July 18, 2011
Corporations/B.A. Roundtable: Corporate Social Responsibility in the Basic Business Organizations Course
Posted by Erik Gerding

This post comes to us from David Millon, the J.B. Stombock Professor of Law at Washington & Lee University School of Law.

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.

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Corporations/B.A. Roundtable: Coverage
Posted by Afra Afsharipour

Thank you to Erik and the team at the Conglomerate for organizing this roundtable and the prior roundtables.  As the relatively “newbie” person participating in this roundtable, I know that I will learn much from my esteemed co-participants.

Teaching Business Associations (BA) is a privilege.  I am quite thankful that I get to teach a class that is informed by and informs my scholarship.  I love the fact that I am often the first person to expose my students to business law.  I appreciate teaching a class where I can bring in a transactional perspective for students whose minds have been shaped by thinking through a litigation-lens in their first year.

But . . . teaching BA is much more challenging than any of my other courses.  I teach a 4 unit BA course that covers agency (just a small bit), partnerships, LLCs, closely-held corporations and big public corporations.  Frankly, it is often too much material to cover in one course.  My first year, I made the typical rookie mistake of trying to cram too much into the course.  By the end of the semester the students (and I) were exhausted.  So, over the past two years I have tried to figure out how to intelligently cut some of the material.  Nevertheless, I often find myself wishing that I could teach BA as a 5 or 6 credit course.  Part of this desire is driven by my need to ensure that there is enough coverage of unincorporated entities versus corporations. Part of it is driven by the background and goals of my students.  At the beginning of each semester, I distribute note cards asking students why they are taking the course.  In a class of about 80, there is a small group who were economics or business majors as undergrads, or LLMs interested in business law.  Many of these students hope to practice transactional law or business-related litigation at big law firms.  Another handful hopes to own a business or advise small businesses.  A few are taking the course to have a better understanding of their own small family business.  Unsurprisingly, the vast majority take the class because “it’s on the bar.” 

Given this diversity in student backgrounds and goals, I find that teaching both incorporated and unincorporated entities is critical. 

  • First, this helps prepare those students who take the course in order to pass the bar.  This is not the only reason to take a BA class, but it is an important one for many of my students.  One of my goals is to ensure that I at least cover the basic concepts on the bar in a clear way. 
  • Second, it helps all of the students understand the economic and legal significance of both incorporated and unincorporated entities.  Many of my students hope to do anything other than business law. Some have not thought very deeply about the role and importance of business, whether large or small, in our society.  Some have a relatively negative view of all businesses.  One of my favorite stories is from my first semester of teaching BA when a student came into office hours the first week and said “I just want you to know that I am taking this class because it is on the bar. I have never dealt with corporations, but I hate them and think that they are absolutely awful for our country.”  I asked, “So where did you buy your sweater?”  She replied “At The Gap.”  I smiled and said, “Let’s talk again in a few weeks.”  At the end of the semester, she came up to me again and said “Professor Afsharipour, I still hate corporations, but now I think I know why.”  When I teach BA (versus when I teach M&A), I often think of her as the type of student that I am trying to reach.  It’s not necessarily that I want her to love corporations, but I want her to understand their importance, the various legal rules that apply to them, and why we have developed the corporate form vis a vis partnerships or other unincorporated entities.  I hope that understanding partnerships and corporations can also help students appreciate the increasing importance of LLCs and what motivates business people to want to organize their firms as one form or another.
  • Third, through coverage of both incorporated and unincorporated entities, I can try to introduce basic business concepts in the course at different junctures.  For example, throughout the partnership material, we talk a lot about money capital and human capital, the relationship between risk and return, and transaction cost factors.  We return to these concepts again in the corporations material.  We begin our study of corporations using a hypothetical fact pattern about three recent college graduates planning to start a new internet-related entertainment venture that they hope to sell or take public one day.  For those of you who use the O’Kelley/Thompson casebook, you should be familiar with this terrific hypothetical problem.  We talk about why forming a partnership may not help the founders achieve their business goals, especially as they plan to bring in additional investors fairly quickly.  By working through the problem at the early stages of the corporations material and returning to it throughout the rest of the course (including when discussing closely-held corporations), we address the types of capital being contributed to this firm, the risks and potential rewards of the business model, the risks associated with the relationship among the founders and other investors, and the transaction costs that the lawyers for the firm need to address.  We can then think about the way business decisions affect the choices a lawyer may be asked to make at the formation stage and the way the choices that a lawyer may make at the formation stage affects business decisions down the line.

Anyway, I will sign off now, and will save some more of my thoughts for later posts.

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Corporations/B.A. Roundtable: Teaching the Financial Crisis in the Basic BA Course?
Posted by Lisa Fairfax

As David and Erik's posts suggest, there are many different ways in which you can teach the basic BA/Corporations course, and deciding how, and to what extent, you incorporate the many different topics associated with such a course is always a challenge.  Which is why, from a teaching perspective, the financial crisis was a double-edged sword.  On the one hand, and especially at first glance, the financial crisis seemed like an ideal teaching moment, where you could grapple with issues ranging from the efficacy of the derivatives market to the impact of executive compensation on risk incentives.  More importantly, the financial crisis put issues related to corporate law, corporate governance and core economic concepts center-stage.  From a teaching perspective, this not only enhanced student interest in those issues, but also generated student expectation about coverage related to those issues.  On the other hand, particularly because many did not view the financial crisis as implicating corporate governance concerns, at least not to the same extent as the 2002 crisis, thinking about how best to incorporate the financial crisis into the core BA/Corporations class posed unique challenges--especially if that incorporation had to occur in four credit hours.  I think once you decide that you are going to incorporate the crisis into your basic course, then you must tackle at least three questions.

