"Let's say you want to buy something—a business, an apartment, or even a car," says Dean David M. Schizer, who teaches the Deals course along with Professors Ronald Gilson and Victor Goldberg. "As soon as someone offers to sell it at a particular price, your first thought should be, ‘Wait a second. What does the seller know that I don't know?'" This imbalance in information is a fundamental challenge in any deal. So is the need to align everyone's incentives.
The Deals course shows that, even though transactions vary in detail, they all present common economic problems, such as those regarding information and incentives. In addition to identifying those common problems, the course offers a menu of solutions. The buyer can ask the seller to share information, for instance, through due diligence backed by an indemnity. Or the buyer can pay a contingent purchase price, offering a partial payment up front and more later if things go well. Or the buyer can depend on a third party, such as an investment bank, to vouch for the quality of what is being sold.
"Deal lawyers are an imaginative group," Dean Schizer says, "and they are forever dreaming up new solutions to fundamental economic problems."
The course has both positive and normative goals, teaching students about patterns that have emerged with respect to different types of transactions and, perhaps more importantly, how parties may more effectively govern their relations. Students are introduced to the economic tools necessary to evaluate alternative contractual regimes, and then apply those tools to real transactions.
The Deals course is divided into two parts: The first part is designed to introduce students to the economic tools necessary to evaluate alternative contractual regimes, including transaction costs, information economics, risk sharing and incentives, property rights, and finance. Students also work through some of the existing empirical work on contracting regimes. The second part applies tools developed in the first part, culminating in group projects that consider different real world transactions, with the particular transactions selected to give students a range of subject matters in order to highlight a common set of problems that arises in multiple settings. Each group, comprised of approximately a dozen Columbia Law and Business students, is given a thick stack of documents from an actual transaction, which might be financing for a movie, a merger of public companies, or a venture-capital deal. The students are asked to identify the economic problems in their deal and the solutions the parties used. Were these the right solutions? Why were they chosen, instead of alternatives? The students present their deal to the class. Then, in the next class session, the expert who spearheaded the deal (usually a Columbia Law School graduate) comes in to explain what really happened. "They are the answer key," says Dean Schizer.
"When we began the course, we were filling a huge gap in the curriculum," says Prof. Goldberg.
"The first-year contracts course is about appellate decisions, but this course is about the law of designing transactions. It is about the law that sits in the background. If one understands the basic underlying economics, a lot of seemingly disparate elements come together."