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Thursday, October 23, 2008

Ritualistic Lawyering

Jeff Lipshaw has a great post on the value of lawyers in business deals.  He posits (in part) that lawyers are not making the pie bigger in many cases, and that if lawyers always made the pie bigger then we would see them used more often on smaller deals.  He sees a different and interesting reason for lawyers:

My equally non-testable theory is that lawyers sometimes add value to deals, sometimes subtract value, and appear most of the time during the deal for the same reason neckties do:  it's part of the ritual.  There is no intrinsic reason they have to be there.  Lawyers, like neckties, have value, not because they necessarily make the pie bigger, any more than neckties make the pies bigger, but because somebody values the lawyer enough to pay more for her to be there than it cost for her to get there (marginally speaking, of course).

I think his theory has legs, perhaps in big business deals where he has experience.  For example, he notes that representations and warranties often expire at closing, significantly limiting their value in comparison with the lawyering cost of negotiating those clauses. 

That said, I think the cockfighting necktie theory goes a bit far - lawyers can add real value in ways I discuss after the jump.   

I'll admit that I have very little experience on large public company deals, though I have worked on a few.  Most of my experience comes from working on smaller deals (big company down to individual) and also litigating such deals when they go bad.  And that, I think, is where lawyers can add the most value - foreseeing how deals might sour.

Two specific points:

First, good lawyers have a wealth of experience on a variety of transactions.  They know contract language that worked and didn't work, they know business terms that worked and didn't work, they know representations and warranties that are likely to give problems, they can recognize assets that need examination (for example, in intellectual property).   Even the most experience business person likely works on a fraction of the number of transactions that a lawyer will work on, and certainly not with the same variety of transactions, parties, and industries.  When good lawyers quibble over seemingly small terms, it is because they have seen the small terms turn into large future costs.

This leads to second, just because small deals didn't involve lawyers doesn't mean that a lawyer wouldn't have added value.  Having worked in litigation and transactions, I can say with a certainty that a large percentage of business disputes I saw in litigation could have been avoided if a good lawyer had been involved in the transaction.   It is true that most deals don't sour, but enough do that I wouldn't write off the importance of a quick contract review to minimize risk if things go bad.  I think that lawyers are often not used not because they don't bring value, but because a) potential clients don't know they won't bring value, b) potential clients have not had good lawyers in the past, or c) attorney access is limited due to cash, status, retainer, etc. 

Note that I use the proviso "good lawyers."  There are plenty of bad lawyers, who negotiate just for the sake of minor victories, who use cookie cutter forms without modification rather than understanding why provisions are needed, and who don't recognize when the cost of the negotiation is exceeding the value of the requested change.   I would definitely agree that these lawyers are not making the pie bigger or decreasing transactions costs.  Perhaps there are more bad lawyers than good, and maybe that's the difference between fact and theory.

Posted by Michael Risch on October 23, 2008 at 11:41 AM in Corporate | Permalink


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