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.

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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.

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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.

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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.  

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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.

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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.

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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.

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When I started teaching law, I wrestled not only with whether and how to fashion a course in Corporate Finance, but also with what materials to use.  Because I determined, as a former corporate finance practitioner, that I was best equipped to teach a practical law course that addresses principally applicable legal doctrine and practice skills (founded on theory and policy, but with those aspects of the course having subsidiary roles), rather than a finance course (which my students could, after all, get "across the street" at our College of Business Administration), I first searched for an appropriate law school teaching text.  (Hat tip here to Trey and Brian for raising the issue of law-course-versus-finance-course in their earlier posts.)  

Although there then were a number of fine books by distinguished scholar-experts, none of them was my book.  In particular, none of them engaged actively the wide variety of legal and practice materials with which I wanted my students to interact in and outside the classroom.  Although I settled on one text eventually (which I thought did that best), I also supplemented it heavily with my own materials and used the book in novel ways--more as a jumping-off point than as a Bible.  I will write my own book; I have promised myself this.  But until then, I continue on with what I have cobbled together over the years.  If anyone would like any of my materials, all they have to do is ask.  They vary from simple assignments on prospectus disclosure drafting to PowerPoint slides on M&A to law review articles, including ones written by Steve Davidoff and me.

I also routinely teach a module in our practice simulation course, Representing Enterprises, one of two alternative capstones in our Concentration in Business Transactions. From time to time, the module that I have taught has varied.  I currently have been looking through a new book written by Ken Adams for teaching the M&A module that I sometimes teach in that course.  I will review that briefly in a separate post.

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Thanks Erik for putting together this roundtable.

One of the difficulties of teaching corporate finance in law school is that there is no legal subject called “corporate finance”. To be sure, various bodies of law – securities regulation, corporate law, contract, etc. – regulate certain aspects of financing transactions. The resulting set of laws, however, is a bit of a hodge-podge, and is difficult to teach as a coherent subject. I think this problem is central to the organization of most of the law school textbooks on corporate finance.

My approach instead is to organize the class around the underlying finance concepts. For my purposes the underlying concepts include: time value of money, valuation of bonds and stocks, portfolio theory (i.e. CAPM), market efficiency, option pricing, and theories of capital structure. I use an MBA style corporate finance textbook (Ross, Westerfield, and Jaffe), and I divide the class into groups and assign several numerical problem sets throughout the semester. Only after spending considerable time working through the finance concepts do I introduce any “legal applications”. I specifically divide the syllabus into “finance theory” and “legal applications”, and I would estimate that about two-thirds of the class time is spent working through the finance concepts and only one-third on legal applications (I put together a supplement reader for the legal applications). If the students walk away from the class with a solid understanding of the finance concepts, but only a surface level grasp of the legal applications I am perfectly fine with that. I think it is possible to learn many of the legal applications on the job, but very difficult for a lawyer to learn option pricing or portfolio theory, for example, as a practitioner.

Ultimately, I think finance concepts are useful to all lawyers regardless of practice area. I share Karl’s view on this point, and I wish law students had a better grasp of these concepts before they even come to law school. But since this is not the case, the corporate finance class ends up serving this basic purpose, as well as being an upper level business law class for students who want to go into corporate practice. The fact that it has these multiple purposes is troubling. I have debated splitting the class in two, creating (i) a separate course “corporate finance basics for lawyers”, similar to the “accounting for lawyers” class that is offered at some law schools, and then (ii) putting together a true upper level business law course for those who want to go into corporate practice, with knowledge of finance concepts as a prerequisite.

The multi-audience problem is a huge challenge for the corporate finance class that I teach, especially since I make the students work through problem sets. Though Erik is kind enough to call me a "distinguished scholar" in this area my class is still a work in progress. I look forward to seeing how others organize this material.

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Thanks to Erik and the gang for putting these valuable panels together, and for inviting me to provide my two cents.

It has struck me in talking with fellow corporate-law types over the years that there are a wide variety of approaches to teaching Corporate Finance - more than any other course that I am familiar with in the business law curriculum. 

