the firms, says Wong, including the aforementioned internal administrator. Four years ago, he carved out 40 per cent of the board secretary’s position to administer and track their large annual legal budget, because, “I found the law firms weren’t doing that work for us, even though our agreement requires that they track it and advise us on a monthly basis where they are at.”
In fact, he says every year there’s a quarter of the original quote “extra that’s being asked of us,” before they typically negotiate the overages back down. “We have actually not paid some of our law firms for five or six months until we’ve gotten satisfaction on 1) what they were doing, and 2) that the fees they were charging were on budget,” says Wong. “A lot of times they basically ignore their own fee quotes, and we have to do this to protect the agreement that they provided to us. The law firms were just sending in bills without regard to their original budgets.”
But, Janice Lewkoski, who was TCHC’s legal administrator until recently, adds the process is needlessly time consuming on both sides, particularly in December when the job becomes full-time requiring intensive tracking and reconciling the amounts.
Lewkoski says a large part of her job has been to get the law firms to “understand that when we get a budget that’s what we expect the matter to cost and when they go over that it’s not like we have this endless amount of money to go ahead and pay what they want to charge.”
She says the job has had its moments. “A few years ago there was a firm that charged us for coming up with a fee quote!”
Wong recently negotiated a flat rate on a litigation matter; it’s a system he says works and he will explore doing it more, but for him, the answer may be in hiring more in-house counsel. “The law firms think they are competing against each other. I don’t think they realize they are actually competing against hiring more in-house counsel. The competition is going to be whether we hire another lawyer in-house,” he warns. “I’d rather hire another lawyer than give more work out — it’s a lot cheaper and I know exactly what it’s going to cost me.”
TCHC has grown from two to nine lawyers working in-house, three of whom were hired in the last year. “It’s great because I hire from Bay Street, so they’re already well trained.” Six years ago TCHC had 10 outside law firms and now there are three.
Smart says he doesn’t see Oxford “being a competitive force with our outside counsel, (but) I do see us demanding more for less. I also see us demanding less from the law firms from a strategic perspective and needing them more for a lot of the due diligence, organizing a deal, and making sure all the i’s are dotted and t’s are crossed.”
Smart says Oxford’s system is based on a review of the bill. “We certainly ask for budgets beginning on any transaction and the law firms typically will provide a budget or a range.”
But, he notes, just like with the mechanic, the scope of the work can grow. He suggests the firms appoint someone to manage their bills and the time for the various areas of the law firm to monitor whether they’re going over budget or how much they need to invoice at the end of a transaction. In fact, Smart says Oxford asks for bill monitoring. The bottom line, he says, is that if there isn’t an electronic system, the law firms need to manage their own costs better in terms of how they do things. As for in-house counsel, Smart says, “Our obligation is to get a budget, ask the law firm to better monitor the bills and who does what, and be vigilant in terms of getting updates on a regular basis to see where things are so they don’t get out of control.”
Barry Fisher, special adviser to the Association of Corporate Counsel Ontario Chapter board of directors, and vice president of SAP Canada, says it’s in-house counsel who should manage the relationship and monitor not just the billing, but also who is delivering the services. It’s also vital to develop a budget at the outset, not just an estimate and have the right level of person on the job. “If you get the right person to find the result quickly then it’s the overall cost in value, not the hourly rate that it takes to get there,” he says, noting he’s speaking personally and not on behalf of ACC. “It is our responsibility as the consumer of legal services to make sure that those providing it to us are doing so in an efficient way, delivering value.”
Fisher suggests looking at the ACC’s Value Challenge, a series of suggestions on how inside counsel and outside legal advisors should be managed so the law firm will deliver value.
Wong is counting more on his legal team to track and manage their law firm relationships themselves. “It’s a lawyer-to-lawyer discussion. They are going to work with the law firms directly when it comes to working on the budgets.”
That takes the conversation from their administrator dealing with a billing department that has no authority to make changes to a bill, directly to the lawyers.A mechanic pushes his invoice across the table: it’s $1,000 over the original estimate. Sure, it’s for extra work discovered during the course of the tune-up, but the larger bill wasn’t pre-approved.
