Law Firm Selection and the Value of Transactional Lawyering

Following the contraction in demand for law firms’ services during the Great Recession, “Big Law” was widely diagnosed as suffering from several maladies that would spell its ultimate demise, including excessive fees, excessive size, increased competition from in-house counsel, the commoditization of legal work, and the decline in demand for “relationship firms.” While each of these market pressures is only too real for certain segments of the law-firm population, their threat to the most elite U.S. law firms has been largely misunderstood. Even as many firms reduce their fees and contract in size, we should expect certain firms to continue to charge more and grow bigger. The current prescriptions for fixing Big Law fail to recognize that the top-tier firms within the group serve a unique market function. Focusing on a particular type of legal work – major corporate transactions – this Article proposes a novel theory of the value created by elite law firms: their private information about “market” deal terms, acquired through repeated exposure to the same types of transactions, provides clients with a significant bargaining advantage in deal negotiations. By aggregating expertise in the ever-changing and ever-increasing set of deal terms for certain transactions, law firms help their clients price such terms more accurately and thereby maximize their surplus from the deal. This pricing function – traditionally thought to be limited to investment banks – is one that cannot be replicated or subsumed by in-house counsel, other service providers, or commoditized contracts

Corporate Finance in the Law School Curriculum

Review of: Corporate Finance: Cases and Materials. By Robert W. Hamilton: West Publishing Co., St. Paul, Minnesota, 1984

The Sum of Its Parts: The Lawyer-Client Relationship in Initial Public Offerings

This Article examines the impact of the quality of a lawyer\u27s working relationship with his or her client on one of the most important types of capital markets deal in a company\u27s existence: its initial public offering (IPO). Drawing on data from interviews with equity capital markets lawyers at major law firms, and analyzing data from IPOs in the United States registered with the Securities and Exchange Commission between June 1996 and December 2010, this study finds a strong association between several measures of IPO performance and the familiarity between the lead underwriter and its counsel, as measured by the number of times a particular law firm serves as counsel to a managing underwriter within a relatively short time period. Performance is gauged according to a stock\u27s opening day returns, price performance over thirty, sixty, and ninety trading days, correct price revision, litigation rates, and the speed at which deals are completed. I also analyze the relationships between the lawyers for the lead underwriter and the lawyers for the issuer. The analysis shows some benefits from familiarity, albeit generally smaller than those associated with the underwriter-lawyer relationship. In all cases, the positive effects of repeated interaction diminish the further back in time the previous collaborations occurred. To rule out selection and reverse causality, I perform a number of tests using smaller subsets of the data to remove observations that are plausibly selection driven. I also show that the relationships between familiarity and deal quality occur independently of the level of the lawyers\u27 experience. These findings support the conclusion that lawyers\u27 relational skill can positively influence deal outcomes, independent even of substance and process knowledge. I hypothesize that the core advantage of repeated interaction is the formation of more effective lawyer-client team dynamics

The Political Ecology of Takeovers: Thoughts On Harmonizing the European Corporate Governance Environment

Economic policy debate in the United States during the 1980s focused on the dynamics of bidder and target tactics in hostile takeovers. Confronted with the largest transactions in business history, financial economists took advantage of developments in econometric techniques to conduct virtually real time studies of the impact on firm value of each new bidder tactic and target defense. For courts and lawyers, hostile takeovers subjected standard features of corporate law to the equivalent of a stress x-ray, revealing previously undetected doctrinal cracks. Congress held seemingly endless hearings on the subject, although managing to enact only relatively innocuous tax penalties on particular defensive tactics the public found especially offensive. State legislatures, closer to the political action, acted more substantively, if less wisely. Whether or not takeovers created new wealth they did result in its transfer, and at least one of the parties from whom wealth was transferred – target management – had remarkable influence in state legislatures. When labor also came actively to oppose hostile takeovers, the coalition was virtually unstoppable. The decade saw some thirty-four states pass more than sixty-five major laws restricting corporate takeovers, including states discouraging partial offers and front-end loaded offers. The 1980s have now closed transactionally as well as chronologically. The first quarter of 1991 marked the lowest level of merger and acquisition activity since the first quarter of 1980. The passing of this remarkable decade invites a broader perspective, which can be helpfully thought of as the political ecology of takeovers. An ecological perspective builds on the proposition that phenomena are embedded in interactive systems – a rich web of mutually dependent relationships. Thus, a seemingly independent event cannot be fully evaluated without understanding how it relates to the environmental forces to which it was a response and which, in turn, respond to it. What the narrow focus of the 1980s debate missed was an appreciation of the complex economic corporate governance and political environments in which hostile takeovers are embedded. Corporate acquisitions are a response to real conditions in the economic environment. The choice among acquisition techniques, most importantly between friendly and hostile transactions, depends both upon the economic motivation for the transaction and upon conditions in the corporate governance environment. Finally, conditions in the corporate governance environment are directly influenced by politics; both what is allowed and prohibited is defined, in the first instance, by legislation. My goal in this article is two-fold. I begin by sketching the political ecology of takeovers in the United States – the interaction of economics, corporate governance and politics that shaped the experience of the 1980s. I then make a tentative effort at applying the insights gained from an ecological perspective to the current endeavor to change dramatically the European corporate governance environment through the harmonization of takeover and company law in the European Community. Sheltered by the cloak of political naivete commonly allowed those attempting comparative analysis from a distance, I will argue that an ecological understanding of takeovers suggests a different approach than that reflected so far in the debate over the terms of harmonization. This approach is based on what I term the mutability principle