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Alicia J. Davis, Professor of Law, University of Michigan Law School
Originally published in 59 ST. LOUIS U.L.J. 823 (2015) | Reprinted with permission of the Saint Louis University Law Journal © 2015 St. Louis University School of Law, St. Louis, Missouri.
Excerpt: Introduction, Part I introduction & Part II.
[Footnotes omitted. They can be found in the original via the link above]
INTRODUCTION: WHY TEACH BUSINESS STRATEGY TO LAW STUDENTS
For the past twenty-five years, my academic and professional pursuits have straddled the line between business and law. I majored in business administration in college and then worked as an analyst in the Corporate Finance department at a bulge bracket Wall Street firm. After completing a JD/MBA, I returned to investment banking with a focus on middle-market mergers and acquisitions (M&A) and subsequently practiced law with a focus on private equity and M&A. Finally, in 2004, I found my current home as a corporate law professor. In my courses, which include Mergers & Acquisitions, Enterprise Organization, and Investor Protection, I strive to teach my students the substantive law, the ethics surrounding the practice of law, the nuts and bolts of how to execute transactions, and how corporations can be better world citizens. Though imparting those skills is a significant undertaking in and of itself, it is not enough. I also want my students to appreciate the underlying business rationales for the transactions we discuss in class and to begin to develop an intuition for sound business strategy.
A basic understanding of a client’s business, of course, aids with traditional transactional lawyering tasks, such as due diligence, negotiating a deal, and drafting acquisition agreements. For example, if a lawyer knows that her client’s acquisition target derives forty percent of its revenue from a particular customer, she will pay particular attention to that customer’s contracts with the target during her due diligence review. She also will draft the M&A agreement’s target representations and warranties section so that her client receives contractual assurances of full disclosure about the status of those customer contracts. However, in my teaching, I strive to go beyond giving my students this basic understanding. Perhaps I am too ambitious, but I want more for my students than understanding just enough about business to draft merger agreement provisions effectively. I want them to begin to develop the ability to serve as lawyers who provide legal advice in a strategic context.
The type of business knowledge necessary to put legal advice in a strategic context is different from an understanding of accounting and finance terms or specific skills in drafting, negotiating, or performing due diligence. It is something more. While it is, of course, imperative to know your way around a balance sheet or understand which contracts are most critical to your client’s business when performing due diligence, I believe the most effective transactional attorneys are those who appreciate their clients’ overarching business objectives and understand how initiatives proposed from time-to-time further those objectives.
I encourage my students to take either business courses such as finance and accounting that are taught by our business school faculty or the mini-MBA courses offered at my law school (e.g., marketing for lawyers, finance for lawyers, accounting for lawyers) to learn basic business concepts. However, in my M&A class, in particular, I am trying to do something different. Through class discussions, I strive to provide my students with an interdisciplinary experience-an opportunity to make legal decisions in a context rich with facts about the strategic interests of the businesses involved.
Appreciating business strategy is important for a young lawyer’s professional development. General Counsel, for example, provide their clients (i.e., the corporations for whom they work) with sophisticated legal and business advice. As Marla Persky, former General Counsel for Boehringher Ingelheim Corporation, states “A General Counsel needs to be a business person first and a lawyer second-not a lawyer that understands the business, but a business person that happens to be a lawyer.” She is not alone in that view. An effective General Counsel understands not only the internal aspects of the business (e.g., products, what drives revenue, financial accounting, culture, etc.), but also the external ones (e.g., market and industry characteristics, regulatory environment, macroeconomic and political environment). Thus, the role of the general counsel is not merely that of risk assessor or fire fighter; rather, the general counsel is expected to be a full partner on the management team of the corporation. General counsel increasingly are consulted early on about corporate strategic initiatives, and not just to receive their views from a risk management perspective, but also due to their roles as knowledgeable members of the business team committed to the corporation’s success.
