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American Bar Association

ABA Section of Business Law


ABA Section of Business Law
Business Law Today
July/August 1999


Teaching problem solving

New business lawyers need to know how to find the deal

A new task force: two views

The Task Force on Business Lawyers as Problem Solvers was established in 1998 to consider ways in which the education of younger business lawyers can be improved not simply by skills training, but by focusing their attention of the problem-solving dimension of transactional lawyering.

Two people involved in the creation of the task force, James Freund and Donald Langevoort, discuss the project — one from the standpoint of a business lawyer, the other as a law school professor.

A call for ideas

The Task Force on Business Lawyers as Problem Solvers held its first meeting at the ABA’s 1998 Annual Meeting in Toronto. The task force is interested in receiving ideas and suggestions from members of the Section. The task force would also be grateful for access to copies of law firm training materials that address the problem-solving or strategic side of deal-making. Materials relating to negotiated corporate acquisitions are of special interest, because this will be the prototypical transaction of the first book project.

Please communicate with Professor Donald C. Langevoort at Georgetown University Law Center, 600 New Jersey Ave., N.W., Washington, DC 20001; 202/662-9832; e-mail langevod@law.georgetown.edu.

Comments and suggestions for the book project can be sent directly to James C. Freund, Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Ave., New York, NY 10022-3897; 212/735-2000; fax 212/735-2000.

A lawyer’s perspective

By JAMES C. FREUND

Freund is a retired partner at Skadden, Arps, Slate, Meagher & Flom LLP, in New York City, and is now of counsel to the firm.

Smith is selling his business (Smithco) to BigCorp. The parties have agreed in principle on price, half of which will be contingent on Smithco’s future earnings as a BigCorp subsidiary. Smith will stay on during the earnout period as Smithco’s chief executive.

In negotiating the acquisition agreement, Smith raises the concern that during the earnout period BigCorp will force Smithco, against Smith’s better judgment, to expand into new sales territories or introduce new products — with a resulting adverse effect on Smithco’s earnings during the years that measure the contingency, and thus a lower purchase price. To obviate this, Smith demands a veto right over territorial expansion and new products during the earnout period.

BigCorp is unwilling to restrict its ultimate control by delegating this power to Smith. BigCorp argues that any such potential expansion or introduction of new products would be for the overall good of the business, even if it has an adverse short-term effect on earnings. And, BigCorp contends, "a reputable company like ours would never be influenced by the possible reduction of Smith’s earnout in making any such business decision." "I’m not questioning your motives," Smith replies, "just your timing." The parties start to dig in, and the impasse is causing some real tension in the deal.

For us business lawyers, situations like this comprise our daily diet. In a transactional practice, nothing comes easy. There are invariably two opposing points of view on significant issues — and the parties will even clash, as here, over a circumstance that may never come to pass. Every disputed issue has to be resolved in order for the deal to take place. And the business lawyers bear the primary responsibility for getting it done.

Viewed in its broader context, this activity falls under the rubric of problem solving. Unless you’re a problem solver, you’re unlikely to be an effective business lawyer. And the problems that stand in your way aren’t limited to transactional matters (although most clearly etched there) — they can involve dealings with regulatory agencies, tax planning, strategizing about how to protect intellectual property, and on and on.

All this calls for a very activist posture on the lawyer’s part. Devising and then implementing constructive measures to advance our client’s interests — that’s how we business lawyers contribute the kind of value to justify our hefty fees.

Although this takes place against the backdrop of our legal system, there’s very little pure "law" involved in much of what we do. Rather, what’s at issue are such matters as deciding between alternative courses of action (each of which is legal but carries differing risks and rewards), or negotiating matters of agreement (where, in effect, the parties are creating their own law), or delving into financial strategies or techniques — all far removed from a legal text.

But when young lawyers emerge from the law school cocoon — flashing their freshly minted analytical bent of mind — and take their places on the firing line practicing business law in firms or corporate legal departments, most of what they know anything about is "the law," as taught primarily through the study of appellate court opinions. Some law schools, to be sure, have made recent strides in exploring the problem-solving area; but in the main, the new graduates are unlikely to have much more than a passing acquaintance with what is about to become the grist of their mill. And the continuing legal education courses they take, while providing useful substantive information about relatively narrow areas of practice, don’t usually focus on what it takes to be an effective practitioner.

