The Contractual Foundation of Family-Business Law

Most U.S. businesses are family owned, and yet the law governing business organizations does not account adequately for family relationships. Nor have legal scholars paid sufficient attention to family businesses. Instead, legal scholars operate within a contractarian model of business organization law, which holds that a firm is comprised of a nexus of contracts among economically rational actors. Intimate relationships appear irrelevant except insofar as they affect contractual choices. Indeed, strictly speaking, there is no such thing as family-business law.This Article lays the foundation for a law of family business by expanding the contractarian model: a firm includes not just business contracts, but all bargains among participants that affect the business enterprise. The payoff for including family considerations is twofold. First, when family obligations introduce uncertainty, such as when co-owners of a business divorce, contract offers an explanatory resource for resolving disputes consistent with the parties’ expectations. Second, a contractual conception of the firm can guide the establishment of appropriate default rules for the interpretation and enforcement of family-business bargains

Nonmarket Values in Family Businesses

Despite the economic importance of family businesses, legal scholarship has often overlooked their distinctive character. Instead, scholars focus on the chosen form of business organization— partnership, corporation, LLC—and assume that the participants are economically rational actors who seek to maximize their individual preferences. This Article contends that family businesses are extensions of family relationships and that nonmarket values affect their goals and governance choices. Just as family law scholars have shown that contract principles can be applied to regulate intimate relationships, corporate law scholars should recognize that the intimacy of family life often substitutes for arm’s length bargaining in family businesses. Notably, although relationships of trust and loyalty can lower transaction costs, the strength of family ties offers an intrinsic benefit for family business participants apart from any economic return they may achieve. When disputes arise in family businesses, courts have an indispensable role to play because the parties cannot anticipate and resolve all potential conflicts in advance. Like other business ventures, family businesses are long-term relational contracts. However, rather than seeking to supply the terms that would have been chosen by individuals who are disconnected from one another and economically rational in their pursuit of their own advantage, the law should recognize the importance of shared family values relevant to the parties’ expectations. Put differently, to respect private ordering, the law must respond to the ways that individuals actually choose to order their affairs

The Meaning of the Market Myth

This Book Review contends that the perfectly rational market may be a myth, not just in the sense of a false or over-simplified account of reality, but also in the deeper, anthropological sense of cultural explanation. Part I describes how rational-market theories were developed by financial economists and applied to Wall Street, sometimes without adequate appreciation for the difference between simplified economic models and real-world behavior. Part II contends that if the rational-market theory has met with acceptance that outstrips its empirical support, the favorable reception may be explained in part by the theory’s congruence with broader normative views about laissez faire social ordering

The Value of Insider Control

According to conventional wisdom, insider control of businesses is detrimental to the interests of non-controlling investors. Family-run businesses, in particular, are seen as nepotistic and inefficient. Yet, commentators have overestimated the dangers of insider control and overlooked its potential benefits for all stakeholders. Controlling owners have a personal stake that gives them reason to identify with their business and to adopt responsible business practices capable of creating lasting value. A stewardship model of insider control helps explain the continuing vitality of family businesses as well as the success of recent public offerings by Facebook, Google, and Snapchat involving low-vote or no-vote stock. Consequently, this Article criticizes efforts to limit insider control categorically — for example, recent moves by stock exchanges to block companies that issue stock with unequal voting rights. To the extent controlling shareholders are tempted to abuse their control in particular cases, this Article contends that the fiduciary duties of care and loyalty provide an appropriate basis for judicial monitoring

