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Monday, September 30, 2013

The Wine Spectator Serves Up An Excellent Example of The Value Added by Corporate Law

I haven't posted anything in 3 weeks, mainly because the weather has been too good to sit at a computer for any length of time.  However, I happened to come across an article in the October 15, 2013 edition of The Wine Spectator that provided a pithy example of the value of corporate law; In contrast to the populist cliche that corporate law is just about making rich people richer at others' expense, this little story shows how corporate law can solve a problem that had paralyzed a business from making good decisions and thereby enable the business to grow to make a whole community better off.

I'll set the stage (all the quotes in this post are from the article I have linked to:  "Campo de Borja" is a "quiet corner of northern Spain, a dusty red blur of rocky hills and sleepy towns located on the western border of the region of Aragon."  On the slopes of Moncayo, a mountain about 7,000 feet high near the town of Borja, garnacha (grenache in French) has been grown and made into wine for centuries.  "On a small plateau perched at 3,000 feet, a modest parcel of vines is blooming, thrusting green canes toward the sun. This is el Tablon, a vineyard where the average vine is 104 years old. Their trunks are as thick as a man's torso, undulating masses of wood that have grown slowly in this difficult environment for decades."

"Aragon was devastated by economic isolation during Francisco Franco's decades-long reign. In the 1950s, cooperatives became a way for farmers to pool their resources. Borja's cooperativa, Agricola de Borja, was founded in 1958."  Jose Sanmartin, the hero of our story, became general manager of the cooperative early in the 1980's.  "Borja was doing well selling gallons of cheap wine in bulk, but Sanmartin knew those days wouldn't last. And yet, growers were doubling down on high-volume wines, ripping out Borja's best asset by the roots.... Sanmartin believed Borja's future lay in good wine.  In 1990, the Borja cooperative began bottling its better wines, naming this new brand Borsao, the ancient Celtiberian name for Borja."  With the 1992 vintage, Sanmartin began selling Borsao to a U.S. wine importer, who was soon buying 40,000 cases a year.

Now we come to the business problem.

"One day in 1997, the U.S. importer "called Sanmartin with a problem: When he had opened wines from the latest shipment, a viscous, oily mess had oozed out of the bottles. The co-op had not dosed the wine with enough sulfur before bottling, and now the importer had 10 shipping containers—about 9,000 cases worth of wine—that were undrinkable".

Sanmartin understood exactly why the problem had arisen. "Cooperatives are not, by nature, innovative. Every grower in the organization gets a vote in company decisions. ... Men who had kept their farms afloat for decades thanks to their arrangement with the co-op were not prepared to give in without a fight. 'It was not easy to convince hundreds of winegrowers to change their minds,'says Sanmartin. 'They had to adjust to the idea that they would be more paid based on quality rather than on quantity of grapes produced.' But in the end, a majority recognized that adjustments were necessary."

And here is where corporate law provides the tool to solve the problem.

"To create a more nimble operation, Sanmartin proposed creating a separate corporation: Bodegas Borsao. This new entity would source its grapes from the co-op and produce all the wines itself. Co-op members would be shareholders in the enterprise, but the business would be run by a professional management team. And most crucially, growers would be paid based on the quality of the fruit they harvested. ...In order to compete in the new global wine world. Bodegas Borsao S.A. was incorporated in 2001."

And thereupon three things happened:  First, "Sanmartin made quality and control the main focus in the cellars."  The corporation hired a technical director in 2001. "Quality has been the first priority since he came," Sanmartin says. "He makes sure nothing goes wrong."

Second, the new corporation "authorized a cellar expansion", installing new tanks better suited to quality control.  With greater confidence in the quality of Borsao's operations, the U.S. wine importer "asked for a new product ,,, for the U.S. market" that would be of higher quality and carry a higher price point (known as "Tres Picos")..

Last, the U.S. importer introduced an Australian vintner to the region and the two of them formed a joint venture with the new corporation -- not the cooperative --which produces an even higher rated and higher priced wine (known as "Alto Moncayo").

The author of the article closes his article with a paragraph that recognizes the economic significance to the Borja community of the decision to abandon the cooperative structure for the corporate structure:

"If it weren't for the ingenuity of Bodegas Borsao, it's unclear what life would be like in this small town. Perhaps all the old vineyards would have been ripped up  ... and small growers would have abandoned their farms for the city. But today, the old vines remain rooted to the slopes of Moncayo, as timeless as the mountain on which they grow."