The traditional method of addressing this gap has been through on-the-job training. But this can be, at best, hit or miss. For young associates in law firms, the emphasis is on doing the tasks assigned — less so on how to do them, and very little instruction on more intangible matters such as how to handle clients or exercise good judgment. Constructive feedback can be quite helpful, but is often lacking from harried partners. Associates, for their part, may be loath to ask questions that imply a need for close supervision. And without specific guidance, it may be difficult for a young lawyer to abstract a general principle usable elsewhere from merely observing what has occurred in a fact-specific situation.

It’s this sizable gap in the education of young business lawyers to which I’ve addressed myself over the years, in books, at professional forums, and through instructional videotapes. That’s why I was excited when Jim Cheek asked me to join the new task force of the ABA Business Law Section dealing with Business Lawyers as Problem Solvers, and to edit a book by which experienced practitioners can provide useful advice on problem solving and related transactions skills to young lawyers caught in this gap. In addition, I would help Don Langevoort with a similar but more academically oriented book aimed at law students, and work with the task force on organizing seminars and programs based on the books and featuring both practicing lawyers and academics.

The book I envision for young lawyers would take the reader step by step through one or more typical business transactions, from the initial preparations right through the closing. A sidebar to this article (below) contains my preliminary views as to what general topics would be covered. The emphasis would be not on the fine points of a particular type of deal, but rather on considerations that are illustrative of a broader category of business transactions, with special attention given to problem-solving.

Because, let’s face it, problem solving is the name of the game. That’s how we have to shake our unfortunate image among some business people as breakers, not makers, of deals. Good business lawyers never stop at the point where they’ve spotted the problem — they go on to solve it. Lawyer-negotiators don’t allow a seeming impasse to sabotage an otherwise viable deal; rather, they devise a favorable compromise, which fulfills the basic needs of both sides without subjecting either to serious adverse consequences.

So, for example, let’s return to Smith and BigCorp. How would a couple of able business lawyers resolve this impasse and move the deal ahead? Well, they would first come to realize that, behind all the rhetoric, what Smith and Bigcorp are really interested in are two different things. Bigcorp wants to be able to control the expansion/new-product business decisions; Smith is concerned with the size of his earnout.

So, the lawyers reason, let’s split it up this way: Bigcorp will have the final say on expansion/new-product decisions, as befits its status as the owner of the business; but if Smith declines to consent to the move in advance, then the results attributable to the expansion or new product — whether they turn out to be a profit or a loss — will be ignored in computing Smithco’s profits for earnout purposes. Each party is protected in so far as what really counts in its eyes, and now everyone can move on to the next issue. (Except, of course, as every business lawyer knows all too well, there will still be some huffing and puffing about how to allocate overhead and other indirect items to the included and excluded portions — but, hey, that’s just detail; the key breakthrough has occurred, and this issue will not hold up the deal.)

But it’s not enough for the young business lawyer to take away from such an example merely that this is a good way to solve a frequent problem in earnout deals (which, after all, aren’t that common a form of transaction). Rather, he or she should be able to abstract from this a more general principle that will be useful in other situations — not limited to earnouts or even to acquisitions. If I were the young lawyer’s mentor, here’s how I might state the proposition.

Lots of times in a deal you’ll encounter an impasse on an issue where there seem to be only two possible resolutions, and neither side is willing to agree to the outcome that’s favorable to the other side. But often, as here, it’s a false dichotomy — you’re not limited to a choice between the apparent "either" (if Bigcorp controls the expansion/new-product decision, Smith’s earnout will be adversely affected) and the "or" (for Smith to protect his earnout, he must have a veto over that decision). In devising creative compromises, a key tool is having the insight to split up a seemingly indivisible issue like this one, so that you satisfy the other side’s real concerns (which are generally narrower than those they have expressed), while protecting your client’s essential interests (which are often more limited than those you’ve previously advanced).

This is the kind of educational insight — both analytical and practical — that we’ll strive to get across in the books and instructional programs undertaken by the task force. Any thoughts or materials from members of the Section on how best to accomplish this — how you’ve been handling this kind of training in your own practice — would be much appreciated. With your support, we hope to have a significant positive effect on the early development of business-lawyering skills.

Possible topics for a book on problem solving

Here’s my abbreviated first cut at the topics to be covered in the book on problem solving for young business lawyers referred to in the article — organized in terms of the chronological steps to be taken in a typical business transaction such as a corporate acquisition.

1. You’re part of a legal team

The need to relate to the partners, senior associates and other supervisory individuals you’re working with, including matters of responsibility, authority, initiating contacts and disagreements with seniors.

2. Your team has a client

How to handle the real party-in-interest, involving such concerns as seeking out the client’s views, keeping him or her informed, knowing when to give advice and when to duck, and helping the client make difficult decisions.

