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Riding the pacific wave

Cover Story
|Written By Milton Kiang
Riding the pacific wave

The 21st century is said to be the Pacific century. Here’s why: according to Asia-Pacific Economic Cooperation, member countries contribute nearly 54 per cent of the world’s GDP and drive about 44 per cent of the world’s trade. Sixty years ago, China was a newly-formed People’s Republic of China, Japan was rebuilding its shattered economy from the Second World War, and Korea was on the brink of a four-year military conflict which would literally tear the nation apart. Today, companies like Samsung, Hyundai, Sony, Toyota, and Lenovo have become household names.

Anthony McArthur heads the Tokyo office of Davis LLP
Every industrialized nation is scrambling to strengthen trade ties with China, and Canada is no exception. And wherever commerce and trade go, law firms are sure to follow. Of the top 10 Canadian law firms by size, six have a dedicated Asia Pacific or China practice group.

Canadian law firms either focus on inbound work, outbound work, or a bit of both. For Borden Ladner Gervais LLP, the focus is on outbound work, which involves working with Canadian companies as they expand into Asian markets, helping with due diligence, briefing them on foreign legal environments, and co-ordinating with local counsel. Martin Donner, the firm’s Asia-Pacific practice group leader, says: “There’s a perception — and a certain amount of reality behind that perception — that China’s investment potential is huge, and its needs are great. For our Canadian clients, they see China as having the most potential, in terms of what they can provide.” Martin Cauchon, a former federal Justice minister who is leader of the China group at Gowling Lafleur Henderson LLP, says: “China’s middle class is growing at an amazing pace. It’s fast becoming a nation of consumers. With a population of 1.2 billion people, we’re talking about a huge middle class. There’s more and more well-educated people, and a lot of them want a similar lifestyle to us. Canadian clients want access to that marketplace.” Gowlings has several Mandarin-speaking lawyers who are in China almost on a full-time basis. In June, the firm hired the first PRC lawyer licensed to practise Chinese law in Canada.

According to Pitman Potter, a BLG consultant and UBC law professor, Canadian clients in China are concerned about issues like contract enforcement, repatriation of profits, the regulatory process, labour issues, and more recently, environmental sustainability, and corporate social responsibility. Donner adds: “Our clients want us to get involved. Quite often, clients may enter into a deal which might affect their overall structure. They may have Canadian reporting requirements, Canadian regulatory or financing issues. The China component may straddle its other operations, and this is where we provide value-add.”

Lang Michener LLP advises Chinese companies that do business in Canada. In May, it opened its first China office in Hong Kong in order to market its services to companies looking to invest in Canada. Stephen Wortley, chairman of its China practice group, says a typical transaction might involve helping a Chinese state-owned enterprise acquire a Canadian company, and then list it on the TSX. The listed company may then turn around and acquire assets back in China, or elsewhere, at which point, the transaction becomes outbound. “You find that a circular path emerges,” says Wortley, referring to transactions that follow when Chinese companies invest in Canadian interests.

Despite opening its Hong Kong office in a fairly bad recession, Wortley says it was a wise move. “We finalized our business plan in late 2008, just as the markets fell. At the time, we were still getting work from China. We figured the worst possible thing was not to pursue the opportunities before us, not to pursue our niche. We figured our business plan was too good to turn down.”

One law firm that’s weathered several financial storms is the Beijing office of Blake Cassels & Graydon LLP, headed by partner Robert Kwauk. He arrived in Beijing alone in the midst of the 1997-98 Asian financial crisis. His office now employs three Canadian lawyers and five PRC lawyers. At the Beijing office, equal focus is placed on outbound and inbound deals, though Kwauk says the dollar value of Chinese investments into Canada is larger. “Provincial trade reps were tripping over one another to open offices in China,” Kwauk quips, referring to business development delegations from B.C., Alberta, Ontario, and Quebec.

When asked about barriers to Chinese investment in Canada, Kwauk says: “There’s a Chinese perception that Canada isn’t receptive to foreign investment, but I haven’t seen one deal that’s been rejected by the Canadian government. Not even the Noranda deal,” he says in reference to the failed 2004 merger between China Minmetals Corp. and Quebec mining company Noranda Inc. “If a deal fails between a Chinese company and a Canadian one, it’s not due to the Canadian regulatory or approval process. It’s because the parties couldn’t reach a commercial agreement.”