This variety stems from how faculty answer two fundamental questions about the course:

1. Do you want to teach a law course or a finance course?  

Are you going to focus on cases and lawyers and rules and regulations, or on formulas and markets and problem sets?  Do you spend more time on preferred stock and convertible debt, or NPV and CAPM?  All of us touch on both, but everyone I've ever talked to leans heavily in one direction or the other.  My rule of thumb is: do you require a calculator?  If so, you're teaching a finance course.

2. How does the corporate finance course fit into your broader curriculum?

Is this one of the few upper-level business law courses, or does your school have a laundry list of niche and seminar offerings for students who want to pursue a carrer as a corporate/securities lawyer?  If you're in the former circumstance (like me), there is more of an onus on the corporate finance course to include exposure to fundamentals like accounting, and to lean toward the "law" side in the law v. finance debate above.  If not, you're much more able to let your freak flag fly, as the kids say.

In my next post, I'm hoping to talk more directly about course coverage, including an accidental discovery I've made that has turned into the best part of my class.

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I see the concept of valuation as built around the core concept of present value. Why is a 10-year bond paying simple interest at an annual rate of 10% worth $1,134 in a world where comparable bonds are issued at par with an 8% coupon? If you understand present value, you can answer that question. Bonds are worth the sum of the present values of their future cash flows – interest and the return of principal at maturity. The same approach – discounting cash flows – is the essence of valuation.

So what about CAPM? Or the Efficient Market Hypothesis? Most assets (whether they be publicly-traded equities, entire businesses or the role of lead counsel in a plaintiff’s class action) are a bit more complicated than a straight bond. So challenges like risk and the volatility of future payments call upon more sophisticated techniques than simple NPV calculations. And finance’s efforts to build models that can handle (over-simplify?) these complexities is certainly fascinating stuff. Anyone who cares about financial market regulation should understand these ideas. But I like to teach valuation as a story of slightly more complicated bonds.

Why? Because valuation is the lingua franca of clients. Exit values, EBITDA multiples, and IRR are what business folks care about. They buy a building because of the “good cap rate.” They buy stock because of the “arbitrage.” They sell a business because of the poor return on assets. And so on. All of these concepts are about cash flows and valuation. They are about more complicated bonds.

Most business folks I know don’t believe in efficient markets (because they are not good places to make money). But valuation is their religion. Lawyers need to understand it.

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Not to disagree completely with my friend and colleague Karl Okamoto, but I do believe there is value to a course in Corporate Finance in the law curriculum (as well as the inculcation of finance in that curriculum, as Karl suggests).  I also have determined that the existence and nature of an appropriate, valuable course in Corporate Finance may vary from law school to law school.  It is the responsibility of each law faculty and law school administration to design the appropriate curricular approach to educate its profile of students using the talents of its faculty.

Over the past 11 years, I have worked with my deans and my colleagues at the Clayton Center for Entrepreneurial Law here at Tennessee to design a planning-and-drafting course in Corporate Finance appropriate for our business law students, most of whom work in small and medium-sized firms on small business capital formation, M&A, and other routine business transactions (in addition to business formation and maintenance).  To do this work, they have to know how to draft basic business transactional documents and ancillary materials (e.g., board resolutions) that comply with law, contract drafting principles, and transactional norms.  This type of drafting requires specialized legal knowledge and skills, most of which cannot be obtained in full in the normal course of a three-year law curriculum, even if a student concentrates on business law in his or her second and third year.  But I believe the appropriate foundation can be set in law school.

The details of my Corporate Finance course are complex, but the basics are embodied in my portion of the transcript of a recently published panel discussion (the rest of which also is appropriate subject matter for this Roundtable).  Students who take my course typically have a background in finance or have taken our Introduction to Business Transactions course (which is an introduction to finance created and taught by my colleague, Bob Lloyd).  That course is described in our curriculum as a "[n]on-technical introduction to accounting, finance, and the functional relationships among the various actors in business transactions" and includes "[a]nalysis of business transactions with view toward needs of business clients."  Like Karl's course, Bob's course involves his own teaching materials.

I look forward to the continued discussion in this Roundtable.  Corporate finance is an important subject matter for us to consider and debate as our students prepare themselves for an ever-growing variety of careers in and involving the law.

