Toronto’s Bay Adelaide Centre, home of Heenan Blaikie ()

UPDATES: 2/7/14, 7:30 p.m. EST. The Globe and Mail reports that DLA Piper’s talks with Heenan Blaikie partners have been suspended. 2/10/14, 12:50 p.m. EST. DLA has called off its discussions with Heenan Blaikie lawyers.

Buffeted by a wave of partner departures, Heenan Blaikie, one of Canada’s most prominent firms, announced Wednesday night that it has embarked on an orderly “windup” of its operations.

In a statement on its decision to close its doors in a process likely to last several months, Heenan Blaikie said it had explored various restructuring options—including the spinning off of certain offices and practice groups into freestanding firms—in hopes of surviving. Instead, it will become the first truly national Canadian firm to dissolve.

“For over 40 years, Heenan Blaikie has been a leading player on the Canadian legal services scene,” the firm said, while promising that all client files would make a smooth transition to new homes. “Heenan Blaikie would like to thank all the clients who put their trust in the firm over the years, and all the lawyers, professionals and employees who served it well for more than four decades.”

For Heenan Blaikie—which had 500 lawyers and 600 staffers spread across nine offices in Canada and an outpost in Paris a little more than a month ago—the fall came quickly once its partners began bolting. The firm’s collapse has some Canadian legal industry observers raising questions about the market’s underlying health as top local and international firms recruit from the ranks of the newly displaced.

In reporting on a leadership transition at 4,000-lawyer DLA earlier this week, The Am Law Daily noted that the firm was in discussions to take on Heenan Blaikie partners in Calgary and Toronto. Roger Meltzer, the head of DLA’s global corporate group and cochair of its Americas arm, confirmed Thursday that his firm is in “serious negotiations” about hiring between 55 and 70 Heenan Blaikie lawyers in both cities.

“Both sides have a sense of urgency to get a deal done or begin the process of moving on,” says Meltzer, who will become a DLA coleader next year. “It won’t be a straight merger, but it will be a commercial combination, and these [Heenan Blaikie lawyers] would form the basis of a DLA Canada.”

Meltzer says DLA has hired Toronto firm Aird & Berlis to advise on various aspects related to adding a Canadian component. Accounting issues, lease obligations and concerns about how DLA Canada would fit into the international behemoth’s Swiss verein structure have yet to be worked out, says Meltzer, who notes that DLA general counsel Peter Pantaleo and global energy chair Robert Gruendel are meeting with Heenan Blaikie partners.

DLA has long sought to establish a Canadian presence, and Meltzer says he is keen to stop referring work to Canadian shops that his firm—the world’s largest in terms of both gross revenue and head count—could handle if it had a base north of the 49th Parallel. Meltzer says Canada’s natural resource and energy sector is particularly attractive to DLA and that he is intrigued by Toronto’s “interesting capital markets approach.” (The country’s financial capital features stock and venture exchanges that dovetail with DLA’s transactional and litigation practices.)

Heenan Blaikie’s former co–managing partner Norm Bacal—a well-regarded tax and entertainment law expert who founded the firm’s Toronto office in 1989 and moved back into a leadership position last year as its struggles gained steam—did not respond to a request for comment about the talks with DLA. Nor did current Toronto-based co–managing partners Robert Bonhomme or W. Kip Daechsel.

The negotiations between Heenan Blaikie—home to legal luminaries like former Prime Minister Jean Chrétien, an Ottawa-based counsel for the past decade—and DLA grew serious late last month when it became clear the Canadian firm was unlikely to survive on its own.

Ralph Lean, a 68-year-old political powerbroker in Toronto who joined Heenan Blaikie as counsel last year from rival Canadian firm Cassels Brock & Blackwell, told The Am Law Daily the recent spate of partner departures amounted to a “run on the bank.”

Lean spent 25 years at Cassels Brock and once chaired the firm’s executive committee. He left after reaching the mandatory retirement age and joined Heenan Blaikie when it offered him a two-year contract, although in recent weeks Lean started searching for a new professional home. After a one-month vacation in Miami Beach, Lean says, he returned to Toronto in mid-January for a partners meeting during which he learned that Heenan Blaikie had underperformed by 15 percent in 2013. He was also told at the meeting that the firm planned to downsize and negotiate with its landlords in order to meet its financial obligations.

Compensation to partners was also being held back, according to Lean and a half-dozen other individuals who spoke with The Am Law Daily. Once that happened, it wasn’t long before firms in better financial condition began wooing Heenan Blaikie partners with promises of more money. Amid the ensuing flood of departures, Lean says, it became apparent that the Heenan Blaikie partners who stayed behind would only be working to repay the capital contributions owed to their former colleagues.

“Now a lot of them aren’t going to get their capital back,” says Lean, a corporate lawyer by training who spends about 25 percent of his time doing political fundraising, including backing Toronto Mayor Rob Ford. “I don’t have capital in the firm, but I just feel awful about what happened here, because [Heenan Blaikie] had very good lawyers and quality, salt-of-the-earth people.”