First, should you teach the crisis as a separate subject, or incorporate it into topics that you already cover?  It is likely that when the crisis initially began unfolding most of us simply taught it on a kind of ad-hoc basis.  I know I found myself taking an extra five (or ten or fifteen. . .) minutes before class talking about issues as they surfaced.  I can imagine others devoted an entire class or otherwise created an extra optional class to teach the issues that emerged during the crisis.  But not only did this prove time-consuming, it also made it very difficult to sufficiently cover other areas. Thus, after that first phase, I knew I needed to be more strategic.  To be sure, given the complexity associated with some of the issues related to the crisis I can well imagine some saying that it is best taught in an upper-level seminar, after students have been exposed to the fundamentals. Ultimately, I made the decision to try to incorporate aspects of the crisis into my basic course.  Of course any tactic you take involves trade-offs related to time and subject matter coverage--which gets to the second question.

On which subjects will you focus?  I decided to integrate the crisis into two areas--financial matters and shareholder rights/responsibilities.  With respect to financial matters, the traditional way in which I had been teaching this subject (consistent with the manner in which it was presented in the course book I used) was to talk about the basic difference between debt and equity, and then talk in greater detail about different types of equity shares as well as the rights associated with them.  Now I have significantly expanded the topic to talk about securitization, derivatives and all of the other financial instruments highlighted by the financial crisis.  I find that students really appreciate gaining an understanding of things like swaps and asset-backed securities, even if it is only for purposes of cocktail conversation!  Moreover, I am able to use transactional documents ranging from charters and by-laws to purchase and mortgage agreements to help explain various financial instruments.  To answer one of Erik-s questions, I at least try to teach my course from a transactional perspective, and teaching the crisis in this manner is ideal because it allows me not only to focus on transactions, but also to expose students to some basic transactional documents.   With respect to shareholders' rights, I discuss topics such as majority voting, proxy access, and say on pay, including how these issues were treated in connection with TARP and Dodd-Frank.  Because I already focused on these topics, incorporating how they emerged in the crisis did not involve that much of a change in my syllabus.

The third question is, what kind of teaching materials do you use?  I confess I need help with this one.  There are some good law review articles and even books out there that you can certainly assign.  And some course books do a better job than others of supplying materials that make certain aspects of the financial crisis teachable.  However, I find myself doing a lot of lecturing to explain the concepts, and then relying on original transactional documents to highlight those concepts, though I believe students enjoy looking at the documents of companies that have become household names like AIG and Lehman.  In any event, if others have found good teaching tools in this regard I welcome hearing about it.

In the end, I always feel like there are more subjects on which I could focus, but I am ever mindful of the need to teach the basics.  Moreover, I am mindful about the broader questions concerning student capacity and absorption.  That is, what do I want students to understand/take away, and how much can I expect them to absorb?  I try to think about these questions every time I re-visit my syllabus--though I am not sure I have come up with the right answers. . .

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Corporations/BA Roundtable
Posted by Kent Greenfield

Thanks to Erik for inviting me to add my 2 cents to this Roundtable -- I am eager to see what kind of variety we see in our various teaching styles.  I am presuming that we will find quite a bit of variation, and the correct question is whether such variety is a good or bad thing.

My own view is that such variety is a good thing -- not only because it gives us all such incredible freedom to teach by our own lights -- but it also offers students a diversity of viewpoints, which is good for them both personally and professionally.  The downside, of course, is that some professors may wander away from the core curriculum so far that students will be left lacking in fundamental concepts or understandings.  And one's own failings as a teacher in terms of curriculum coverage will not always be obvious to anyone (including the academic dean -- am I right David? -- or the students) until it is too late.  

The truth of the matter is that my own choices on topic and methodology have changed drastically over the 16 years I have been teaching the basic course.  Early in my career I taught agency and partnership in the basic BA course (at BC we call it "Corporations").  Now I cover it hardly at all.  Early in my career I spent quite a bit of time on the charitable contribution cases; now I cover them not at all.  (Though I spend quite a bit of time on issues of corporate responsibility and stakeholders.)  Early in my career I taught VanGorkom; now I do not.  Early in my career I spent a good amount of time on issues of close corporations; now I do so only to contrast how different the law is for public corporations.  Early in my career I did not do much basic corporate finance; now I spend as much as two weeks on it.

The elements that have stayed mostly the same have been an examination to Delaware law when it comes to the duties of management, an introduction to federal insider trading law, and a coverage of the M&A core cases (Revlon & Unocal etc).  And of course even in these areas the law itself has changed enough that the coverage is drastically different now than it was in the mid-90s.  (Who, for example, focused on "good faith" back then?)

So I won't exhaust all my thoughts in this first post, I will stop there for now.  But I do have one specific question for my fellow roundtable participants.  How much have you been focusing on Lyondell over the past couple of years?  Do you see it as a key case in DE law that informs how you teach fiduciary duties as well as Revlon/Unocal?  

More to come...

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Corporations/B.A. Roundtable: A Different Approach to the Basic Business Organizations Course
Posted by Erik Gerding

This post comes to us from David Millon, the J.B. Stombock Professor of Law at Washington & Lee University School of Law.

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.

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Corporations/B.A. Roundtable: Introducing Our Panel
Posted by Erik Gerding

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!

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