3. Your client will have engaged other professionals

Your dealings with investment banking firms, outside accountants, public relations firms, other unaffiliated lawyers providing advice in specialized areas, and so on.

4. Gathering information pertinent to the deal

Assembling actual material regarding the other company and your own, as well as the personalities involved; being prepared on pertinent legal questions; collecting agreements/documents from other deals as possible useful models; and attempting to understand what forces are driving the business deal on both sides of the table, in order to grasp the relative leverage and gain insight into each party’s strengths and weaknesses.

5. Deciding on the transaction structure

Advance planning as to the most effective structure of an acquisition (with regard to tax and accounting implications, competitive bidders, shareholder votes, strategies to protect public company deals, etc.), as well as material covering other significant forms of business transactions.

6. Working out initial negotiating strategy

As a seller, will you try to involve multiple buyers? As a buyer, will you try to preempt the bidding? What are your side’s realistic expectations regarding price and other key issues? Who will handle the price negotiations? Which side will put the first number on the table? If it’s your side, how much bargaining room will you give yourself? Which nonprice issues will be raised in the opening rounds and which saved for the contract negotiations after agreement in principle has been reached?

7. Handling the price negotiations

Although the young lawyer is unlikely to be directly involved in the crucial negotiations that take place in the early rounds, he or she should become aware of what’s involved in the kind of positional bargaining that forms the mainstay of most commercial deals — staking our original positions, supporting these with rationale, adopting a constructive concession pattern, striving for credibility, and ultimately achieving a compromise result satisfactory to both sides.

8. Drafting and negotiating the definitive agreement

Assuming agreement in principle is reached, the next big step — the one that most clearly involves the lawyers, and not only in acquisitions — is the drafting and negotiation of the definitive agreement. That will probably be the largest segment of the book, including such matters as whether the parties should sign a letter of intent; how to use or negate the advantages inherent in drafting the contract; responding to the other side’s first draft; dealing with unbalanced bargaining authority; the due diligence function; negotiating tactics; desirable qualities for a negotiator; how to resolve typical recurring issues over representations, indemnification, covenants, conditions, closing and termination provisions; the use of disclosure schedules and reference out to financial statements; the contractual shorthand of "materiality," "knowledge," "best efforts," "ordinary course of business," "consent not to be unreasonably withheld," and so on; laying the groundwork for compromise; and knowing when to stop negotiating and get the deal signed.

9.The SEC and disclosure requirements

Understanding the role of full disclosure, the process of assembling proxy statements and prospectuses, how to deal with the staff of the SEC, and so on.

10. Other governmental authorities

Introducing the reader to the world of regulators who hold some power over deals — the antitrust agencies, those ensuring compliance with statutes regulating particular industries, state and local governmental authorities, and so on — and addressing how lawyers should interact with these regulators to best achieve their client’s goals.

11. Employment-type issues

Including employment agreements with matters of compensation, perks, termination for cause, and noncompete agreements; transition issues, such as how existing options will be handled in the deal; and social/cultural concerns, like management positions and board seats, succession planning, and integrating the different business approaches and historic traditions.

12. Problems arising prior to closing

What if the needed consents from third parties are not forthcoming; what if an undisclosed skeleton is unearthed from the seller’s closet; what if a third party brings a lawsuit against the seller two days before the closing?

13. The closing

A primer on how to run an efficient closing, including the handling of officers’ certificates, lawyers’ opinions, third-party documents and the like.

14. Miscellaneous

A potpourri of other matters such as: dealing with boards of directors and the concept of fiduciary duty; the terms and conditions of typical securities used in business transactions; complications that ensue when a purchase price is payable wholly or partially in the buyer’s stock; positioning matters so as to be able to successfully "spin" the deal to the Street; various lawyer skills that come to the fore in a transactional or problem-solving context, such as due care, self-starting, productivity and meeting deadlines; the counseling function — helping clients make decisions, especially when not all the facts are in, or some matters are inherently ambiguous, or the client doesn’t know his or her own mind; the troublesome issue of deception in negotiations and where puffery crosses over the line into unethical behavior; and, last but not least, other ethical issues that can arise for the lawyer.

— James C. Freund


An academic’s perspective

By DONALD C. LANGEVOORT

Langevoort is a professor of law at Georgetown University in Washington.

L aw schools, law firms and corporate legal departments are giving more attention to the task of training young business lawyers.

