Values and Value Creation in Public-Private Transactions

• Author: Néstor M. Davidson
• Position: Associate Professor, University of Colorado Law School. J.D., Columbia Law School
• Pages: 03

Associate Professor, University of Colorado Law School. J.D., Columbia Law School, 1997, A.B., Harvard University, 1990. For helpful comments, the author wishes to thank Deborah Cantrell, Scott Cummings, Vic Fleischer, Clare Huntington, Scott Moss, Pierre Schlag, Jim Smith, Phil Weiser, and the participants in the 2007 Workshop on Affordable Housing and Public/Private Partnerships. Charles Swanson and Kelly Kafer provided excellent research assistance.

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I Introduction

Scholars of the legal profession have long puzzled over the role of lawyers in transactional practice. Unlike the work of litigators, there is nothing inherently law-related about many of the characteristic tasks that deal lawyers undertake. Yet, attorneys command a significant premium for quarterbacking deals, and there must be some reason that clients continue to pay that premium for work that might as easily-and at lower cost-be performed by any number of other professionals.

One answer that has emerged in a robust body of work over the past two-and-a-half decades has focused on the unique potential that lawyers have, not only to memorialize agreements and allocate risks, but also to add fundamentally to the overall value of deals. Lawyers, in this view, have the capacity to structure deals to minimize a variety of ubiquitous transaction costs, including parties' information asymmetries, differential time horizons, and strategic bargaining. This literature envisions lawyers as transactional engineers, creating value for all parties to a deal with the potential not simply to slice the deal pie more favorably for one side or the other, but instead to grow the size of the pie.¹

This value-creation literature, however, has traditionally made two foundational assumptions about the role of the state in transactional law that bear challenge. First, scholars have assumed that the regulatory environment in which transactions occur is a background condition largely irrelevant to the essentially private task facing deal lawyers. As discussed below, Victor Page 941 Fleischer and others have begun to upend this assumption, arguing convincingly that engineering regulatory costs is as central to the contemporary deal lawyers' role as adding value by responding to transaction costs.²

The second assumption-and the focus of this Article-is that transactions are unilaterally private. In the transactional world envisioned by the traditional value-creation literature, not only is the government little more than a neutral referee, but the state in no way takes an active role in engaging the private sector to advance public goals. This may have been true a generation ago, but in the modern transactional world, public-private partnerships are a significant and growing sector of the economy and have become one of the most important approaches to policy at the federal, state, and local level. Even before the recent wave of massive interventions in the financial sector and other areas of our economy,³ public-sector spending represented nearly a third of the domestic economy,⁴ a singularly vast incursion into what might otherwise be considered the private market. Although much of this spending represents direct government outlays-for employees, direct benefit transfers, and the like-governments at all levels are increasingly relying on private-sector capabilities. Public-private partnerships touch almost every modern policy area, including national security, infrastructure, economic development, energy, social services, and environmental protection. The growing presence of private actors in the public arena is a deeply contested development-sparking a debate that has direct relevance to the work of deal lawyers⁵-but represents a clear trend nonetheless.⁶ Page 942

Foregrounding public-private partnerships provides a richer description of the actual continuum of contemporary transactional practice. Any given deal can be seen to occupy a point along a spectrum of state involvement-from a paradigm of the purely private transaction where the state is primarily an indifferent referee, to an opposing paradigm of near complete alignment of interests between the private and public sectors, with private dealmaking in regulated environments in between. Either end of this spectrum represents an unrealistic ideal type-the state is almost never neutral, nor is there ever a perfect alignment of public and private interests-but the continuum provides a more accurate picture of the varying roles the state actually takes in transactional law.

Focusing on the largely unexplored region of this transactional spectrum that involves some alignment of public and private interests, this Article asks whether lawyers involved in public-private partnerships do something different than their counterparts working in more private-sector-oriented deals. The short answer is yes. What is fundamentally different about deal lawyers in the public-private context is that the "value" they create cannot be divorced from the public-policy goals that the private sector has been engaged to advance. For deal lawyers in public-private partnerships, the programmatic and transactional contexts, as well as their clients' own mission-driven goals, necessitate a broader perspective on the concept of value. Deal lawyers in this context must contend with a challenging double layering, structuring deals to balance economic value creation with essentially non-economic-indeed, often counter-market- transactional goals. Thus, unlike garden-variety private transactions, the end-product of public-private partnerships cannot be captured simply in economic terms, although the underlying economics can be as important as the policy goals that drive the partnership.⁷

Accordingly, beyond structuring for transaction costs and leveraging regulatory constraints, deal lawyers in public-private partnerships must also anticipate myriad challenges posed by engaging the private sector in responding to complex social problems. This function-which this Article Page 943 calls regulatory translation-requires structuring private transactions to reflect the ofttimes abstract or conflicting goals of public policy, frequently in political environments, where the ultimate beneficiaries are some segment of the public. Deal lawyers in public-private transactions can create value in much the same way that the traditional transactional-engineering literature has highlighted, but they also have the potential to add value in no small part by translating their clients' and the government's policy goals into the practical mechanisms of private ordering. Deals are thus created that would otherwise collapse, and deals are made more valuable in the broadest sense of the word. These lawyers, in short, hold the potential not only to make the pie bigger, but to help bake a very different pie.⁸

In identifying and explaining regulatory translation, this Article seeks to make contributions to two traditionally distinct academic discourses. First, the Article brings to the fore an increasingly important transactional context Page 944 that has been largely ignored in the literature on value creation. Conversely, the Article likewise brings the descriptive and normative insights of the value-creation literature to the literature on new governance and public-private partnerships. Just as scholars focused on deal lawyers have largely ignored public-private partnerships, scholars exploring the private role in public governance have largely ignored the central and complex role that such lawyers play in that dynamic. The Article accordingly provides theoretical grounding for the role that attorneys play in this context that has the potential to enhance the advantages and mute the concerns associated with public-private partnerships. Ultimately, there are lessons in this perspective for deal lawyers in all transactions.

The Article is organized as follows. Part II reviews the literature on value creation in transactional law and particularly the emerging emphasis in that literature on the work of deal lawyers in arbitraging regulatory constraints. Part III turns to...