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A few years ago I shared with Glom readers an exercise I use to expose law students to the concept of present value. Given the current state of affairs, I guess I should try and get a slot for this talk during Accepted Student’s Day. But whatever the true cost-benefit calculus of a legal education may be, one concept every lawyer should leave school equipped with is present value.

It’s simple for me.  If you do not understand deep down in your soul how it is that a dollar today is worth more than a dollar tomorrow, you cannot intelligently take out a mortgage, plan for your retirement, settle a case or, yes, negotiate an earn out provision. The mistake law schools make is that we tend to teach present value in the context of talking about earn outs or debentures or other such esoterica.  We should be talking about life's little NPVs from day one of orientation (or as I said above maybe even earlier).

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Greetings to all and much thanks to Erik and his fellow Glommers for the invitation to participate.

I should admit upfront that I have never taught a course called “Corporate Finance.”  I have taught “Mergers and Acquisitions” using Gilson and Black’s book.  I’ve taught “Private Equity and Venture Capital” using Josh Lerner’s “book of cases.”  I’ve taught a “Deals” course using my own materials.  But never a Corporate Finance class. 

My [Senior] Associate Dean asks periodically if we shouldn’t offer Corporate Finance to round out our upper-level business law curriculum.  And my answer is always, “no.”  Let me explain. 

I think every lawyer should learn something about finance.  And I mean every lawyer, not just aspiring corporate lawyers.  By “finance,” I mean a few basic concepts.  These include: 1) present value, 2) valuation, 3) enterprise value and net worth, 4) dilution and 5) basic option pricing theory.  I know these are familiar concepts to all Glom readers, but probably sound pretty technical to your average law student or lawyer for that matter.  These are certainly concepts one would encounter in a typical Corporate Finance class.  They are also concepts that I teach at every opportunity in every course I teach (including at the dinner table). 

The reason I am not anxious to offer Corporate Finance is because I’d rather see these concepts taught in Contracts, Torts, Property, Business Organizations, Tax, maybe even Constitutional Law!  My preference would be for us to teach finance in law school as a core conceptual framework rather than an esoteric specialty course for a narrow subset of our students. 

I’ll elaborate below . . .

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Today and tomorrow we continue the Conglomerate's series of summer roundtables on teaching business law courses with a roundtable on "Teaching Corporate Finance."  (Here are links to our earlier roundtables on teaching Contracts and Banking Law/Financial Institutions.)

We are joined by the following roster of distinguished scholars and teachers in the corporate finance area: Brian Broughman (Indiana -Bloomington); Trey Drury (Loyola - New Orleans); Eric Helland (Claremont McKenna); Joan MacLeod Heminway (Tennessee); and Karl Okamoto (Drexel).

Our panelists may take different approaches to teaching the course.  Some of them may not teach a "corporate finance" course.  Indeed many schools offer courses in Venture Capital, Entrepreneurship and Finance, Deals, or Analytic Methods for Lawyers that still incorporate core concepts involving the capital structure of firms. 

But there are still many choices to be made in approaching this subject matter.  Should the course focus on case law?  Should it introduce students to quantitative aspects of finance? What should we expect students to get out of the course?  (A question perhaps we could ask of every roundtable panel.)

As with earlier roundtables, we give our panelists free rein to talk about any aspect of teaching corporate finance.  Some of the topics they may discuss include:

• What are the core topics of the course as you teach it?
• Do you have a transactional focus to the course?
• Do you use simulations or problem sets? Case studies?
• How do you integrate finance theory and quantitative analysis into the class?
• Do you orient the course towards a particular type of transaction or type of company raising capital (e.g. start-up companies seeking financing, or venture capital)?  How important is debt?
• How does you course cover (or integrate with other courses in the curriculum that cover) topics like accounting?
• How much do you focus on the powers and duties of boards?  The rights of shareholders and debt holders?
• Where do you draw the boundaries among what should be taught in your course and what is/should be covered in other courses, like corporations, corporate governance, or securities regulation?
• How, if at all, has the financial crisis changed your course?
• Do you cover derivatives, asset-backed securities, and other structured instruments?
• How do negotiate the needs of students with no finance background with those with vast experience?
• What advice would you give to a rookie teacher?

Let's get started!

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