We live in a world in which the words "corporation" and "corporate" are stereotyped epithets, usually paired with words and phrases like "greed" or "soul-crushing".  A movie set in a corporate setting can be counted on to reinforce the populist cliches and portray the corporation as some sort of extrusion of hell on to the surface of the earth.  In contrast, other ways of organizing people, such as cooperatives or governments, are portrayed as noble expressions of democracy, regardless of the reality of their many flaws (cumbersome decisionmaking, political entrenchment, self-dealing, etc.)  More intellectual analysis from winners of the Nobel Prize for economics like Ronald Coase or Douglas North have shown that the corporation is merely a form of economic technology that improves decision-making and resource allocation over other forms of organizing people and their resources, such as contracts or, in the case of the Borja wine-growers, a cooperative.  So I set this example out as a reality based counterweight to the populist and romanticized stereotypes and I hope it serves that purpose.



Tuesday, September 10, 2013

Bruce Ackerman's Incredibly Arrogant Arguments To Maintain the Status Quo in Legal Education

On the 6th, the Washington Post published an opinion piece from Bruce Ackerman, Yale Law School professor, "Why Legal Education Should Last for Three Years" in which he argues President Obama "was dead wrong" when he suggested that law school should only last two years.  The editorial is full of hyperbole, labeling the idea "tragic" and stating "If Obama’s 'cost-cutting' measure were adopted, it would impoverish American public life." 

His main argument is that in three years of law school, students somehow acquire much deeper knowledge about "statistics" and "big data" than they could in only two.  That argument, by the way, is made entirely without any use of "statistics' or "big data", which I found both ironic and telling.  One thing I have noted about law school professors: they spend so much time listening only to themselves and people with similar views that they lack the habit of anticipating the weaknesses in their arguments that practicing lawyers develop as they operate in adversarial settings. Or maybe the statistics about the benefit of the third year of law school are so earth-shaking they are being kept secret.

Ackerman fears that without the benefit of a third year of law school, lawyers will be reduced to "secondary figures who prepare the way for 'experts' to present the crucial arguments before administrative agencies, courts and legislatures."  It's funny, I always thought clients were supposed to be the primary figures, but I guess at Yale they teach you that lawyers are to be the primary figures.  What does that relegate clients to? 

Even worse, "Decision-makers with two-year law degrees will proceed to rubber-stamp the expert testimony that seems most impressive because they aren’t prepared to test it in a serious way."  Deliciously, Ackerman seems to believe that the only competent "Decision-makers" in the future will be lawyers.  I guess the rest of the world, without the benefit of that all-important third year of law school, just has no role to play in making any decisions ever again. 

Perhaps you are starting to see why I use the phrase "Incredibly Arrogant" to describe Ackerman's perspective in the title of this post. To him, the only people who are qualified to make decisions and be primary figures in policy debates are those who have had the blessing of that third year of law school. 

But even if we ignore the condescension, look at how overstated his claim is.  All the fields he offers as examples of areas where statistics is used in debate are evolving rapidly.  It's ludicrous to think that the limited exposure one might get in the third year of law school is either sufficient to qualify a graduate to challenge an expert in a particular field ten or fifteen years later. 

Here is the final howler, the one that actually prompted me to write this post, actually: "Once two-year graduates move into practice, they won’t be able to deal adequately with bread-and-butter issues of antitrust, intellectual property or corporate law, let alone with the challenges of civil rights or environmental law. It is frivolous to suppose that these lawyers would pick up the key skills on the job."

Wow.  What kind of students are they admitting to Yale Law School these days that they could not learn "antitrust, intellectual property or corporate law" on the job?  How lucky they are to have a paternalistic figure like Ackerman to help them overcome their limitations.  Granted, Yale has a reputation for not turning out lawyers who are trained for private practice (and God knows Ackerman's ridiculous generalizations reinforce that reputation), but Ackerman seems to be saying something different, that the students he observes are inherently unable to educate themselves on the job, which is an amazing slap in the face.  

So look, here is a personal account to disprove Ackerman's condescending assertion.  At my equally prestigious law school, I had ZERO academic training in any of the main areas of a New York corporate practice --  M&A, securities offerings or credit documentation. I had ZERO practical or clinical coursework of any kind, business or litigation.  My only exposure to the Bankruptcy Code came from two classes on avoidance at the end of the segment in Commercial Transactions that covered with Article 9 of the UCC.  I cut 1/3 of my Contracts classes and every class in Evidence after the 4th one.  When I showed up for work at a top tier New York law firm after graduating, I was assigned to its banking and credit practice area, which was and is a market leader.  Within that practice area, I wound up devoting a large chunk of my time to restructurings and chapter 11s, due to the economic environment of the day. 