Lean says by last week his priority—in addition to handling his normal workload and a teaching job at Toronto’s Ryerson University—was finding a new home for his clients. He found it at 715-lawyer Gowling Lafleur Henderson, which legal publication Lexpert lists as Canada’s second-largest firm by head count in 2013.

Gowlings and DLA aren’t the only firms recruiting Heenan Blaikie lawyers.

In recent weeks, dozens of partners have decamped for national Canadian rivals like Borden Ladner Gervais, Davies LLP, Fasken Martineau DuMoulin, McCarthy Tetrault and Osler, Hoskin & Harcourt, as well as smaller shops such as Montreal’s Lavery, de Billy and Robinson Sheppard Shapiro, Toronto’s Lenczner Slaght and Ricketts, Harris and Vancouver’s Coutts Pulver, Roper Greyell and Terra Law Corp. Other Global 100 and Am Law 100 firms have also been in the lateral hunt.

Dentons, which last year finalized a three-way merger with Paris-based Salans and leading Canadian firm Fraser Milner Casgrain, announced this week that it had hired a six-lawyer real estate and financial services team in Montreal led by Heenan Blaikie partners Chantal Sylvestre and Joel Cabelli. Dentons also added Heenan Blaikie corporate partners David Carbonaro, Andrew Elbaz and Michael Ledgett in Toronto.

Last summer Dickinson Wright recruited former Heenan Blaikie insurance and risk management partner Vivian Bercovici in Toronto. Bercovici resigned from Dickinson Wright this month upon being nominated to serve as Canada’s next ambassador to Israel.

Even with all the departures, a number of the firm’s top business generators stayed with the firm until the end, including former executive committee member and corporate partner Allen Garson, corporate partner Kevin Rooney, financial services partner Kenneth Kraft and IP litigation head Jonathan Stainsby, all of whom are in Toronto.

Marcel Aubut, a Quebec City–based corporate partner who sat on the firm’s management committee, is another key rainmaker. Aubut is a former president and CEO of the National Hockey League’s now-defunct Quebec Nordiques and currently serves as head of the Canadian Olympic Committee. Aubut is currently in Sochi, Russia, for the Winter Games that start Friday.

Other prominent lawyers who remained at Heenan Blaikie until the end include former Canadian Supreme Court Justice Michel Bastarache, counsel in Ottawa, and former Quebec Premier Pierre-Marc Johnson, who holds the same title in Montreal. Geoff Plant, a former attorney general of British Columbia, is a partner in the Vancouver office. On Thursday, it was announced that Plant, Bastarache and Heenan Blaikie cofounder Roy Heenan will become of counsel with Gall, Legge, Grant & Munroe, a litigation and labor and employment spin-off formed by 16 departing Heenan Blaikie lawyers.

Though not a member of the top tier of Canadian firms dubbed the Seven Sisters, Heenan Blaikie was among the country’s notable full-service shops. Founded in 1973 by Heenan, Peter Blaikie and Donald Johnston—the latter a former secretary-general of the Organization for Economic Co-operation and Development whose name came off the firm’s shingle when he was elected to Canada’s parliament in 1978—Heenan Blaikie distinguished itself with its corporate, IP litigation and labor and employment expertise.

In recent years, the firm launched a rapid expansion effort beyond its Montreal base. According to historical head count data compiled by Lexpert, Heenan Blaikie had 349 lawyers in 2004. A decade later that number had reached more than 500, enough to qualify it as the seventh-largest firm in Canada.

One sign of how significant the struggles of a national firm like Heenan Blaikie were is how closely its travails were covered by the country’s legal and business press. Other big Canadian firms that have folded—such as Goodman and Carr in 2007 and Holden Day Wilson in 1996, three years after the tragic death of one of its young partners—were based solely in Toronto.

The national firm model is relatively new in Canada, with most of the nation’s largest shops created out of mergers that began in the early to mid-1990s. According to Lexpert, the country’s largest firm by head count last year was Borden Ladner Gervais, a 769-lawyer shop formed in 2000 through the merger of Montreal’s McMaster Gervais, Ottawa’s Scott & Aylen, Toronto’s Borden Elliot and Vancouver’s Ladner Downs.

Gowlings, second on Lexpert’s list, adopted its current name in 2000 via the merger of Ottawa’s Gowling Strathy & Henderson and Montreal’s Lafleur Brown. The firm has continued to grow globally, and reportedly held merger talks last year with Asian-Pacific legal giant King & Wood Mallesons.

Canada’s third-largest firm, according to Lexpert, is 631-lawyer Fasken. It grew out of a trio of mergers in 1999 and 2000 between Toronto’s Fasken Campbell Godfrey, Quebec’s Martineau Walker and Vancouver’s Russell & DuMoulin. Fasken, which in 2012 picked up South Africa’s Bell Dewar, held its own merger talks with DLA in 2008.

Now DLA is poised to follow in the footsteps of competitors like Dentons and Norton Rose Fulbright—the latter of which bet big on Canada in recent years by absorbing leading local firms Ogilvy Renault and Macleod Dixon—by picking up the remnants of Heenan Blaikie. (Another London-based firm, Clyde and Co, also established a base in Canada by picking up 40-lawyer insurance boutique Nicholl Paskell-Mede in 2011.)