Though outside counsel generally do not have a regular seat at the management table and, thus, are not intimately acquainted with the day-to-day operations of their clients, outside counsel who can add value with their strategic vision are appreciated by their clients. When she hears about potential regulatory changes on the horizon, a good lawyer will think about how those regulatory changes will affect her client’s business. A corporate lawyer who thinks strategically will, as well, but she also will think about whether the changing regulatory landscape presents an opportunity for potential expansion or acquisition that would be appropriate given her client’s strategic position and core competencies. In addition, lawyers communicate with different businesses every day and will almost certainly become aware of business trends. If the lawyers are trained in business and able to translate what they are noticing into actionable steps, they can become invaluable advisors to their clients.
What seems clear is that not all corporate lawyers are strategic, but many clients wish they were. Peter Bragdon, general counsel at Columbia Sportswear Company, for example, laments the fact that very few of the outside lawyers with whom he works seem to understand the importance of investing the time to learn his business. As the role of the general counsel has evolved over time, general counsel have to be more business-savvy to do their jobs effectively. They, in turn, are expecting higher levels of business sophistication from the outside lawyers that service their corporations. One exchange is particularly telling.
At the InsideCounsel SuperConference, Ted Olson, former Solicitor General and partner at Gibson Dunn, asked a panel of General Counsel from Ford, Procter & Gamble, and Allstate Insurance what they look for in their outside lawyers (other than lower fees and alternative fee arrangements). The responses included good communication, candor, appreciation for how their business operates, and having “a point of view.” On this last point, Deborah Platt Majoras, currently Chief Legal Officer at Procter & Gamble and former Chairman of the Federal Trade Commission, said,
Give me the advice. Firms think they do this. But actually, firms want to explain the law, give some legal thoughts, and then let you decide. I want you to understand our business enough, that when you give me legal advice, and we discuss it-it’s not usually yes or no, if it were that simple, we’d do it ourselves-.., you … have a point of view. Too often, outside lawyers don’t have that.
Perhaps not all clients would welcome strategic business advice from their outside counsel. However, with complicated transactions and business initiatives, it can be hard to draw a solid line between what is strictly legal and strictly business. Moreover, in my experience, if you have good ideas and useful suggestions, clients will listen. Therefore, there is ample reason to train our students, when possible, to understand business strategy.
I. MY APPROACH TO TEACHING BUSINESS STRATEGY
In my teaching, I employ a number of pedagogical methods: modified Socratic method, lecture, and problem sets. I find them all necessary to cover the material in my courses. However, one pedagogical tool is my favorite, not only because I enjoy teaching with it the most, but also because I believe it allows students to develop a skill set that they cannot develop using traditional law school course materials. The tool is the Harvard Business School (HBS) case study.
Harvard Business School prides itself on the general management education it provides its students. Though Harvard Business School professors utilize lectures, simulations, and fieldwork, as appropriate, approximately eighty percent of classes involve instruction via the case method. The case method utilizes case studies, which are written primarily by Harvard faculty and generally feature a real, not fictitious, protagonist facing one or more critical business decisions. Though the professor acts as a guide during class sessions, she is not the focal point. Instead, the case method is a participant-centered education model in which the students play a leading role in their own learning and that of their peers.
In the typical case, the main text is ten to twenty pages long, and there are five to ten additional pages of exhibits. The cases contain complex data and often have insufficient information to allow for fully informed decision making. Despite the ambiguity, each student is required to develop a plan of action and come to class prepared to defend her approach. Case discussions are about much more than the transfer of specific skills or knowledge. Though cases and the accompanying discussions are designed to hone a student’s diagnostic skills-important in today’s business world of ever-changing technology and markets-and develop students’ skills of persuasion, their primary purpose is to get students into the habit of taking decisive action on the basis of limited knowledge, a common situation facing businesspeople. In short, the case method is designed to develop what my former HBS accounting professor, Tom Piper, calls “the courage to act under uncertainty.” Cases are designed to train future business leaders who exercise good judgment–those who know which skills and analyses to apply in a situation and those who understand which facts are important and which can be ignored.
