As innovators in the sector adapt to Ottawa’s constraints, their lawyers are adapting (and billing) right alongside

As the price of income trust units plummeted in the fall of 2006, the one thought that reassured many a Calgary law firm was this: “At least we’re not as heavily invested in the trust sector as BDP.”

Not that they expected their competitor to roll over and die. But, frankly, they wanted Burnet Duckworth & Palmer LLP to hurt. Just a little bit.

See, BDP was never supposed to be a colossus – the “No. 1” legal player in a hot sector of the patch. Of the three independent firms that have ruled the Calgary marketplace since year zero and successfully withstood the onslaught of the Toronto-outbound national law firms, BDP has been the undisputed “No. 3” and junior brother to Bennett Jones LLP and Macleod Dixon LLP, both much larger and more ambitious than the one-office, 100-lawyer BDP.

“We were like a colossus astride the Western Canadian Sedimentary Basin,” says John Brussa, a tax partner at BDP. The firm parlayed Mr. Brussa’s trust know-how and its own strong energy client base into a virtually uncontested dominance of the income trust sector in the oil patch. By mid-2006, it represented about two-thirds of the energy income trusts listed on the TSX. It got the front seat on all of the mergers between energy trusts, too.

The income trust phenomenon changed the dynamic in the market, vaulting BDP to the top. But even as the market languishes, BDP is waxing optimistic. And one of the big reasons? The future of trusts.

SIGNS OF LIFE

The large mergers between PennWest and Canetic Resources Trust and between Enerplus and Focus Energy Trust, announced in October, 2007, and December, 2007, respectively, signalled that the wait for a reaction to changes in the sector is over and a new phase had begun.

And it was not about dumping the trust structure.

“There certainly hasn’t been a stampede to convert back to corporations,” says Ross Freeman, a tax partner with the Calgary office of Borden Ladner Gervais LLP. And not just because the first attempt – True Energy Trust in April, 2007 – was slapped back hard by unitholders. “The market continues to value yield instruments and businesses that are well suited to the model, that have reasonably stable cash flows, are probably best served by holding on to the model.”

It’s about figuring out how to keep the model viable within legislative constraints, both current ones and the ones that will permanently erase the tax advantage of trusts in 2011.

“The trusts are beginning, in earnest, to jockey for position post-2011,” says Mr. Brussa. “The mergers are telling you the big trusts are going to go into a low-growth, dividend-paying model. To do that you have to have a certain critical mass, the size to undertake big projects.”

And the vision to start applying your strategy long before Ottawa’s deadline comes. Mega-mergers such as PennWest’s are one strategy. Crescent Point Energy Trust’s creation of Shelter Bay Energy Inc., which will work with the trust “in a way that will ensure it doesn’t go offside the rules on unreasonable growth” is another “very innovative, creative solution to the constraints put on trusts,” says Jim Pasieka, a partner at Heenan Blaikie LLP.

“The clients are evaluating the constraints in front of them and morphing and adapting,” says Mr. Pasieka. The lawyers lucky enough to be representing the innovators and visionaries are morphing (and billing) alongside with them.

The lawyers at BDP are sanguine too. They’re again poised to be in the vanguard as the trusts move to reinvent themselves. They represented PennWest and Focus in the two flagship mergers in the sector so far. Notably, the BDP team was virtually identical on both deals. And it worked with a virtually identical Blakes team for Canetic and Enerplus. No one ever accidentally showed up with the wrong file folder.

“We were on opposite sides of the deals – for the target in one and for the acquirer in the other – so we all had to be more reasonable,” says Grant Zawalsky, a corporate partner with BDP. And, they’re working with their income trust clients on a variety of legal and strategic approaches to life post-2011.

“I think we are going to be on the cutting edge of what happens to the trusts, because of the expertise that we have,” says Mr. Brussa.

BOOM, BUST, AND THEN …?

The trust boom also rearranged the players on some other rungs, too – notably, the Calgary office of Heenan Blaikie LLP.

The Montreal firm set up shop in Calgary in 2000 and focused on oil patch juniors and startups. By 2003, those juniors were bulking up and playing the trust game: either converting or gearing their exit plan toward a sale to a trust. Over 2005 and 2006, the firm was second only to BDP in the number of trust mergers done. (As no one other than the trusts was merging or doing much acquiring in the oil patch during that stretch that meant sitting atop the M & A heap in Calgary.) As Heenan’s Mr. Pasieka tells it, 2005 was a banner year and 2006 was going to be even better.

Then – Oct. 31, 2006, the Halloween Massacre, which hit the legal market almost as hard as it hit the trusts themselves.

“I had five things on my desk, all income trust related – conversions, equity offerings, planned acquisitions, and on Oct. 31, 2006, all five of them came to an immediate halt,” says Chad Schneider, a corporate partner with the Calgary office of Blake Cassels & Graydon LLP.

AFTER THE HALLOWEEN SCARE

Game over? Not even close.

“The industry has a history of being resilient and innovative after a body blow from government legislation,” says Mr. Pasieka. Billable hours are probably down across the board in Calgary, he concedes. “But up to October, 2006, the firms of note were all bursting at the seams. The market was totally overheated.”

Then, it froze.

“There was definitely a period when people were frozen,” says Mr. Schneider. “Nobody knew what to expect, and so nobody knew what to do.”

Now, many Calgary income trust players expect to be leading innovation in the sector.

Mr. Brussa predicts the cutting edge of what happens to trusts is going to look a lot like … trusts.

“The one thing that has resulted from the income trust run is that a whole lot of people out there got used to getting a monthly cheque,” says Mr. Brussa. “And they liked that, and it’s not going to go away. So there will be a myriad of structures that address that coming out, and the factors that will drive them are all the same: They will provide as high an income stream as possible to the investing public.”

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BCE’S IRONIC END RUN

Jim Flaherty may not know this, but the privatization of BCE Inc. by Ontario Teachers’ Pension Plan and company – amounts to an income trust. At least, it does if you talk to John Brussa, one of the so-called fathers of the income trust structure.

“If you look at the BCE transaction, it is an income trust in everything but name,” says Mr. Brussa, a tax partner with Calgary law firm Burnet Duckworth & Palmer LLP. “From a pure tax leakage point of view, the tax leakage in the current structure is probably more than it would have been had BCE become an income trust.”

The irony is sweet. After all, BCE’s trust plans were one of the triggers behind the federal government’s move – in the persona of Mr. Flaherty, Minister of Finance – to close the “loophole” that gave income trusts their tax advantage.

Marzena Czarnecka

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