I agree with his legal analysis that shareholder wealth maximization is not dictated by corporate law (with a few exceptions) to the extent many law students believe. Managers do have quite a bit of flexibility in choosing the ends and means of corporate operations.
When teaching at New Mexico, though, I found students generally came to this conclusion a little too easily and were perhaps a little too uncritical of what corporate social responsibility means and how to foster it. I usually ask some of the questions at the end of this post to try to flesh out both what is the problem that CSR is meant to address and what is the solution. Is the solution about substantive changes in corporate activities, or is more about process (changing who has a seat at the table)?
I ask many of these questions because I am genuinely curious about this topic (even though I don't write about this area of law -- unlike many of our panelists). I am also not so sure that many legal scholars are on the same page as to what is CSR. My students tend to focus on issues like pollution and child labor. I then ask whether these issues should be deal with by corporate law or with environmental or labor law. Moreover, some of those issues – like pollution – might pit different “stakeholder” groups against one another. This raises the very thorny issue of “how would we identify socially responsible behavior?” In some classes, I lay out a hypothetical of two different shareholder groups pushing a corporation for and against a policy of granting benefits to the same sex domestic partners of the corporation’s employees.
I worry that by teaching this way I am discouraging students who have a real passion to change corporate law. Indeed, this class (which I normally teach at the end of the semester – more on that in a minute) tends to generate the liveliest discussion. Some students tend to see many of my questions as trying to discourage social activism, which I am not. My view is that we should take this idea seriously – and taking it seriously means examining it very closely.
At the same time, I don’t want critics of CSR to get too comfortable either. Some of the optional readings I have assigned in some semesters are critiques of CSR which argue for the division of the political world of government and the private world of corporations into separate spheres. As I have blogged about before, does that distinction make much sense after Citizens United?
I tend to focus on CSR in the last class of the semester. The downside of this is that some students misinterpret this as marginalizing the topic. But I want to ensure students have a sense of the structure of corporate law first, before we talk about what they would change.
Here are some of the questions I ask:
- Which rules or doctrines that we studies in this course, if any, would you change to make a corporation (or other form of business entity) more “socially responsible”?
- What is meant by “corporate social responsibility”? When is a corporation acting in a socially responsible manner?
- Which, if any, of the following strands of corporate law reform do you think is more important?
- Agency Cost Version of Corporate Law Reform: should corporate law focus more on making sure that management – directors and officers – actually acts in the best interest of shareholders?
- For example, if you believe that there is a problem with exorbitant executive compensation, is the problem that executives are taking too much value from shareholders and that shareholders do not have adequate means to discipline management? Or is there a larger problem?
- CSR Version of Corporate Law Reform: is the idea of shareholder primacy and the norm of shareholder wealth maximization too narrow? Does a corporation owe duties to constituents (“stakeholders”) other than shareholders? If so, who are these constituents? Employees? Communities in which the company is physically located? Communities in which the company sells or conducts operations? Consumers? The public? Who defines these constituencies? Who speaks for them? How should these constituencies be represented in corporate decision-making?
- Agency Cost Version of Corporate Law Reform: should corporate law focus more on making sure that management – directors and officers – actually acts in the best interest of shareholders?
- Should corporate law attempt to change corporate behavior on particular social issues? If so which issues? Employee rights? The environment?
- How should corporate social responsibility or progress on certain social issues be measured?
- Is corporate law the right tool to encourage corporate social responsibility? Or should other laws – e.g. labor laws and environmental laws – be employed instead to meet the desired social goals?
- If corporate law is the right tool, what mechanisms in corporate law should be used? Proxy access?
- How should law encourage corporate social responsibility? To what extent should laws or codes on “responsibility” be voluntary or permissive? To what extent should it be mandatory? How would any mandatory law be enforced and who could enforce it?
- What do you think of state “shareholder” constituency statutes?
- To what extent do these statutes, which allow management to take into account other stakeholders besides shareholders in making decisions, only insulate management from takeovers?
- What do you think of state “shareholder” constituency statutes?
- To what extent does corporate social responsibility undermine efforts in the agency cost strand of corporate law reform, i.e. making management more accountable to shareholders? To what extent do these two strands of corporate law reform conflict?
- To what extent do these two strands of corporate law reform mesh? Would efforts to give shareholders more access to the proxy ballot enable more radical reformers to submit other items – environmental responsibility, labor rights – to a shareholder vote?
- To what extent is the market already making corporations more socially responsible?
- What do you think of “corporate codes of conduct” voluntarily enacted by corporations or industry groups?
- What do you think of corporations that market themselves as being good corporate citizens?
- How do you evaluate the claims of corporations of corporate citizenry?
- Should all corporations (and other business entities) of whatever size be subject to corporate social responsibility standards? Or only big, publicly held corporations? Is it equitable or efficient to hold smaller business entities to the same or different standards as big corporations? Where do you draw the line?
- What can the U.S. learn from corporations and laws in other countries?
- Are the different corporate governance laws in Europe a good model for the U.S.? For example, many European countries have two board of director entities, with labor groups having a seat on one of the boards.
- Alternatively, would corporate responsibility standards undermine U.S. competitiveness?