Though I have used a few HBS cases in my Enterprise Organization class, I find them to be most effective when teaching advanced students in M&A. In M&A, I use HBS cases to address what I perceive to be a gap in my students’ educations. The rest of the law school curriculum helps them “think like a lawyer.’ As a law professor, I, of course, believe “thinking like a lawyer” is important. Having the ability to think carefully and with precision, to read and speak in a manner that demonstrates attentiveness to detail and nuance, to recognize the importance of small differences and understand that legal outcomes can turn on fine distinctions, and to exercise judgment that allows one to distinguish good arguments from bad ones is invaluable. Honing these skills is something at which traditional legal education excels. However, I also want my students to begin to “think like a businessperson” in the context of real situations that face lawyers.
I use HBS cases for a variety of purposes, including skills training and supplementation (e.g., illustration of valuation analyses, review of M&A tax principles, review of state antitakeover provisions). I also use a modified version of the Darden Business School case Takeover! 1997 (A) as the basis for a three-hour hostile takeover simulation. The simulation serves as the capstone for my M&A course, and though it is set in the context of a hostile takeover, which constitutes a small percentage of deal activity, the lessons (on fiduciary duties, negotiation, deal strategy, deal structure, valuation, and regulatory constraints on M&A activity) are transferable to negotiated transactions.
Most notably for present purposes, I use HBS cases to introduce students to business strategy in an M&A context. I do not teach a course in business strategy, so I do not have the luxury of choosing from among the hundreds of HBS strategy cases. Rather, the cases I choose have to do double-duty as “strategy plus M&A law” cases. I use cases to allow students to engage in legal decision-making in the shadow of corporate strategy. This limits the cases that are suitable for my purposes.
The basic question with which we are concerned in our strategy discussions is essentially “Why are we here?” Without some business strategy, there is no (or at least there should not be a) company, much less a deal. All the things we study over the course of the semester in M&A on, for example, when it makes sense to structure the transaction as a reserve subsidiary merger rather than as a cash tender offer; when to file a Schedule TO or Form S-4; or whether, if challenged, the board’s actions will be reviewed under the entire fairness standard or the more deferential business judgment rule is irrelevant if there is no transaction.
Admittedly, it sounds strange to say this, but law school is, in many ways, too law-centric. Nowhere is this perhaps truer than in courses such as Mergers & Acquisition that purport to prepare students for transactional practice. There is no “chicken and egg” problem in deals. The business rationale for the transaction precedes the legal processes by which the transaction is executed. No CEO ever thinks, “My career will not be complete unless I can put ‘oversaw forward triangular merger subject to the business judgment rule’ on my resume.” The strategic rationale should always precede a consideration of deal mechanics and fiduciary duties.
Thus, in my view, business rationale discussions are not just “nice to have” in corporate law classes. They are fundamental to the educational enterprise. Just as many would not consider someone who does not appreciate the historical and political contexts underlying the evolution of constitutional legal doctrine well versed in constitutional law, I argue that we should not consider someone who lacks an appreciation for the strategic rationale of transactions well versed in corporate law either.
II. BENEFITS AND DOWNSIDES OF USING HARVARD BUSINESS SCHOOL CASES
There are a number of benefits to using HBS cases as a teaching tool.
1. The Human Element
The typical M&A judicial opinion discusses the motivations of the parties only to the extent they are relevant to the legal analysis the judge is undertaking. Providing deep psychological insights and background context is not the responsibility of the judiciary, of course. Judges are resolving disputes and do not provide context that is not germane to that enterprise. Most opinions, therefore, leave out the context surrounding how business decisions are made. However, in my view, coming to understand this context is a key part of my students’ education. HBS cases can fill in the gaps by providing a number of rich details about the protagonists’ backgrounds and the considerations that drive their actions.