Yet there is still no well-articulated notion of what makes an "excellent" business lawyer. To be sure, basic skills in legal analysis, negotiation and careful drafting are essential. But most experienced practitioners argue that there are many other special qualities that distinguish those who are simply competent from those whose creativity and problem-solving skills repeatedly add distinct value to their clients’ dealings.

As a law professor, I am particularly curious as to what law schools can do to help develop a stronger image among students of the kind of business lawyer who contributes vitally to successful transactions, rather than one who (as some popular critics would suggest) frustrates them. The Task Force on Business Lawyers as Problem Solvers is an opportunity for academics and practitioners to join together in this mission. A problem-solving orientation is valuable not only for what it teaches about integrating legal knowledge with practical insight but also for the opportunity it presents to introduce a strong dose of professionalism into the educational process.

The idea that there is an "art" to business lawyering is by no means revolutionary. The writings of my task force colleague Jim Freund come to mind immediately. His books and articles on mergers and acquisitions, client counseling and negotiation go well beyond the need to understand the prevailing legal rules and create airtight documentation.

Some continuing legal education programs now also have components that go beyond simply talking about new legal doctrine and trends and speak to the more global concerns about getting a deal done right. Drawing from his long practical experience, Ed Bernstein of Graham & James in New York has developed a one-week mini-course on the strategies of contract design, which he has offered at the University of Illinois, Vanderbilt and the University of Oregon. I suspect that many law firm training programs have also come up with creative means of addressing deal-making strategy — and the task force would very much like to learn more about those that do.

Just as practitioners have taken note of the art of making deals, law professors have begun to see science in it as well. Most well known here is the work of Professor Ron Gilson of Columbia and Stanford, who argued in a famous Yale Law Journal article that business lawyers are "transaction cost engineers" who would benefit from a more sophisticated understanding of the economics of contracting. This idea has led to the development of a growing number of courses at law schools around the country that study the deal-making process, sometimes bringing in local lawyers as resources. The "Deals" course designed by Gilson and his Columbia colleague Victor Goldberg is the most celebrated effort along these lines.

Drawing from the explosion of work on judgment, decision-making and conflict resolution, some schools have also added materials on the psychology of contract formation and other forms of economic behavior. The most innovative law schools are coming to see the need to reform a portion of their curriculum to more closely resemble that found in MBA programs, with an emphasis on richly detailed case studies, strategic decision-making and teamwork solutions. They are also trying to give their students a better understanding of the language and skills of accounting and financial analysis, so that they can speak more fluently to the business side of the deal.

To me, there is great promise in joining the arts and sciences of transactional lawyering. Law students need to become familiar with the process of examining client objectives and evaluating different courses of action in a proposed transaction. For example, in a sale of a business, how would you think about the trade-offs between a fixed price and some sort of earn-out? What is the role of representations and warranties? Are they just something that buyers want and sellers resist, or is there some more rational way to allocate the risk of informational uncertainty (that is, finding the person who can produce and verify the information most efficiently)?

By looking at a series of different transactions from the standpoint of "value-added lawyering," students can begin to see the common kinds of issues that exist in deals and refine their intuitions about how to help design the best contractual structure. They can also begin to gain a sense of the potential for dysfunctional lawyering — lawyers’ insistence on belaboring the unimportant, or taking hard-line positions out of habit, fear of being second-guessed or a desired posture for their clients, even though there is little economic sense to what they are pushing.

The task force was established to help connect the efforts of lawyers and academics more closely, with a view toward producing books and other educational materials, plus a series of live programs, that will help both law schools and law firms with the training of younger business lawyers. Academics very much need the help of the bar. While many of the faculty who are innovating in this area have some first-hand experience as business lawyers, we do not necessarily have a large stock of empirical evidence from which to draw in bridging the more abstract insights of economics and psychology to the realities of the lawyering process.

Our scholarship and teaching could benefit considerably from case studies and other kinds of data drawn directly from legal practice, as well as the critical evaluation of our ideas by practicing lawyers. These same kinds of case studies could also be helpful to lawyers who teach in continuing legal education programs, both for in-house training and for wider professional audiences. In turn, practitioner-led training might gain from a better appreciation of the insights academics have recently been offering about the dynamics of business transactions.

Obviously, creativity and problem-solving skills can never fully be taught in the classroom. Nothing here is meant to suggest that experience will not be the lawyer’s best teacher, or that most of the training of young business lawyers should not be spent on more basic analytical and practical legal skills. But a more sophisticated conceptual understanding of transactional practice and some early exposure to examples of good strategic decision-making should make lawyers more critical and adept "learners from experience" as their professional training evolves.

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