- Should the participation of corporations in the political process – e.g. by making political contributions – be limited by law? (If the students have already read Bellotti or Citizens United, we discuss those cases). Should shareholders be able to limit (or vote on) the political activities of corporations?
As I explained in my earlier post, at Washington and Lee we divide the basic course into two, Close Business Arrangements (CBA) and Publicly Held Businesses (PHB). We don't deal much with CSR in the CBA course because privately owned firms, typically small in size, are much less likely to generate significant externalities (e.g, environmental or human rights costs) than are larger ones. Or at least the magnitude of any such effects is generally far smaller. Further, because there is usually a unity of ownership and control, those in charge of closely held firms are much less likely to possess the discretion or the inclination to deviate from profit maximization and, if they do, they do it with the consent of their fellow investors so there is typically no one to complain about it.
So CSR is really a problem for publicly held corporations and therefore needs to be addressed in the PHB course, which I teach. I don't spend a lot of time with the political or moral question of whether large corporations have an obligation to temper profit maximization with pursuit of conflicting objectives. I do, though, want the students to see that their size and the scope of their operations necessarily mean that there are substantial and potentially negative effects on the wider society in which our largest corporations operate. And I think they also need to know that there is significant disagreement here and abroad about the appropriate social responsibilities of large businesses. So I start the course by explaining the shareholder primacy conception of corporate purpose and management responsibility and then contrast it with CSR as a competing alternative that is taken seriously in most quarters (even if not by many of the most prominent corporate law academics in this country). No effort is made to resolve what is essentially a dispute about social policy or moral obligation.
In my view, the students need to understand that corporate law – this is supposed to a course about law, after all – is ambivalent on the question of shareholder primary, at times conflicted or agnostic or even hostile. (My colleague Christopher Bruner's articles on this subject are important.) So, for example, state statues authorize corporate philanthropy. Federal Rule 14a-8 allows shareholders to communicate with each other about the social, political, or ethical implications of what their firms are doing. The business judgment rule insulates from shareholder scrutiny policies aimed at promoting nonshareholder interests. Corporations confronted by hostile takeovers can take effects on nonshareholders into account in formulating defensive responses (except in the narrowly-defined and readily avoidable Revlon situation). At the same time, even if the law does not require it, it does allow corporate management to disregard nonshareholder interests (as long as it honors contracts and complies with applicable regulations) and pursue profit maximization if it chooses to do so.
So corporate law ends up being irrelevant to the crucial question of corporate purpose and management's responsibility. The students therefore need to understand the non-legal incentives – including compensation arrangements, pressure from institutional shareholders, social norms – that nowadays lead management to prioritize current share price maximization over long-term strategic considerations or costly (as opposed to public relations) CSR policies.
Our approach to teaching the basic Business Organization survey at Washington and Lee splits the course into two parts, a three-credit course called Close Business Arrangements (CBA) and a second three-credit course called Publicly Held Businesses (PHB). Our basic assumption is that the legal issues confronting the organization and management of privately owned, typically small businesses are different enough from those of large, publicly held firms to warrant separate courses. As a result, we have six hours to cover material that is typically taught in a four- (or even three-) credit survey. Needless to say, that is a much-appreciated luxury.
The CBA course begins with a thorough study of agency law, with an emphasis on authority issues. (We don't do much with vicarious liability for torts in this class.) We think this is important because questions of actual and apparent authority can be complicated, come up frequently in practice, and are nowadays not given the attention they deserve at most law schools. We then do an extended look at partnership law, followed by several weeks on corporate law as it relates to privately owned firms. So we don't do much with complex m&a or federal securities regulation (other than the law governing exemptions from registration). Once the students understand partnerships and corporations, the LLC is easy to grasp as a hybrid organizational form.
Having three hours to cover this material makes broader, deeper coverage of the cases and statutes possible. Importantly, it also allows more time for attention to business considerations – concepts like leverage and problems like conflict of interest or minority shareholder oppression, for example. In our experience, introducing students to basic business concepts and vocabulary is at least as important as teaching them the law; most are almost entirely ignorant about such things. We also take advantage of the extra time to introduce basic accounting concepts and terminology, with the goal of getting the students to understand the purposes of and differences between the income statement and the balance sheet.
The follow-on PHB course focuses on the legal problems related to publicly owned corporations. This is essentially a detailed study of Delaware law. (For the corporate law part of the CBA course we use the MBCA.) In addition, we cover the federal proxy rules and offer a brief overview of the mandatory disclosure system. Having three hours for this subject allows us to cover material that is more typically dealt with in a corporate finance course. So, we can devote significant attention to preferred stock and debt as well as to m&a. We cover the leading Delaware cases dealing with defenses to hostile takeovers in detail. Again, in this course a great deal of time is spent on non-legal issues – valuation, for example – because students know so little about the world of business. In our experience, students who end up in a sophisticated, big-firm corporate practice believe that they are very well prepared.
At W&L, most students take CBA, usually in their second year. Enrollment in the PHB course varies from around 40 to 60 or so percent of the class. CBA is a prerequisite for PHB, though we allow students to take both concurrently if they need to.
