May 04, 2010
Let us now praise agency and partnership law
Posted by Erik Gerding

Now that I’ve taught my last class for the semester, I thought I’d jot a few posts with reflections on teaching from the semester before I turn attention to grading and then writing.

Watching the SEC’s Goldman suit, the Senate hearings, and the financial reform legislation unfold has left me convinced that we business association teachers should consider teaching agency and partnership in the basic course (if we don’t already do so). Why? It is not just that many actual business entities are the “uncorporations” that Larry Ribstein writes about and not the “inc.s” in many law school class rooms. Consider the following two problems identified in the Goldman hearings or with respect to the financial crisis:

• Conflicts of interest (by Wall Street firms, rating agencies, mortgage brokers, mortgage originators etc.); and

• Lack of disclosure (to mortgage borrowers, investors in asset-backed securities etc.).

Of course there are lots of other potential areas of concern – like financial institution “safety and soundness,” but the two problems above are essentially about agency costs. As are two of the proposed remedies being discussed:

• Fiduciary duties (for mortgage brokers, or registered broker-dealers); and

• Greater disclosure.

We can have a discussion about whether these are the most important problems and the most pressing reforms in the wake of the crisis, but they are front–and-center in the current debate. To frame the basic tradeoffs involved, there are two analytical approaches and two approaches to teaching students. The first is to start deep in the weeds of specialized areas of securities and financial regulation. The second is to start with basic building blocks.

The place to go for those building blocks is agency and partnership law. It is funny how much of the public debate on the Goldman suit resembles debates in those chestnut fiduciary duty cases from a Business Associations case book. Could “sophisticated investors” protect themselves against conflicts of interest with greater diligence or harder negotiations on price? Or do they need (or would it be more efficient to give them) the protection afforded by fiduciary duties? And when we talk about fiduciary duties, even the basic Business Associations course should help students see that those duties could vary quite a bit from one context or form of business entity or state to another.

Perhaps it is just my own learning style, but if I had to take a Business Association class again, I’d prefer to start learning the basic concepts that Corporations borrows from Agency and Partnership rather than being parachuted into the world of staggered boards and poison pills. Don’t kids learn basketball by practicing lay-ups before moving to dunks?

We’ll see how I feel in the fall when I teach my first purely Corporations class.

Agency Law, Business Organizations, Fiduciary Law, Financial Crisis, Partnerships, Teaching | Bookmark

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