CHAPTER 3C
Value Creation by Business Lawyers
The true test of the favorable or unfavorable view of the lawyer is, does he reduce or increase the value of the deal? If the business lawyer does have value, then the transaction will be worth more, net of attorney's fee, than without his participation.
Value is created in a business deal when the lawyer's "transactional methodology protects his client in a imperfect world and allows this one transaction to function as if the capital asset pricing theory is accurate."(Gibson 1984)
Information has a cost, and also it has a value, because information should reduce uncertainty, which reduces risk, which increases value. Uncertainty in a transaction compels a bargainer in a deal to rely upon his own expectations. The rational man sees mere expectations as more risky than a sure thing. For him that risk reduces the value of the outcome of the unsure transaction. A lawyer may increase value if he reduces uncertainty, thus reducing risk, and brings expectations of both parties closer together. The investor prefers less risk for a given return, or a higher return for equal risk. The market seldom rewards risk which can be avoided.
The question is - does the lawyer(s) increase value by contributing information and reducing uncertainty more than his fee takes away from the sum of the values exchanged ?
From the perspective of the sum total benefit to both clients, resources are expended to alter the distribution of gains, but the total value of the transaction has not increased. The surplus of the transaction is to be divided between the bargainers, and that surplus will be smaller after paying legal fees. (Gibson 1984)