Because our two-course sequence is unusual, available teaching materials are limited. Most casebooks attempt to cover both the CBA and PHB material in a single volume, with varying emphases and degrees of thoroughness. For CBA we use the only casebook devoted to privately owned businesses, the Ragazzo and Moll book. For PHB, Klein, Ramseyer, and Bainbridge works well because it covers debt securities and includes the most important Delaware takeover cases. For both courses, though, it's necessary to supplement the casebooks with additional cases and materials.
Today and tomorrow we are pleased to host another in our series of summer roundtables on teaching business law courses. We have already been fortunate to have law professors share their insights on teaching Contracts, Banking Law, and Corporate Finance. Today we kick off our Roundtable on Teaching Corporations/Business Associations.
Our own Gordon Smith (BYU) and Lisa Fairfax (George Washington) will be joined by Afra Afsharipour (UC Davis), Kent Greenfield (Boston College), and David Millon (Washington & Lee). As with the previous roundtables, we give our panelists free rein to discuss any aspect of teaching Corporations or Business Associations. Some of the topics they might discuss include:
- What are the core ideas you want students to take away from the course? What are your core objectives?
- To what extent should the course include Agency, Partnerships, LLCs, and other unincorporated entities?
- To what extent do you focus on publicly held corporations versus closely held ones?
- How do you handle the wide dispersion in students – in terms of both reasons for taking the course (ranging from “it’s on the bar” to “I want to run my own hedge fund”) and background in business or economics? What kind of practice do most of your students aim for?
- How much do you teach basic economic concepts? What are those concepts? Does this course tend to focus too much on agency costs to the exclusion of other important dynamics?
- Do you include basics of corporate finance or accounting in the course?
- To what extent do you cover securities and m&a?
- How much do you focus on problem solving, problem sets or simulations versus traditional case law analysis? Do you include any other innovations, such as business school style case studies?
- How much of a transactional versus a litigation focus do you have?
- How do you approach issues of Corporate Social Responsibility? (I’ll have another post framing some of the issues on this later) Where do you place it in the syllabus? Do you teach Citizens United? Is there any public law intersection in the course?
- How has the financial crisis changed what you teach or the way you teach?
- How important is Sarbanes Oxley and Dodd-Frank in your course?
Let’s get started!
This post comes to us from Lawrence Baxter (Duke University School of Law) as part of our Roundtable on Teaching Banking Law/Financial Institutions. You can read the other posts in the roundtable here.
Thank you, Erik, for setting up this fascinating and very helpful forum. I apologize for coming late to the conversation, situated as I now am in chilly but exuberant and splendid South Africa after languishing for a week in beautiful Croatia. I have had the benefit of being able to read the inspiring contributions to the forum; as a result, I am inspired to revise completely the order of my assigned readings before classes begin—in only four short weeks!
I should note that I come to the teaching of bank regulation with a particular set of biases. In the first place, having spent some of my earlier years consulting with the federal banking agencies and working with the staff of the Senate Banking Committee during passage of FDICIA, I am keenly aware of the importance of understanding the law within the larger framework of financial policy. Secondly, my time working with a financial institution was entirely on the strategic and business side, not within the office of general counsel. So I tend to think of legal practice as serving the long term strategic prosperity of the business, which long term prosperity necessarily involves stability and the addition of value for sharehoders and the communities in which they operate. This is not to say that I believe the role of lawyers is simply to serve the immediate ends of the businesses that are their clients; on the contrary, I take the view that some among the legal profession, whether external or in-house counsel, sometimes submit far too greatly to the will of business executives without asserting independent leadership where the long term interests of the financial institution and its shareholders and customers really demand this independence. Financial lawyers have sometimes allowed themselves to become too much of a service industry and appear to have abandoned their roles as a source of wise counsel.
So my approach is to try to inculcate in students an understanding of the whys more than the whats. My hope is that this will encourage students not only to think strategically but also to recognize and understand both public and long-term private interests. This asks a lot of such future lawyers because impatient executives are seldom willing to listen to a sermon on the virtues of constraints they are trying to avoid. But if we don’t persevere in this effort then attorneys might as well consign themselves to roles not significantly different from those of marketers and human resource personnel.
I teach domestic and international banking regulation in separate courses—the former in the fall and the latter in the spring. During the past academic year I used a diverse collection of material for the domestic course and the superb Schooner/Taylor book plus additional material for the international course. Before I left on my current trip I had worked out the syllabus and reading assignments for the fall 2011 domestic course, almost all of which are based on Lissa Broome’s and Jerry Markham’s new casebook edition.
I never felt comfortable with this approach for two main reasons. First, it is now entirely artificial to separate domestic and international bank regulation, so a good deal of the international course has to find its way into the domestic course anyway. How can one possibly teach domestic regulation without recognizing that the operations of large banks are transnational and, in most cases, global? And, of course, Basel is integral to domestic bank regulation, while the actions and recommendations of the Financial Stability Board, G20 and other international institutions have a great impact, whether acknowledged or not, on the shape of domestic regulation, be it through rules or agency decisions. The Collins Amendment provides one of many illustrations.
