• Video

Why Learn Corporate Law?

If you don’t intend to practice corporate law, is there any reason why you should bother learning about it? Professor Robert Miller argues that studying corporate law helps all lawyers understand the way business transactions work, why contracts are written a certain way, and how economic activity gets organized. https://youtube.com/watch?v=2u_ExIlWNJs


Why should you study corporate and securities law, if these seem to you to be about the most boring subjects imaginable? The answer to that is corporate and securities law is the area of law where, along with antitrust, law and economics reaches the height of its powers. Law and economics is about employing economic concepts and methods to understand legal problems. And the thing about economics, as Milton Friedman once said, is that understanding economics usually requires the ability to understand more than one step in reasoning. Here's what I mean. Suppose that in a franchise agreement between, say, McDonald's and a small business owner for the operation of a particular McDonald's location, you find in the franchise agreement, a provision that says the McDonald's may terminate the franchisee for any reason or no reason, whenever it feels like. In fact, you probably will find a provision like that. Who benefits from that provision? The simple answer is McDonald's does. It looks like a terrible provision. It's in fact called a guillotine provision. It looks like a terrible provision from the point of view of the franchisee. It's not. You might imagine that if we were to pass a law saying no provisions like this, if the franchisor, McDonald's, is going to terminate the franchisee, the small business person, that it has to be for cause, or it has to be a 90 days notice, or there has to be a hearing or due process, or something like that, you would think that you're benefiting the franchisee at the benefit of McDonald's. You'd be wrong, and here's why. In reality, there are going to be two types of franchisees, ones who do good jobs and ones who do bad jobs. The ones who do good jobs McDonald's is never going to terminate, because McDonald's is in the business of franchising restaurants, and a franchisee who sells a lot of hamburgers? McDonald's loves that person. They're going to bend over backwards to keep that person. They're not going to terminate them without a decent reason. But then there are the bad franchises. Those are the ones McDonald's wants to terminate, and those are the ones you are making it harder for McDonald's to terminate. When you make it harder for McDonald's to terminate these people, however, what really happens is that McDonald's now knows it has to deal with two classes of people, the good franchisees and the bad franchisees, and the cost it incurs for the bad franchisees is going up. And for that reason, they're going to pay all franchisees less. All franchisees as a group are going to get a worse deal because of the added costs from the bad franchisees that McDonald's now has to deal with. You intended to transfer wealth from McDonald's to the franchisees. What you really did is you transferred wealth from good franchisees to bad franchisees, and it's even worse than you know. Because the reason that McDonald's normally terminates a franchisee is because the franchisee is not doing a good job. His or her restaurant isn't clean. In that restaurant, they allow the cheeseburgers to stay too long under the heat lamps, or they allow the shakes to melt, or whatever, but they produce food that is not up to McDonald's quality. When that happens, that particular location of McDonald's suffers, but so do all the other locations of McDonald's, because it impairs the McDonald's brand. If you go into one McDonald's and have a bad experience, you're going to be less likely to go into other McDonald's and have bad experiences. So, the provision in the franchise agreement that allows McDonald's to terminate bad franchisees quickly, for any reason or no reason, whenever it feels like it, not having to litigate the issue with the franchisees lawyers actually protects good franchisees from the bad acts of bad franchisees. If you want to understand the world and why people do things like this, create contractual provisions of this kind, you've got to think it through in economic terms. Perhaps this isn't the area of law you want to practice. It's a big world. There are lawyers who need to do all different kinds of things. But if you want to understand, either in a theoretical way or for some practical purpose or other, why economic activity gets organized the way it does, this is the type of course that will begin to tell you the reasons for that.

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