In 2007, China established a US$250-billion sovereign wealth fund, with a mandate to invest in overseas corporate assets. So far, it hasn’t been shy in spending that money: in July it invested $1.7 billion in Vancouver-based Teck Resources Ltd. Potter says China’s invest-abroad program is being streamlined to ease restrictions, making it easier for Chinese companies to invest overseas. Though BLG focuses on the outbound market, it’s preparing to handle more Chinese investments into Canada.

With all eyes on China, it’s easy to forget that across the East China Sea lies Japan, still the world’s second-largest economy. Japan is an important trading partner for Canada: it represents the third-largest market for Canadian goods exports ($9.2 billion in 2007). “As the number two economy in the world, Japan is still a major driver of the world’s economy,” says Anthony McArthur, managing partner of Davis LLP’s Tokyo office. “In metropolitan Tokyo alone, there are 30 million people, roughly the population of Canada. The types of activities you see here — the size, the scale, the breadth — are huge.”

Davis’ Japan practice started after the Second World War, when the firm began acting for Japanese-Canadians forced from their homes and detained in internment camps from 1942 to 1949. The firm sued the federal government to recover their clients’ confiscated property. As Japan rebuilt its economy during the 1950s and ’60s, Davis began representing major Japanese companies investing in Canada. Today, it has one of the nation’s leading Japan practices, and is the only Canadian firm with an office in Japan.

Davis’ inbound work overshadows its outbound transactions. “By far, a big part of our Japan practice is representing Japanese clients,” says McArthur. “Here in Tokyo, we help our Japanese clients with their ongoing investments and operations in Canada. Some issues are dealt with locally in Toronto, Montreal, or Vancouver, but we try to help on issues which reach their head offices.”

For Fasken Martineau DuMoulin LLP, the focus is also on the inbound work. “That’s where you get the fees,” says Mark Stinson, leader of the firm’s Asia-Pacific practice group. “As you know, the Japanese economy is in bad shape right now. But on the other hand, there are several Japanese companies which are huge, and they have a lot of money. And there’s also the strong yen. What they’re trying to do is diversify their investments around the world, rather than rely on things within their own country where domestic demand is weak. Some of the biggest deals you see are being done by Japanese companies.”

Stinson observes a similar pattern with Korean companies. “Since the Korean economy is in the doldrums, the chaebols [Korean conglomerates], like the Samsungs of the world, have a lot of money, and they’re looking for investments around the world.” While Korea has emerged as a leading Asian economic power, Canada represents a small market for Korea. “Most of their trade is still with the U.S. and China,” says Jay Shin, a BLG partner. “A Korea-Canada free trade agreement has yet to be reached, though it’s been in discussion for some time now.”

Shin thinks more can be done to boost Korean investment in Canada. In Korea, the government takes an active role in helping businesses get off the ground, sometimes providing financial incentives, in an effort to promote investment. “That’s not necessarily the case in Canada,” says Shin. “Korean businesses find that once they set up a company here, the kinds of assistance they expect from local governments — which can range from financial incentives to hiring information — isn’t there. The Canadian and provincial governments tend to be more passive in this regard.”

Shin sees potential synergies between Korea and Canada, particularly in B.C. “Korea sits in the middle of the Far East, and can function as a hub for the region. At the same time, B.C. can be a gateway for Korean companies into North America. Korean companies have the perception that taxes are too high in Canada. But the reality is that the B.C. corporate tax rate isn’t as high as some U.S. states.”

Korea’s legal market is closed to foreign law firms, so lawyers servicing the Korean market work from Canada. There aren’t many Canadian lawyers practising Korea-Canada transactions — Shin is one of the few — so perhaps setting up an office in Korea isn’t necessary — yet.

Apart from Blakes, Lang Michener, and Davis, other firms seem content handling their Asia-Pacific work from Canada, supplemented with frequent trips to Asia. “We haven’t had clients say to us that they won’t work with us because we don’t have an Asian office,” says Donner. But he admits having a physical presence in China is beneficial, and says his firm is looking into it.

At one time, Canadian law firms had nine offices in China and Hong Kong, but Blakes is the only one left. With Lang Michener’s recent Hong Kong opening, perhaps other law firms will follow suit. Or not. Canadian law firms, like all other businesses, are taking a cautious approach, waiting for signs of an economic rebound before taking the plunge back into Asia. “If we do open an office in China,” says Donner, “we don’t want to close it.”

Read the other section of our cover story here: India: a modern day silk route.