Second, although Lissa and Jerry performed a Herculean task in updating their excellent casebook so soon after the passage of Dodd-Frank, I have become increasingly disenchanted with the casebook method as a means of teaching financial regulation, particularly now that the field has become so dynamic when compared to how it was twenty years ago. Of course there are key historical cases (e.g., McCulloch v. Maryland, Tiffany National Bank), and well-crafted judicial opinions, albeit rather scarce, help students to understand essential principles and the way these are applied in formal disputes. Cases such as the Second Circuit’s § 20 decisions form part of the dynamic tableau of financial regulation and they help to illustrate the interaction of public policy, agency positioning, industry advocacy that produces important though evanescent inflection points. But forcing the class to understand the larger picture through the episodic vignettes and procedural contortions of cases that make their way to the federal circuits and Supreme Court seems to me to distort the overall picture in ways that are not ideal when one is trying to lay down a long-lasting framework for future counsel. It is true that future financial lawyers are going to need to know the law with great precision once they engage in practice, but they are never going to acquire such precision within the framework of a three-hour course of passing technical validity. My hope is that the learning in law school that lasts is the bigger picture that frames the continually changing detail.
Perhaps it is also true that the case method, if used too much beyond the first year (where one is teaching basic forensic skills), wrongly encourages young lawyers to the assumption that the most important service they can provide is to defend their clients’ positions at almost all costs. This teaching method might even have contributed to the more general malaise in regulatory Washington, where no sensible result can be reached because adversary gridlock is perpetually generated or encouraged by lawyers terrified of conceding ground on behalf of their clients.
The previous conversations in this blog, in which others have described such imaginative use of diverse material in a fluid environment, leaves my earlier planned approach seeming not only uncomfortable, for the reasons already outlined, but also rather pedestrian. So although the die is cast for course listings for the 2011-12 academic year and my messy domestic/international bifurcation between must continue for the time being, I am nevertheless going to impose my own framework on the class reading sequence for the casebook. Instead of following the general order of the casebook, in making the reassignments of the readings from Broome & Markham I now plan to lay out my syllabus along the outline below (readers will recognize in my terminology my fascination with complexity theory as it applies to financial regulation):
I. The Financial Regulatory Ecology
- Financial systems, agents and stability
- Incl. brief overview of industry structure and demographics
- Central banking and regulatory supervision
- Agency structure overview
- Incl. some comparatives
- Exchanges and FMUs
- Regulatory forms, market failure and regulatory failure
- Why banks are (still) special and often Too Big to Fail
II. Path Dependencies
Like others in this forum, I cannot conceive teaching financial regulation without helping students to gain a basic understanding of how our regulatory framework evolved, what happened at various key moments in US and international economic history, and why legislation such as Dodd-Frank ends up being as complex and convoluted as it is. This history provides crucial elements of the initial states from which our regulatory thickets sprung, and how the financial industry has formed. Besides, the history is one of the most entertaining elements for students and a way to help them integrate their knowledge from other courses, such as constitutional and administrative law, into their understanding of financial regulation in general and banking regulation in particular.
III. “Banking” in its Modern Forms
- “Business of banking,” “incidental business,” and “closely related” financial services
- Balance sheet structure and P&L dynamics
- Basic overview of capital/liability/asset structure
- How banks earn (and lose) money
- Liquidity and funding management and risks
- Incl. securitization, derivatives, etc.
- Accounting and tax trickery
- How other financial segments fit in
- Investment banking
- Public and private funds
- “Shadow banking”
- Rating agencies
- Competition, Scale and Universal banking
- The conflicting ethics and cultures of modern finance
- Fractional reserve banking
- Risk management
- Capital, risk-adjustment, Collins, etc.
- Traditional “walls:” Glass-Steagall, McFadden, BHC Act, McCarran-Ferguson
- M&A & competition
- Affiliation & Anti-tying
- GLB & “Deregulation”
- Dodd-Frank, esp. Volker Rule(s): the attempt to separate, once again, custodial banking from investment banking
- Size and TBTF redux
(Note: Here I lean in the direction of Adam Feibelman rather than Heidi Schooner. But I would go further: not only are consumer protection issues, presented a certain way, of macroprudential importance; they are also directly relevant to the supervision of individual institutions for safety and soundness (i.e. as a microprudential consideration). As an illustration, my own company (after I retired from it, I hasten to add!) entered the realm of adjustable ARMs when it purchased Golden West. This step eventually destroyed the company. I believe the regulators and shareholders should be asking penetrating questions about why financial institutions are making patently stupid, or at the very least imprudent, loans and why such activity will not impact the solvency of the institution. Regulators should be demanding proof that mortgage service outsourcing, for example, has been done responsibly and in a manner that can withstand a crisis like the one we are in. The debate on consumer protection has been cast as one of irresponsible lending versus irresponsible borrowing, but I think this way of framing the issues underplays the important microprudential elements that regulators failed to police. So my presentation of consumer and investor protection issues would be presented, not so much from the point of view of consumers and investors themselves but from the point of view of regulators and shareholders.)
- General consumer and investor protection
- HMDA etc.
- Fed and traditional agencies
- Incl. Durbin (fees), smart cards, etc.