- Professional Profile
For anyone who loves Canada’s national sport, it’s a dream job, and for Michael Bruni, the newly appointed chairman of Hockey Canada, it’s possibly the best sports-related job in Canada, or even the world. “It’s a privilege, and I take it as a privilege,” he says. “And it’s a real challenge, too.”
But challenge, it seems, is what drives Bruni. Having spent much of his career in the oil and gas industry, he attributes his career success to a long history of volunteering. “One thing that has contributed to my experience and abilities more than anything — even my workplace — has been my volunteer life, without question,” he says. Based in Calgary, Bruni started volunteering with minor hockey associations, working his way up through the provincial scene to head Hockey Alberta, to eventually become vice chairman at large and executive vice chairman of Hockey Canada. He was named chairman of the board in June 2011.
Hockey Canada is the national body that oversees pretty much anything hockey-related in the country. It oversees minor and Junior A hockey, and its membership includes 13 provincial sports organizations. It’s also a member of the International Ice Hockey Federation, so it’s responsible for any teams that compete in international competitions, from the Olympics to world championships. The Canadian Hockey League is a member, although Hockey Canada does not oversee it. As part of his role, Bruni works closely with Hockey Canada’s president and chief executive officer, Bob Nicholson, who is Canada’s face of hockey. Nicholson runs the not-for-profit organization, which has in excess of 100 employees and a budget in the millions of dollars.
When Bruni took on the role of chairman, he coined the phrase, “staying relevant with the courage to change,” which has become his mandate at Hockey Canada. Change is not easy for a lot of people, he says. “I’m looking at change in the game — change in head hits, in violence. It is a learning experience on change management.”
Ultimately, his vision is about doing what’s best for kids, about creating the most opportunities for them. One issue, which has been making headlines in the mainstream media for some time now, is conduct on and off the ice. In his address to board members when he took on his new role, Bruni wrote: “My constant message will be very succinct and clear. Hockey Canada stands for no fighting and zero tolerance for violence in the game.” This means no head hits, regardless of the intent, and no to any grey areas. “The tipping point has arrived and pushed us to a crisis with concussions and injuries in the game. We have the ability and, quite frankly, the obligation to engage attitudinal change.”
Bruni says he’s also working toward a much better governance structure. “I oversee a board of 37 people, which is too large and we’re working on reducing that,” he says.
What Bruni brings to Hockey Canada is not only his legal background, but also a technical background, and he believes the two combined skill sets allow him to bring something different to the table. Before he became a lawyer, Bruni was an engineer with a geological sciences degree earned at Queen’s University in 1974, and experience as a geological engineer for various companies, including Falconbridge Ltd., Getty Mining International Inc., and the Nova Scotia Department of Mines. He then studied law at Dalhousie University, where he met his wife Janice. “She’s the real lawyer in the family,” he jokes. “She got me through law school.” They got married, moved to Calgary, and had four children — two of whom are currently attending law school. When he talks about his wife, it’s clear he values her advice and “unbelievable” support throughout the years.
At the start of his law career, Bruni articled for Atkinson McMahon (now Field LLP) in Calgary, and in 1978 was called to the bar in Alberta. When a position came up with the Energy Resources Conservation Board in 1980, he saw an opportunity to use not only his legal background but also his
engineering experience, and get into technical matters from a strategic, legal, and regulatory perspective.
Bruni was appointed general counsel of the ERCB in his first year. “It was an opportunity for me to head up the legal area there as general counsel at a very young age,” he says. “I basically ran a mini law firm internally.” He later became executive manager of the organization’s law branch, and served in both positions until January 2004. He acted as counsel on major hearings and inquiries, appearing before the Alberta Court of Appeal and the Supreme Court of Canada, and National Energy Board.
He also headed up a team of lawyers. “One of the things I really tried to do — and it was a challenge — was to try to get lawyers to look at things more pragmatically, to look at the bigger picture and to give advice to get to solutions. I’m not one for saying, ‘we’re here for billable hours.’ The service is to try and get it done with diligence, and that was a challenge when I took over operations.”
