Justin Fogarty is not your father’s restructuring and insolvency lawyer. Sure, the Toronto-based partner at Davis LLP was called to the bar in 1986 after graduating from law school but he spends a decreasing proportion of his time in a courtroom. Instead, he’s increasingly brandishing his skills as a provider of business solutions in his clients’ boardrooms.
In the aftermath of the fall 2008 market crash and subsequent recession, Fogarty says lawyers have been forced to become more creative in getting their clients out of financial jams. In the past, there was generally another buyer out there for a distressed company or a financial institution that was prepared to lend or invest money. Not anymore, he says. “We’re really focusing on selling our services not as bankruptcy-insolvency lawyers but as business-solutions lawyers,” he says.
Fogarty says he and the team at Davis’ business solutions and restructuring group need to be more tuned in to troubled companies’ needs and options that are unrelated to insolvency. This includes minimizing taxes, selling off non-profitable businesses, finding new sources of capital, finding new markets, and improving liquidity. “Because business is moving so quickly, the insolvency bar has had to evolve and work with the merger and acquisition and lending bars to use their skills to find solutions to problems, such as finding equity investors, restructuring of debt by getting banks to take equity positions or execute forbearance arrangements,” he says. “These were options that might not have been at the top of the list before because there was another buyer [waiting in the wings]. We don’t have as many quick fixes available to us as we did before.”
Before the economy hit the skids, companies were still going out of business but for different reasons — the competition was too strong, their operations weren’t being managed properly, or because demand had disappeared and the business had come to the end of its natural life. There was usually some form of exit strategy provided to them by banks, investors, or creditors, whether they were being helped through a restructuring or liquidation.
But it all changed in a heartbeat. Even though Canadian financial institutions survived relatively unscathed, unlike many of their U.S. counterparts, both the availability of credit and the market was gone. “If I was going to liquidate or use a court process to find a buyer or strategic investor, there was no market. Nobody could put a value on businesses and assets, things were continually going down,” he says.
Fogarty says insolvency, business, commercial lending, and M&A lawyers had a responsibility to do what they could to keep businesses going, even though they didn’t have access to a lot of capital themselves. He says insolvency proceedings are still extremely important but they are also time-consuming and costly. “There had to be a way for people to try to find solutions without having to go through a protracted insolvency proceeding. [Then] you saw lawyers and business people working with creditors to come up with solutions that were outside of the courts or coming to the court as a last resort as opposed to using the court as the starting point of the process.”
A good example is the bankruptcies and bailouts of General Motors and Chrysler last year, he says. “A lot of the negotiations and tough things that occurred in those files happened way before they went into the formal process. They were all negotiated way ahead of time. It was a quick in-and-out process.”
Lewis Kruger, a New York-based partner at Stroock & Stroock & Lavan LLP, agrees and says lawyers who deal with distressed companies have been “extremely busy” the last couple of years. “It has been an all-out work effort to restructure, recapture value, and preserve value,” he says. “Lawyers have played major roles in trying to assist companies [that] are struggling through the downturn, such as General Motors and Chrysler, just to name a couple. There was a lot of business attention paid to them but a substantial amount of lawyerly attention, too. The lawyers’ roles in those cases were crucial to preserving the economic entities, preserving jobs, and preserving value for creditors.”
Kruger says a number of lawyers have left the practice of law to become financial advisers to financially troubled companies or they have become investors, of both their own money and that of others, in the debt and securities of distressed companies. He says he’s not anticipating a rash of lawyers applying to MBA programs to build their skill set — although he says he knows a number of people who have degrees in both disciplines. “Those that are experienced in the insolvency field and who remain as lawyers develop, over time, a sense of business. When you’re dealing with troubled companies, you see a lot and you learn a lot. The next time, you can offer a combination of legal advice with some sound business advice,” he says.
The blurring of international borders for commerce has also meant lawyers have had to familiarize themselves with the appropriate laws in other countries and search out strategic partnerships with counterparts. “Because economies are so interlinked and commerce isn’t bilateral anymore, when businesses get into trouble, there are touch points in so many jurisdictions. Which laws apply? How can you make sure there’s international co-operation? How can you make sure the administration of the creditors is equal in all jurisdictions?” says Fogarty, noting Davis has cultivated relationships in the U.S., Europe, and South America.
Leonard Gilbert, a Florida-based insolvency and restructuring partner at Holland & Knight LLP, agrees. He says because the world is a much smaller place than it used to be for business and finance, lawyers are trying to find a better system for handling their problems. “We spend most of our time trying to resolve the problems and work with the existing lender if we can. Finding a new one is often impossible and the existing lenders don’t want to take over the companies if they can avoid it. Everybody — the lawyers, lenders, and business people have to be more creative to keep the businesses alive,” he says. “There’s a lot more working together between lawyers. Cross-border problems are being dealt with much more efficiently. A big case in Canada will have ramifications in the U.S. and Europe with subsidiaries and related companies.”
Gilbert says if a problem arises between two international partners, such as a manufacturer in Tampa, Fla., and a distributor in Canada, the easiest thing for him to do is contact a Canadian lawyer in whom he has confidence and see if it can be worked out. Most of the international relationships are lawyer-to-lawyer rather than firm-to-firm, he says. “If you’re the best, I’m going to call you. Or it’s, ‘I know somebody in Vancouver or Montreal.’ It’s a necessity.”
He adds one of the most influential organizations in the world has become increasingly involved in the issue, too. The United Nations created the United Nations Commission on International Trade Law to develop laws to help both countries and companies and promote the harmonization and unification of international trade law. If a firm in Canada has a proceeding that is partly in the U.S., for example, these new laws facilitate the situation and make it easier for lawyers and trustees on both sides of the border to take action.
“Many countries have adopted these laws, including the U.S.,” says Gilbert. “We’ve all learned a lot about each other’s laws and I think as a result, the laws around the world have changed. We’ve learned from the Canadian side, the U.K. side, and they’ve learned from us.”
Since Fogarty started Davis’ new practice last summer along with Shelley Fitzpatrick, it has grown steadily. It has four lawyers dedicated to it in Toronto, seven in Vancouver, two in Edmonton, one in Calgary, and it recently added six lawyers in Montreal.
But it’s not just lawyers and business people who are increasingly busy in the solutions business. Fogarty says judges have been acting in an advisory role to help restructuring as well. “Instead of sitting there listening to people making arguments, they’ve been assisting in building consensus towards the resolution of complicated problems,” he says. Gilbert has noticed this development, too. “Judges working together was almost unheard of 20 years ago,” he says.
Fogarty says this new breed of lawyer is just scratching the surface of the business opportunity that lies ahead. It doesn’t necessarily lend itself to the traditional hourly rate model either. “If you’re able to develop a strategy, you could bill it on a value basis. You might get a cut or a bigger bonus based on performance. You have to be flexible,” he says.
The other good news is the practice area is essentially recession-proof. Companies fail in down markets because their revenues dry up but they fail during boom times, too, because of superior competition. “It’s the circle of life,” says Fogarty.