VII. Depositor Protection
- Origins & comparisons
- Including the financial stability and liquidity roles depositor protection plays
- Moral hazards & influence on regulation
- Including whether depositor protection achieves its goals or perhaps makes things even worse
- Supervisory process
- SFI regulation
(This whole section could form the heart of the evaluative discussion with the class on market v. regulatory failure, our inability to take regulation seriously, whether internal constraints such as ethical and moral precepts might offer better alternatives, and whether some of the ambitions of regulatory constraints—such as preventing systemic failures—are achievable.)
- Why banks are handed differently through the receivership rather than the bankruptcy process Traditional FDIC receivership (incl. conservatorship)
- Living Wills
- Incl. GSFIs and cross-border resolution
X. So What Will Happen in the Next Crisis?
- I.e., an evaluation of the reforms and current approach to banking regulation
# # #
In the final result, some large chunks of the casebook will be left out and I will again provide substantial legal and non-legal supplementary material. Basically I need a whole new type of coursebook, but that is another story . . .
This post comes to us from Erin O'Hara, Professor of Law and FedEx Research Professor at Vanderbilt University Law School. The post is a follow-up to our Roundtable on Teaching Contracts. You can view all the posts in this Roundtable here.
In the Fall of 2007, I undertook to teach my Contracts course in a way that helps students to develop transactional skills. It seemed shameful that most students leave the first-year course without ever seeing an actual contract. I wanted to expose students early to the work of transactional attorneys, especially given that about one third of practicing lawyers earn their livelihood in this way.
Like the earlier contributors to this discussion, I began to think about changing the course on the margin. Maybe I could show the students some real contracts or add a negotiation or drafting exercise, but as mentioned already in this discussion, it was indeed difficult to add materials to an already crammed four-hour course. When I expressed frustration to my then dean Ed Rubin, he responded by suggesting that I needed to throw out the traditional contracts course and start over in order to make room for a modern approach to the subject. The suggestion seemed ludicrous to me at first, but once the message had time to sink in, I realized that Ed was right.
Contracts may be the only law school course that spends nearly all of the semester at the edge of the subject and almost no time at the subject’s center. Professors teach about distinctions: the difference between promise and contract, between contract and tort, between contract and property, and between enforceable and unenforceable promises. With all of these topics, the course attempts to define the boundaries of the subject matter of contract, and in the end students learn far more about what contract is not than they do about what contract is. Ed convinced me to start at the center of contract and move outward from there.
The center of contract is about negotiating and drafting an agreement and/or a change in anticipation of the fact that one day the parties (with or without the aid of a court or arbitrator) will have to determine what that contract means. The vast majority of contracts that lawyers draft do not result in formal disputes, and, when they do, the parties fight much more often about what the contract provides than they do about whether they have a contract. These are the issues that should dominate in Contracts.
These issues are difficult issues for first-year students to grapple with because most have no experience with the subject matter at hand. Stories about hairy hands and Harrier jets and promises to marry resonate with the students, but warranties and conditions and due diligence seem far more remote. Students needed context to begin to grapple with these issues, so I began to look for a simple story that could draw the students into the world of transactions and the role of the lawyer and the contract in that transaction.
Claire Hill provided me with the best possible story: a play that comprised the last chapter of James Freund’s book, Anatomy of a Merger. The play enabled the students to imagine the transactional setting and to begin to understand the role of the lawyer in that setting. The play enabled the students to better grapple with the concepts of risk assignment and conditions and warranties. It gave the students an appreciation for the importance of carefully crafting contractual language and of gently focusing the client on possible problems that can be avoided or minimized with contract language. This play, along with some supplemental materials, provided the basis for a short one-week unit introducing students to The Contracting Environment.
Unit II focused on Contract Interpretation, a subject we covered for 4-5 weeks. We focused on the distinction between promise and condition early and often in this course. I will confess that I left my first-year Contracts course not really understanding what a condition was. In contrast, my students truly understood their function by the end of the semester. We explored the difficulties that can arise with ambiguous contract language, and in the process covered the canons of construction and the use of evidence outside the writing. We then covered default rules and explored the difficulties and benefits of silence in contract drafting. Finally, we covered change and modification and the good faith obligations.
Unit III covered Breach and Remedies (including both damages and self-help provisions). Unit IV covered Contracts of Adhesion. The syllabus included a separate unit on these contracts because in the first several weeks of the course we had studied the negotiation and drafting of contracts by sophisticated commercial parties and their lawyers, and I wanted the students to focus on the important differences between the two contract settings. A final unit, about 3 weeks long, explored contracts/promises that are not enforced. We covered lack of agreement, lack of consideration, formalities, public policy, and impossibility, impracticability, and frustration of purpose in this last unit. In the end, the students were exposed to virtually all of the concepts that they need for their upper-level courses and for bar-exam study (we unfortunately did not cover third-party rights).