Non-Market Values in Family Businesses

Despite the economic importance of family businesses, legal scholarship has often overlooked their distinctive character. Instead, scholars focus on the chosen form of business organization — partnership, corporation, LLC — and assume that the participants are economically rational actors who seek to maximize their individual preferences. This Article contends that family businesses are an extension of family relationships and that non-market values affect their goals and governance choices. Just as family law scholars have shown that contract principles can be applied to regulate intimate relationships, corporate law scholars should recognize that the intimacy of family life often substitutes for arms-length bargaining in family businesses. Notably, while relationships of trust and loyalty can lower transaction costs, the strength of family ties offers an intrinsic benefit for family business participants apart from any economic return that might be achieved. When disputes arise in family businesses, courts have an indispensable role to play, because the parties cannot anticipate and resolve all potential conflicts in advance. Like other business ventures, family businesses are long-term, relational contracts. However, rather than seeking to supply the terms that would have been chosen by individuals who are disconnected from one another and economically rational in their pursuit of their own advantage, the law should recognize the importance of shared family values relevant to the parties\u27 expectations. Put differently, to respect private ordering the law must respond to the ways that individuals actually choose to order their affairs

Wealth Inequality and Family Businesses

Wealth inequality endangers democratic values and calls for a public response. This Article contends that family businesses merit special scrutiny because they control vast amounts of private wealth and combine two of society\u27s most important economic institutions: family and business. Accordingly, family businesses implicate concerns regarding both inherited wealth and the concentration of economic power made possible by the corporate form. Despite their economic significance, little has been done to investigate whether family businesses contribute to wealth inequality. This Article offers the first legal, and one of the only academic, treatments of the topic and shows that family businesses play a double role. On the one hand, family businesses reinforce existing disparities in wealth and opportunity. Heirs, after all, stand to benefit from the hard work of previous generations. On the other hand, family businesses can be a powerful antidote to inequality, disrupting entrenched class hierarchies and creating opportunities for individuals, families, and ethnic communities. This Article concludes that whether family businesses produce net social costs or benefits depends crucially on two principal factors. First, to the extent there is a lack of public investment in social mobility, family businesses can increase the distribution of wealth by providing needed investments in human capital. Second, to the extent the rewards of capitalism are not widely shared, family businesses can offer a source of opportunity, not just for family members, but also for employees and the communities in which family businesses operate. Thus, family businesses should not be viewed in isolation; a comprehensive response to the problem of wealth inequality must involve the state, the family, and the market

The Value of Insider Control

According to conventional wisdom, insider control of businesses is detrimental to the interests of noncontrolling investors. Family-run businesses, in particular, are seen as nepotistic and inefficient. Yet, commentators have overestimated the dangers of insider control and overlooked its potential benefits for all stakeholders. Controlling owners have a personal stake that gives them reason to identify with their business and to adopt responsible business practices capable of creating lasting value. A stewardship model of insider control helps explain the continuing vitality of family businesses as well as the success of recent public offerings by Facebook, Google, and Snapchat involving low-vote or no-vote stock. Consequently, this Article criticizes efforts to limit insider control categorically—for example, recent moves by stock exchanges to block companies that issue stock with unequal voting rights. To the extent controlling shareholders are tempted to abuse their control in particular cases, this Article contends that the fiduciary duties of care and loyalty provide an appropriate basis for judicial monitoring

Monuments to the Past in a Leveling Wind

Early in the twentieth century, the Emperor Franz Joseph sponsored a monument to Hungary\u27s history - a Millennium Monument containing statues of the country\u27s heroes, as well as statues of the proud sponsor and his family (p. 5). When the communists took over in 1919, the statues of Franz Joseph and the rest of the Hapsburgs were dragged out of the Millennium Monument and replaced with more politically correct statuary (p. 8). Counterrevolutionaries, though, retook the country and reinstated the Hapsburg Statues in the Millennium Monument - until a later regime once again reshuffled the millennial display (pp. 9-10). Professor Sanford Levinson1 recounts the Eastern European high comedy of the Millennium Monument to illustrate how those in power use public space to inculcate desired political norms (p. 10). In Written in Stone: Public Monuments in Changing Societies, Professor Levinson\u27s central concern is the effect multiculturalism has on the use of public space (p. 23). Levinson draws many of his examples from the American South, and he considers what is at stake in deciding which statues belong in public parks and what flags should fly over state capitols. The American situation, unlike the Hungarian one, is characterized more by its sheer number of perspectives than by radical shifts from one view to another (p. 24), and so the meaning of public monuments is often hotly debated