Agenda for 17th Class
•
•
•
•
•
Admin
– Slide Handout
– Thank you for electing me PILF Bake Sale judge
– Exam: Tues 12/15 9-11AM (in class / multiple choice) 1-9PM (take home / essay)
– Change in writing assignment grading -- More 3s
Gilson
King v Burwell
Assignment for Next Class
## 65-69, 72-73. Rights and Ordinary Understanding
Questions to think about / Writing Assignment for Group 1
– Pp. 289ff Qs 2, 3, 9, 13
– P. 297 Qs 2, 5
– Kull thinks legal rules should establish liability even when they only provide
compensation for harm, but do not "change the world for the better … by reducing
the incidence of losses." That is, he believes that a legal system should incur costs
(the costs of litigation and adjudication) even when, in economic terms, all litigation
will do is transfer money from one party to another, with no beneficial ex ante
effects. That is, he believes that legal systems should make decisions which would
fail cost-benefit analysis. Why does Kull think it worthwhile for the legal system to
decide such disputes? Do you agree?
1
Last Class – Information I
• Information problems are transactions costs
– They impede potentially beneficial transactions
• Sometimes can be addressed through private action
– Consumer Reports
– Incentive contracts
• Sometimes can be addressed through government action
– Nutritional labeling
– Mandatory insurance cures adverse selection problem
• Moral hazard.
– Incentive problem after contract entered into
• Person with fire insurance takes less care
• Employee exerts less effort
– Informational problem, because if information were costless, problem could be
completely resolved by contract
– Solutions
• Monitoring
• Contracts that give incentives
2
Last Class – Information II
• Adverse selection –
– Lack of information before contract entered into
• Health insurance
• Used car
– Bad information can block transaction entirely
• People don’t buy or sell if don’t have sufficient information about
transacting partner
– Solutions
• Information gathering before contracting
• Warranties
• Mandatory insurance
• Principal-agent problem
– Not separate information problem
• But context in which moral hazard or adverse selection may occur
– Lawyer-client
• Moral hazard – overbilling
• Adverse selection – how choose right lawyer?
– Employer-employee
– Solutions
• See above – incentive contracts, information gathering, monitoring
3
Gilson, Role of Lawyers
• Functions of Lawyer
– Litigate
– Advise
– Draft & negotiate contracts (transactional lawyer)
• Role of Transactional Lawyer
– Transaction Cost Engineer
• Reduce transactions costs for benefit of both parties
• Solve informational problems
• Lawyers often cynically viewed just transactions costs
– But Gilson suggests that function of (good) lawyer is to reduce transactions
costs
– Value Creation
• Function of (good) lawyer is to “create value”
– i.e. increase the pie
– Not just bargaining to get greater share of surplus for client
– Other roles
• Regulatory compliance
• Getting most for client
Gilson, Corporate Acquisition Agreement
• Lawyer as transactions cost engineer
– Lawyer create value (increases pie) by reducing transaction costs, especially
informational problems
• Representations and Warranties
– Detailed statements of facts concerning the relevant business
• Including accuracy of financial statements, absence of particular liabilities,
ownership and condition of key assets, pending litigation.
– Seller liable if turn out to be false
– Purpose. Provide credible information that is key to transaction and its pricing
• Earn out provisions
– Part of price depends on performance of business
• Part of payment delayed and contingent on how well business does
– Helps parties to agree on deal, even if disagree on profitability of business
– Also gives former owners an incentive to help
Gilson, Corporate Acquisition Agreement II
• Covenants and Conditions
– Covenants. Agreement on how owner will
conduct business in period between signing of
contract and transfer of ownership
– Conditions, if not satisfied, relieve buyer of
obligation to purchase
Question on pp. 273ff
• 1. Would you characterize the informational problem in a
typical corporate acquisition agreement as primarily an
adverse selection, moral hazard, or principal-agent
problem?
• 2. Gilson mentions “Convenants and Conditions” as one of
the four main components of an acquisition agreement
(see p. 258), but he doesn’t say much about them. What
kind of informational problem do you think they address?
Adverse selection? Moral hazard? Principal-agent?
• 3. Gilson focuses on private, contractual solutions to the
informational problems posed by corporate acquisitions. Is
there a role for courts, legal rules, and/or legislation?
•
King v Burwell
• §36 of Affordable Care Act authorizes tax credits if an individual
enrolls in an insurance plan through an “Exchange established by the
State…”
• Under Affordable Care Act
– Some states established their own exchanges (websites to
purchase insurance)
– Other states did not establish exchanges, but let the federal
government do so
• Is an exchanged established by the federal government “an Exchange
established by the State”?
– Are individuals in states in which the federal government set up
the exchanges eligible for tax credits?
• Roberts + 5 “yes”
• Scalia + 2 dissent
• Questions 1-11 on pp. 618ff
Introduction to Next Readings
• Non-economic normative reasoning
– One view is that common law legal decisionmaking should track
common understandings and expectations
– Example. If man gives woman engagement ring and couple does
not get married, does she have to return the ring?
• 2 approaches
– 1. Figure out what rule is best
» Morally attractive?
» Economically efficient?
» Reduces litigation and court costs
» Best general consequences?
– 2. Figure out what rule best accords with what people
expect or think is right in such situations
» Role of law is to enforce ordinary people’s prior
understandings
» Analogy to contract law
» Role of law is to enforce parties’ understanding, not
judge’s views as to what would be best
9