By Ackerman's reckoning, I must have been unable to "deal adequately" with the "bread and butter" issues of these practice areas, and my employer must have been "frivolous" to think I would learn what I needed on the job. 

Well, I spent thirty years in that firm, making partner after the first eight of them, and devoted most of those thirty to the restructuring practice for which I had received ZERO academic training, and managed to do well enough that prominent billion dollar distressed hedge funds and bulge bracket investment banks' trading desks kept me busy for most of the last two decades.  On every deal I worked on in my first five years, a partner or older associate took pains to go over my work with me and correct anything I had not done correctly.  Beyond mastering the substance of bankruptcy law on the job, in order to represent my clients in court I learned everything I know about the rules of evidence and everything I know about trial practice on the job.  And I learned quite a lot.  Frequently, I worked with expert witnesses, preparing them to testify, and cross-examining adversaries'.  I had no academic training to do that.  But I read up on these areas constantly, and as most lawyers who litigate financial matters do, I had the benefit of non-testifying experts to help guide me through the more challenging aspects of each dispute.

Every lawyer in private practice learns most of what they need to know on the job.  If you are a commercial litigator, for instance, you are either a generalist who has to be a quick learner about the nuts and bolts of each new client's business, or you are a specialist and you acquire a deep knowledge about one particular business sector. In either case, you acquire your knowledge by working alongside people in the relevant industry and you learn what they know about it.  On the job, bereft of law school assistance.

I found the first two years of law school to be abstract and far removed from the real world.  The few courses that dealt with the day to day functioning of business, like Contracts, were all taught in a philosophical manner, because that was the mindset of the professor who taught it. It wasn't until my second year summer clerkship at a law firm that I got a sense of how law was practiced on a high level in the real world.  Then I was able to get some benefit out of my third year of law school, by taking classes in Corporate Finance, Corporate Taxation, and Commercial Transactions.  But I would have been much better off taking them in the second year, or in a training program in a law firm.

Contrary to Ackerman, I think that persons entering the legal profession and intending to practice anywhere outside of the State Department or a Supreme Court practice, will be far better served if law school were shortened to two years and they had an internship of some kind or something like the English system of articled clerkship to replace the third year.

But to do that requires that state bar admission requirements, nearly all of which require graduation from an accredited law school, be modified to permit admission to the bar after just two years, or after two years and some amount of work.  If Ackerman were as committed to statistics and data as he professes to be, he might endorse loosening those restrictions to create options for students, which would result in outcomes that could be analyzed to test his assertions versus those who disagree with him.  But he suggests nothing like that in his editorial and the paternalistic tone of it suggests that it is more of a brief to preserve the protectionism that law school professors and administrators receive from state bar admission requirements.  So I am very happy that President Obama has put that protectionism in play and hope other lawyers will join him in advancing the best interests of law students and ultimately the profession.

Update: Elie Mystal at Above The Law has an excellent response to Ackerman as well:
http://abovethelaw.com/2013/09/a-yale-professor-offers-a-most-yale-like-response-to-the-length-of-law-school-debate/

Sunday, September 8, 2013

Carlos Danger Man (with apologies to Johnny Rivers)

[To the tune of "Secret Agent Man"; original lyrics here.]

There's a man whose name is Carlos Danger
Says everyone he meets there's no one stranger
With every tweet he makes, it's Huma's heart he breaks
Odds are he won't win the vote tomorrow

Carlos Danger man, Carlos Danger man
Those single digit numbers belong to your campaign

Beware of sending pretty women sexts
You never know what web site gets them next
Ah, be careful what you tweet
Or you'll prove yourself a creep
Odds are you won't win the vote tomorrow

Carlos Danger man, Carlos Danger man
Those single digit numbers belong to your campaign

              [Lead guitar]

Carlos Danger man, Carlos Danger man
Those single digit numbers belong to your campaign

A friend of Hill and Bill, yeah, you were one day
An embarrassment to all your friends the next day
Oh, you're such a laughingstock
For texting pictures of your cock
Odds are we get rid of you tomorrow

Carlos Danger man, Carlos Danger man
Those puny little numbers belong to your campaign

              Carlos Danger man!