A particularly good example of this is the American Cyanamid case study, which provides a window into managerial attitudes during a hostile takeover. American Cyanamid, a pharmaceuticals company, is negotiating for an asset swap with SmithKline Beecham when American Home Products launches a hostile bid. The American Cyanamid board ultimately agrees to accept AHP’s offer, which results in a substantial number of employee layoffs. The case study affords an opportunity not only to discuss corporate strategy, deal structure, and the law surrounding hostile takeovers, but also the management team’s actions in light of the interests–the human interests–they were taking into account during this process. Particularly telling is a case exhibit containing a letter from the CEO that describes the emotional tie he has to the company he has served for thirty-seven years and the responsibility he feels to the employees who, in his words, “had given their best to the company.”
Another example is Circon. This case study focuses on Circon Corporation, a medical device maker that becomes the subject of a hostile attack from U.S. Surgical Corporation. The case, co-written by Harvard Law and Business School Professor Guhan Subramanian, is one of my favorites to teach. The case is rich with information that affords an opportunity to explore Circon’s business strategy, the reasons why Circon became a target of U.S. Surgical’s unwanted advances, U.S. Surgical’s takeover strategy, and Circon’s defense strategy. One of the nicest features of the case is that it provides the students with a window into the thoughts and actions of managers during a hostile raid. In class, we discuss a board member’s seeming struggle between loyalty to his friend, the CEO, and the fiduciary duties he owes to the corporation and the shareholders. We also critique the CEO’s actions, as he struggles to keep the business together during the hostile raid, while seemingly putting up roadblocks for any sale of the company. Students debate whether the CEO is out of touch and needs to be reined in or whether he is a man with three full-time jobs (i.e., running his pre-existing business, integrating a new major acquisition, and fighting off a hostile bid) who is simply trying to protect the company he built from an attack that unfairly takes advantage of temporary weakness.
2. Student Interest
My students love the HBS cases and wish we did more of them during the semester. As the quotes below illustrate, over the years, I have received a great deal of positive feedback from students about the use of HBS cases: “The course was especially helpful for me due to the HBS case studies [that] exposed students to business considerations that are at play in M&A”; “There were moments when the class felt more like a business school class (which I loved) and I believe these helped us to understand the underlying rationales behind the transactions… we were discussing.”
Cases have interesting fact patterns and are usually written in an entertaining fashion (“X was staring outside the window at his villa on a rainy day wondering what to do about xyz business problem”). In one case, after being ousted by the board, the CEO goes into the boardroom in the middle of a board meeting and starts removing personal artwork. Also, comically, in the Circon case, an insurgent director who wins election to the board in connection with a proxy fight is housed in a low-budget motel room that he describes as “pretty long in the tooth, complete with a paper sanitary band over the commode.” He is told he has to stay there because supposedly there is no room for him anywhere else in the entire city. It is clear that he is not welcome. The colorful storytelling in the HBS cases is something my students enjoy.
3. Primary Source Documents
Another nice feature of HBS case studies is that they often contain multiple relevant primary source documents, something not available in judicial opinions. As mentioned above, the Dell case has copies of the actual slides presented by the special committee, consultant and financial advisor. This allows the students to look at the material the board members were reviewing as they were deciding on a course of action. The Circon case contains one of numerous letters from angry and disappointed shareholders urging the CEO to get serious about selling the business and threatening him with (another) proxy contest. In American Cyanamid, there are reproductions of a press report and letters from managers giving their perspective on what happened during the hostile raid. In a letter to the board, the CEO states that he thinks a celebratory board dinner to commemorate the end of management’s tenure would be inappropriate, presumably because a lot of employees lost their jobs following the takeover. It is one thing for me to tell students that shareholders can be activists or that managers care about their employees; it is another for them to hear from actors in real business situations in their own words.
The Circon case comes with a video that professors can purchase that not only features a wonderful policy discussion on the use of the poison pill by a panel of corporate governance experts, including Judge Jack Jacobs, then Vice Chancellor of the Delaware Chancery Court, but also showcases the two main characters in the case study, the CEO and his long-time friend and fellow Circon board member, presenting their perspectives on the events that transpired. These materials serve as a foundation for a more enriched case discussion than typically exists when the only source material is a judicial opinion.