Bruni also helped set up the new Alberta Utilities Commission and led a realignment of the ERCB. In 2008, he was appointed an ERCB board member by the Alberta cabinet, and assumed the position of special adviser to the chairman of the ERCB in 2010.
During this time, Bruni kept up his volunteer work and stayed highly involved in the legal world. In the 1980s, he helped initiate the Association of General Counsel of Alberta, and was a member of the Rocky Mountain Mineral Law Foundation and the Canadian Petroleum Law Foundation. He’s currently a member of the Canadian Bar Association, the Calgary Bar Association, and the Law Society of Alberta. He’s also managed to find time to lecture at the University of Calgary and participate in forums on energy regulation. “I’ve been able to learn a lot about governance, about organizational capacity, organizational structure, what kind of people you want on a team to get things done,” he says.
Bruni is no stranger to change management. “I like to see the evolution of change.” At this level, he says, imparting change becomes more difficult.For anyone who loves Canada’s national sport, it’s a dream job, and for Michael Bruni, the newly appointed chairman of Hockey Canada, it’s possibly the best sports-related job in Canada, or even the world. “It’s a privilege, and I take it as a privilege,” he says. “And it’s a real challenge, too.”
- Editor's Box
When lawyers move in-house they obviously do so with their own career aspirations in mind. Some have an entrepreneurial spirit like that of Evan Johnston, general counsel of Churchill Corp. based in Calgary who, when I spoke with him back in September, told me bluntly that in five years he didn’t want to have a law job — he wanted to be on track to move into more of a business role.
There are others, like AGF Management Ltd.’s new senior vice president, general counsel, and corporate secretary Mark Adams who started out as a securities lawyer and loved that area of law, but wanted to broaden his activities to include more of what in-house duties involve, while staying within the realm of the capital markets (see page 7).
Ideally, contributing to the business is what all in-house counsel do and find challenge in, but there are many who feel a little divided on how much they should be viewed by their internal bosses as a resource dedicated to advancing the business versus maintaining a delicate balance of being a legal expert first, then a business enabler. There’s promoting business, and then there’s keeping a certain independence so one can deliver the tough decisions business units may not want to hear. Should they keep that independent stance so they remain less invested in promoting the success of the business and more on side with potentially keeping it out of trouble? Or can they do both effectively? As Barry Fisher, vice president, general counsel, and corporate secretary of SAP Canada, said recently, “It’s very seductive when you are asked for your business view.” But Fisher makes a point of emphasizing to his business units that his expertise is in the legal realm, not necessarily business, and there are limits as to what he can advise in that area.
He insists in-house lawyers have an overriding responsibility to the legal profession first and points to disbarred lawyers as examples of those who lost track of the legal obligation in-house counsel carry. That doesn’t mean in-house must remain a silo unaligned with the business objectives.
When the Association of Corporate Counsel polled CLOs this past year, some of the issues that came up with respect to in-house counsel’s changing roles revolved around the challenge of being a legal versus business adviser.
Some have said that as in-house lawyers, they are challenged to do more especially in terms of being business enablers.
What additional leadership skills are required to fulfil this expectation? How does an in-house counsel develop a respectful working relationship with their executive team in light of this push towards supporting the business but keeping them out of legal trouble at the same time?
With these issues in mind, we’ve added a new contributor to the magazine with our In Closing columnist Ken Fredeen, general counsel of Deloitte & Touche LLP in Toronto (see page 38). He will explore the evolving role of in-house counsel and the challenges of becoming a trusted member of the executive team who is not asked to simply advance business, but hold a respected position of specialized authority.When lawyers move in-house they obviously do so with their own career aspirations in mind. Some have an entrepreneurial spirit like that of Evan Johnston, general counsel of Churchill Corp. based in Calgary who, when I spoke with him back in September, told me bluntly that in five years he didn’t want to have a law job — he wanted to be on track to move into more of a business role.