Throughout the course we looked at actual contract provisions. In addition, three exercises were used to force the students to apply the course concepts. In week 4 students critiqued a very basic band booking agreement (this is Nashville!), in week 7 students drafted a simple requirements agreement (after giving them a detailed factual scenario), and in week 10 they negotiated and drafted a provision covering the circumstances under which the tenant could withhold rent from the landlord in a commercial lease setting. In week 12 students were invited to attend a lunchtime panel with 5 transactional lawyers who described their practices and talked with students about the world of transactional lawyering. Some of the panelists have served as mentors to the students interested in a transactional practice. The final exam asked students to critique and propose changes to two different contracts. In one, the lawyer was representing the client who was one of the parties to a commercial transaction where the other party had produced the first draft. In the other, the student was placed in the role of new in-house counsel asked to explain to a corporate officer the significance of the provisions in her predecessor’s draft sales agreement and to comment on any provisions that might not be legally valid (many of the customers were ordinary consumers).
I expected the students to excoriate me in their evaluations at the end of the semester. Surely the students would conclude that they had been turned into guinea pigs for some strange pedagogical experiment that robbed them of the sense of comfort that accompanies their reliance on textbooks and study aids (not to mention my old Contracts exams). I was prepared for the beating because I believed in the worth of the course change. In fact, however, I received the highest teaching ratings I have ever received at Vanderbilt. Students completely understood that 21st century law practice was based much more closely on the materials to which they were exposed than they were on the cases studied in the other Contracts section. Student comments indicated that they believed that the innovation was valuable and that their professor was working extremely hard to deliver to them a better educational experience.
The students did not just appreciate the effort being made to reform the course. They actively engaged the materials in a manner that showed that they understood what could be exciting and rewarding and yet difficult about transactional legal practice. For example, a number of students raised practice-relevant ethical issues during the course of the semester, including the circumstances under which the client should be advised to disclose disadvantageous information to the other party. And several expressed interest in transactional practice because it seems like a positive sum game. Others have written about how law schools manage to turn student excitement into cynicism and depression in just one year of law school. The causes for dissatisfaction with the prospect of practicing law are many, but one surely is that litigation is at best a zero-sum game and often a negative sum game. A transactional course enables the students to envision a legal practice in which the parties that they represent can all benefit from the transaction and the lawyers’ efforts. For several of my students, this was both comforting and energizing. I didn’t intend to engage the students on ethical issues or career satisfaction, but the approach of the course did produce these consequences. Enrollment in our upper-level transactional courses has skyrocketed, and my students tell me that they feel much more comfortable in these courses than do the students who were not exposed to a transactional perspective in Contracts.
The materials assigned were terrible in the sense that they required both the students and the professor to work harder than necessary. I assigned the Farnsworth hornbook to give the students a sense of the black letter law that they would need to respond to with their contracts. Unfortunately, however, the extensive detail of the hornbook when used as primary material rather than as review material caused unnecessary stress for the students and countless hours of explanation back in my office. Those materials were supplemented with Restatement and UCC provisions as well as a few cases. (I left to the other first-year professors the task of learning to read a case to distill its legal principles and instead primarily used the cases in Contracts to show students some of the situations that can arise and the ways that courts can treat contract language in addressing those situations.) Nothing tied these materials together, so I wrote a series of unit memos to provide them with needed thematic direction.
At Vanderbilt I had the luxury of being granted a semester’s research leave as my reward for my investment in the course. Without that bargain I frankly would have continued to muddle along with the traditional casebooks because the cost to my research while revising the course was significant and I needed to know that I would get that research time back somehow. My goal in the next two years is to produce the course materials necessary for others to teach Contracts from a transactional perspective without giving up substantial research time. Currently available course materials make it possible to add transactional garnish to a litigation-based course, but we can and should provide out students with more than just a garnish in the first year.
Thank you to our eminent group of contributors -- Brian Broughman (Indiana -Bloomington), Trey Drury (Loyola - New Orleans), Eric Helland (Claremont McKenna), Joan MacLeod Heminway (Tennessee), Karl Okamoto (Drexel), and our own Christine Hurt (Illinois) -- for a stimulating roundtable on teaching corporate finance. I learned a great deal that will shape my own teaching.
Our next roundtable will focus on teaching Corporations and Business Associations and will take place on July 18-19.
Among the conundra that we business law teachers face is where, when, and how to teach M&A. A number of my students go on to work in M&A with small local and medium-sized regional firms. They typically do private-private deals. Of course, I cut my lawyering teeth on much larger transactions, so teaching the subject to this audience meant refocusing more than a bit . . . .
Most law students at Tennessee do not go further than the basic Business Associations course. Yet, many of them will later need to know something about M&A. So, I do spend a few hours talking about the basic M&A structures and the overlay of securities regulation in covering the larger issues of fundamental corporate change transactions and change-of-control transactions. But there needs to be more somewhere, in my view. I do another few hours on M&A structures in Corporate Finance, for the few folks that take the course. But, given the fact that we do not have resources to teach a full M&A course in addition to our Corporate Finance offering, the main place I get to teach M&A in a skills-based context is through our transaction simulation course, Representing Enterprises. There, I can teach a 14-hour module focused on M&A in a practice context. What I teach in the module has varied from year to year, but it gets much more granular and always focuses around transaction documents.