4. Forward-Looking Orientation
Business school cases are designed to provide a problem to solve. Students often are put in the role of the protagonist (the CEO, the Board) and forced to answer the questions “What would you do and why?” Instead of a post-mortem on a deal gone bad or accusations from shareholders of fiduciary duty breaches, in business school case discussions, we can take a forward-looking approach and ask what should happen. This forward-looking perspective lends itself to open-ended exploration that allows students to be more creative and flexible.
B. Potential Downsides
HBS cases as a pedagogical tool also have some limitations, as described below.
1. Law Student Capabilities
There is a lot of material that will be unfamiliar to law students–not just the accounting and financial terms, but information on operations, marketing, and strategy, as well. HBS cases are intentionally designed so that they cannot be “cracked” by just one person. Business school students review the cases with their study groups, often made up of students from diverse professional backgrounds, which makes it easier for the students to prepare for class. During class, resolution is achieved by drawing on the expertise of all the students in the room, whether it is in finance, marketing, operations management, strategy, accounting, or general management. This diversity of experience is almost always lacking in a law school classroom where many students have very limited work experience in a business capacity. As a law school professor, I fill in far more blanks during case discussions than my business school professors did when I was a student.
I am usually fortunate enough to have at least a couple of JD/MBA students in my class (and sometimes, just MBA students) with business school case method experience and substantive business knowledge. They are also experienced in case analysis and can provide insights that move the discussion along. In winter 2014, I taught the Dell case for the first time and was fortunate to have a student who worked for Dell in a technical capacity before coming to law school. During our class discussion, the student was able to offer insights on Dell’s culture and historical strategy. I am not usually this lucky.
2. Instructor Workload
Preparing for any class is a lot of work, but I find that preparing a new HBS case can be far more time-consuming than preparing to teach the typical judicial opinion. Most of the cases have teaching notes, but not all of them do.When teaching a case without a teaching note, I have found that it takes me several hours (often in excess of a whole day’s work) to perform the analyses and background research to teach the case effectively. Even with a teaching note, a substantial amount of time must be invested in fully understanding the case and adapting it for a law school classroom. I have a Harvard MBA, so I spent two years analyzing business school cases. I also spent several years in practice as a banker and a lawyer, so I have had the opportunity to see a number of different enterprises and challenges faced by companies as they were making decisions about financing and M&A activity. Even with this background (which I acknowledge many law professors do not share), studying cases to fully understand the drivers of a particular company’s strategy takes a great deal of time. In addition, supplementing the case study with additional legal materials and finding ways to introduce legal concepts into the discussion are necessary to make a case most useful for teaching law students. I also have to develop teaching plans to help me guide the in-class discussion so that it is neither too tightly controlled, nor too discursive. These activities also take time. However, I find the effort to be well worth it.
3. Potential for Knowing What Happened in Advance
The best case studies are those that do not reveal the outcome of the dilemma. It is easier for students to advocate for one position when they do not know what the protagonist decided. However, though that is the ideal, some cases are not structured that way. The Hewlett Packard case, for example, reveals that the shareholders approved the HP/Compaq merger, albeit by a slim margin. So, as opposed to the students making a decision about the best course of action ex ante, the students know the outcome in advance and are asked to assess the decision making process and whether the decision was likely to be a good one for HP.
Likewise, class discussions are richest when students do not know how the decision turned out (e.g., in the long-run, was acquiring Compaq a good move for HP?) because students are more willing to take sides in a debate when they do not know what the so-called “right” answer is in advance. Unfortunately, the cases that are most relevant for a law school M&A class and the ones I use tend to involve high-profile subjects such as Hewlett Packard and Time Warner. Though some of my students are more in tune with the business press than others, even students that rarely or never pick up The Wall Street Journal have some sense for how these business combinations have fared over time.