The Canadian legal market has been especially active in recent years due the ability of the country’s big banks to come out of the global economic downturn relatively unscathed and the emergence of Alberta’s oil sands as a lucrative source of energy. That confluence of factors spawned an uptick in transactional work that fattened the bottom line of the country’s law firms, as The American Lawyer reported in 2008 and 2010 feature stories.

But several legal consultants and law firm leaders in Canada tell The Am Law Daily that a chill is sweeping through the country’s legal sector.

“To some extent Canada was immune from the immediate impact of the recession,” says R. Scott Jolliffe, chairman and CEO of Gowlings. “Now there’s been a couple of dry years for transactions, which has further depressed the market, and then you’ve got the standard issues like an oversupply of lawyers, demand for better pricing and increased competition all putting pressure on firms.”

Colin Cameron, a founder of Vancouver-based Profits for Partners, Management Consulting Inc., says many Canadian firms have “been living in a dream world” for the last three to five years. With the country’s commodities boom stalled due to China’s diminished desire for natural resources and Canada’s financial services industry suffering a slowdown, a legal shakeout may be looming.

“The Canadian legal market has been protected, but times have definitely changed, so this is sobering, if not disturbing,” Gowlings’ Jolliffe says, asked about the potential ramifications of Heenan Blaikie’s collapse. “I’ve always said that managing a law firm is like running an internal combustion engine—some pieces are up and some are down—and you’ve just got to keep moving forward.”

Cameron says Canadian firms have generally been more conservative than their U.K. and U.S. counterparts in that they’re not highly leveraged and usually have little appetite for risk-taking. Heenan Blaikie rode its country’s economic success by increasing head count and opening new offices.

The firm moved to extend its international reach a little more than two years ago by adding 16 lawyers to launch its new Paris office in 2011. But that base took a hit later that year when the firm’s former international business director, Jacques Bouchard Jr., resigned amid reports tying him to illicit business deals with certain French-speaking African regimes. (Bouchard pleaded guilty to seven disciplinary infractions in late 2012.)

In 2009\ Heenan Blaikie added to the expense side of its ledger when it announced a new long-term lease for five floors of space at the new 51-story Bay Adelaide Centre in Toronto. The firm also recently renovated its office in Montreal and moved to new space late last year in Sherbrooke, Quebec. Heenan Blaikie was dealt another financial blow when several ongoing litigation engagements concluded, according to a report this week by Canadian Lawyer magazine.

D. Shawn McReynolds, managing partner of Toronto-based Davies Ward Phillips & Vineberg, sees similarities between the myriad factors that killed Heenan Blaikie and the bad year that preceeded the 2011 demise of Am Law 100 firm Howrey.

“I think what you have here is a complete loss of confidence in the future,” McReynolds says. “It’s never one thing—it’s the totality of strategy, culture and execution. I don’t know if the cultural issues there were any different than any other firm, but when the erosion starts, it’s breathtaking how fast it goes.”

McReynolds insists that Canada’s top-tier firms—Davies Ward is one of the Seven Sisters—are doing very well. He predicts that it will be the country’s second- and third-tier firms that feel the sting of changing market forces.

Cameron, the Vancouver-based legal consultant, says the arrival in Canada of global legal giants like Dentons, DLA and Norton Rose will force local firms that feel overmatched to reconsider their place in the market. Many of the country’s mid-tier firms are already facing the prospect of slashing their hourly rates to compete with legal services firms like Toronto-based Cognition and Montreal-based Delegatus, adds Cameron, an accountant and longtime former COO for top Vancouver firm Clark Wilson.

While many U.K. and U.S. firms are familiar with such financial pressures, Cameron says their Canadian counterparts have been less receptive to adopting the alternative fee arrangements increasingly favored by in-house counsel, something he expects will soon change.

Not everyone believes the failure of Heenan Blaikie should be used to draw broader conclusions about the state of Canada’s legal services industry.

“The Heenan Blaikie story is more a function of things specific to them than a reflection of the national firm model as a whole,” says Oslers chair Clay Horner. He notes that 10 to 15 years ago, many Canadian firms did not have class action defense practices. Changes in provincial laws in recent years have opened the door for such suits, something Horner says has helped larger Canadian firms move away from feeling “underweighted in litigation” during transactional dry spells.

Gowlings’ Jolliffe and Davies Ward’s McReynolds echo the idea that the national firm model in Canada is here to stay, noting that the arrival of global firms that have traditionally referred cross-border work to Canadian colleagues has helped upend the status quo. Norton Rose’s entry into Canada in 2010 spurred a mini-merger mania, as midsize firms McMillan and Lang Michener announced a combination, while Toronto-based Miller Thomson expanded into Saskatchewan by acquiring 30-lawyer Balfour Moss.

But aside from Dentons’ merger with FMC last year, most of the expected market consolidation has failed to materialize. Horner adds that Oslers has been approached several times by foreign suitors about a potential combination, but notes that his firm recently conducted a strategic review and has chosen to remain independent.

“We benefit greatly from a multiplicity of U.S. [referral] sources,” he says. “We’re happy where we are.”