As I earlier noted, one area of focus, once I figured out the basic subject matter that I wanted to teach, was finding the right book. I always employ PowerPoint slides that I created for my own use in going over the different deal structures. But I keep yearning for a non-casebook (or two short non-casebooks) that explains M&A structures and connects them to the statutory law, and also, at the same time, walks through the components of a business combination agreement and unpacks the legal and practical issues--all in a digestible, yet rigorous, way. I have coauthored a series of annotated M&A agreements for our business law journal over the years (all of which are available through my author page on SSRN), and I sometimes assign one or more of those. In addition, I use excerpts from Jim Freund's Anatomy of a Merger where I can, but it is quite dated now on a number of issues and cannot be assigned in its entirety as a text. It is also frightfully expensive to buy when one can find a copy.
In the hopes that I could find part of my solution, I picked up Ken Adams's new book, The Structure of M&A Contracts, available for download in .pdf. The first thing I noticed was its abbreviated length--94 pages of primary text, all in (110 pages cover-to-cover). The book addresses the structure of M&A agreements and related drafting issues and not much more. So this is not the soup-to-nuts teaching resource I am looking for, but it may well serve as a component piece of the M&A teaching materials puzzle. I plan to "give it a go," as a supplement to other resources, my next time teaching this module. Here are some things that I like about the book, apart from its short length:
- It is written in a very accessible, user-friendly style.
- It includes a series of helpful charts showing, e.g., linkages between and among the different component provisions in an M&A agreement and where in the agreement one would address various client issues.
- Where relevant, it cites to the 2009 Private Target Deal Points Study from the Mergers & Acquisitions Market Trends Subcommittee of the Committee on Mergers and Acquisitions of the ABA Section of Business Law, a resource on transactional norms with which business law students should become familiar. Ken also cites to Jim Freund and to two other former Skadden colleagues, Lou Kling and Eileen Nugent (whom I respect and also cite in my work), as well as further important resources for M&A drafters.
- Those who have read and appreciate A Manual of Style for Contract Drafting (like me) also will appreciate this book. It is written in a similar format and makes many of the same points. (FYI, I do not always agree with Ken's judgments, but I always appreciate them. And where we disagree, the basis of the disagreement usually is an excellent basis for class discussion.)
- The book makes a valuable point up front--which I also make (in a different way using stronger language) in class: "A note to junior lawyers: before embracing the more novel recommendations made in this book, you should consider getting the approval of someone more senior."
- The cost of the book is $25, and it will be useful well beyond law school for those with business law practices (which include most of the students in my course).
Do you all teach M&A in your Corporate Finance courses? As a stand-alone? And do you all cover M&A at some level in your Business Associations or Corporations course? What materials do you use? Comments are invited.
From reading the posts (and as I suspected), it appears that you could take each of our corporate finance courses (and whatever cool thing Karl is teaching instead of corporate finance) and learn something completely different from each of them. However, there does seem to be one thin shred of common ground - finance concepts, and particularly the idea of net present value, are at the heart of this course.
Even my class, which seems to be the most "law-heavy" of the courses, spends a considerable amount of time on basic concepts of finance, and net present value in particular. I believe strongly that this is something our discipline can contribute to the broader legal world. If you don't understand NPV, you cannot negotiate a divorce settlement where, for example, a family business is an asset; you cannot advise your client whether and when to accept a settlement that is paid in installments, or compare a lump sum to an installment payment; you cannot make estate plans that rely on minority or marketability discounts; you cannot make a coherent argument about lost future wages in an employment claim.
The more you look, the more often you find it. Pretty soon, it appears everywhere, just like one of my favorite Woody Allen characters. While I applaud and admire my friend Christine for introducing NPV into her torts class, I worry that she is in the distinct minority on that front. Until more people recognize the essential place for NPV in every lawyer's toolkit, we all do a great service by providing it in our corporate finance classes.
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.
There are several ways we may want to change the way we teach corporate finance after the financial crisis. Off the top of my head, it may make sense to include/increase the prominence of derivatives, securitization, systemic v. firm-specific risk, and/or moral hazard in our syllabi. All of these seem like good ideas, but my primary response has been a different one - I leave an intentional gap in my syllabus, 3-4 classes where nothing at all is planned.
I was teaching a corporate finance class in the fall of 2008 as the financial system was imploding. It was an unnerving but exhilirating time to be doing this, and we would spend the first 15 minutes of every class (and sometimes much longer) discussing the issues of the day. I recognized fairly early on that this was wreaking havoc on my syllabus and did not want to lose the last part of it (where we talk about fundamental transactions, a particular interest of mine). So, early on in the semester, I axed a substantial chunk of my syllabus - about 4-5 classes - to make room for our discussion of current events.
The following year, instead of re-inserting the old material, I left a 3 session gap designated as "Current Issues in Corporate Finance - materials to come." During the semester, the students and I watch the news, and together we choose something to fill the gap with. While I go into the semester with a couple of off-the-shelf ideas about what those current issues might be, I have never used the pre-prepared stuff. Each year, something new and interesting comes along tht warrants in depth investigation.
This spring, we dug into Facebook's offering - what does a $50 billion valuation mean?, who calculated it and how?, why did Goldman Sachs close the offering to US investors?, what are the SEC rules about going public, and how are they claiming to comply?, what are these private secondary markets that are operating in the meantime? It has been a big success every year, and I am glad I resisted the temptation to stick the old stuff right back into my course.
