June 23, 2011
Corporate Finance Roundtable: Where you stand depends on where you sit
Posted by Erik Gerding

This roundtable has gotten so juicy that I am going to exercise my prerogative as convenor to step in briefly and talk about a theme that underlies many of the posts so far.  I do so with humility: I have taught corporate finance only in the context of a Business Planning course organized around numerous long drafting and negotiation exercises.  These exercises involve entrepreneurs starting a company and (in later exercises) venture capitalists.  The class seems a lot like what Joan describes she does at Tennessee and what I know Karl has done in many of his classes.

For me, the real joy of the class is having the students fit puzzle pieces together.  I hope most of them have the following "aha" moment.  Instead of arguing that the there is a "right" answer that is works for the corporation, they realize that whether a particular feature -- whether it is a conversion right, a liquidation preference, or whatever -- is "good" depends on where their client falls in the firm's capital structure.  It is a leap beyond the management-shareholder relationship that is central to business associations.  And it goes beyond debtors versus shareholders.  (I think it also goes to the questions in Eric's class on AIG bankruptcy versus bailout.)  Even two shareholders with the exact same preferred shares (or bonds) may have different interests with respect to a particular provision depending on their holdings, time horizons, discount rates, degree of risk aversion, and estimates of the firm's prospects. 

As I mentioned in the Contracts roundtable, the negotiation dynamic is key for me in teaching.  Not because I aim to teach negotiation skills, but because I think this lens helps students see how these concepts apply in practice.  There are few times a transactional lawyer just drafts an agreement of any complexity without some negotiation.  There are going to be some room for value creation in crafting the terms of debt or preferred stock (which can throw off students inclined to fight every inch).  There is also a large domain of distributive/zero sum issues (which is discomfiting for students who want to find a win/win in everything).

Knowing which issues are important, for whom, when, and why involves some facility with math.  

This can be borne by two handles.  Here's the negative spin: there is a large helping of "eat your vegetables" in this kind of course.  But being innumerate means someone will steal your lunch money on the playground and you won't even know it.  I agree with Karl, that this is true not only for transactional lawyers - but for any lawyer.  Not understanding the time value of money means potential malpractice in the context of settlement agreements.

Here's the positive spin: being familiar with corporate finance helps lawyers create enormous value for clients, it helps students get jobs in a tough market, and the puzzle solving dimension can be immensely gratifying intellectually.  

If students leave a class with a deep understanding for the "where you stand depends on where you sit in the capital structure" point and having sharpened some quantitative reasoning and realized why that is so critical, I'm a lot closer to happy.

 

Finance, Roundtable: Corp Fin, Teaching, Transactional Law | Bookmark

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