I had the good fortune (perhaps that’s the wrong way to put it) to be teaching this course right through the worst of the financial crisis. I think Brian’s point is well taken. Even if I wanted to stick to a book, any book, the events in 2008 were moving too fast. I remember having a set of institutional background slides on the remaining distinctions between investment and commercial banking and realizing that it completely irrelevant by time I got to the lecture. As I remember it not a single bullet on the slide was still correct.
Like Brian I organized the course around finance topics but I always started the class with something in the news. Give how fast things moved that semester these topics sessions, which I had to cut off at 10-15 minutes, were some of the most interesting discussions in the class. My favorite was whether AIG would have done better in bankruptcy than being bailed out. The general consensus of the class was that AIG would have done better even if the systemic risk created by its default was too large for the US government to allow that to happen. That discussion could have motivated about half the topics I covered.
I wanted to follow up on one of Eric’s earlier posts. I suspect that most of us are doing some variation of the hybrid method (this also comes through in Joan's description of her class).
First, a straightforward adoption of the undergrad (or MBA) version of corporate finance would duplicate what is done elsewhere on campus, and would not really be tailored to the needs of law students. Thus, I suspect that most professors who use a business style textbook have to supplement with a fair amount of additional law-related reading material, which as Eric notes can be a lot of work.
Second, law casebooks have been for several decades directly incorporating finance concepts, interspersing this material between cases. In essence, casebook authors have been creating a type of hybrid which differs substantially from the standard law school format.
I think the choice ultimately comes down to organization rather than substance. I organize my class through the underlying finance concepts, which I think is easier to implement with a business textbook. In this sense I don’t think corporate finance, at least the version that I teach, fits easily on the standard law school classification between litigation versus transactional focus. Rather, the course is more of a tool kit or set of analytic methods that lawyers can use in various aspects of their practice.
I wanted to follow up on Karl’s post on present value. This seems to me to be one of the most important things for a student in corporate finance (or anyone) to learn. It is also a deep concept in the sense that it is easy to learn and yet once you start thinking about the assumptions you realize how much this very simple model clarifies your thinking about intertemporal decisions. My preferred way to teach the concept, which came from Eric Talley, is to use Judge Easterbrook’s opinion in the Amoco Cadiz oil spill case. There is a lot in the opinion but Easterbrook’s discussion of why the plaintiffs should be awarded prejudgment interest is wonderfully clear.
By committing a tort, the wrongdoer creates an involuntary creditor. It may take time for the victim to obtain an enforceable judgment, but once there is a judgment the obligation is dated as of the time of the injury. In voluntary credit transactions, the borrower must pay the market rate for money. (The market rate is the minimum appropriate rate for prejudgment interest, because the involuntary creditor might have charged more to make a loan.) Prejudgment interest at the market rate puts both parties in the position they would have occupied had compensation been paid promptly.
To see this, consider what would have happened if the French parties had borrowed $60 million to finance the cleanup in April 1978, and Amoco had put that sum in trust to fund an award of damages (just as Amoco actually put 77 million francs in trust in France). The victims would have had to pay the market rate of interest, which at times during this case has exceeded 20% per annum. If they arranged to repay the debt in a single balloon payment at the end (when they recouped from Amoco), and if the rate of interest averaged 12%, then by April 1991 the victims would owe their creditors $262 million. Meanwhile the trust fund, lending out its assets at the market rate of 12%, would have grown to $262 million. Scores would be fully settled if Amoco tendered its interest in the fund: it would thus "pay" $60 million as of 1978, and the victims would receive $60 million as of 1978; the lenders who financed the cleanup would receive full payment for the use of their money.
Let me start off with a big disclaimer. I’ve taught corporate finance exactly once (at UCLA) and am not a lawyer. Although I do research in the area I don’t teach this course at CMC either. That said I spent a lot of time before teaching the course at UCLA trying to figure out exactly how I wanted to teach the course and ultimately what I wanted law students to know about finance. I also asked several law professor friends about how they teach the course. The responses as fall into three categories: undergraduate corporate finance, casebook or some hybrid (what I finally went with). There is a lot to recommend each one.
The undergraduate course is the easiest to teach because there are several good corporate finance books for undergraduates. My favorite is Brealey and Myers Principles of Corporate Finance. The benefit for law students is that these books have lots of institutional details, are strong on the quantitative parts of finance and are much easier to read than cases. The downside is that a sizable fraction of my students at UCLA had an undergraduate course and I suspect that’s generally true.
I’ve been told by several people that the casebooks method is the safer bet with law students since it looks like other law course. Bill Carney has a good book aimed at law students that I used frequently. The issue here is one that’s been discussed in previous posts already. Is corporate finance a legal subject area or a tool kit that law students can use in other classes? The casebooks approach necessarily covers less of the finance tool kit than say Brealey and Myers but provides cases that illustrate the topics.
I ended up going with a hybrid course suggested by Eric Talley. Eric’s version has a lot of articles and cases designed to illustrate key from a good undergraduate book which he requires students to read. The key advantage is that the topics are ones emphasizing the legal aspects of corporate finance but covering more topics than a casebook. The downside is it’s a lot of work both for the faculty member and the students since the cases and articles are uncondensed.