The Bargain in the Firm: Partnership Law, Corporate Law, and Private Ordering within Closely-Held Business Associations

Abstract

The law that dominates legal scholarship is the corporate law of the public entity. This corporate law struggles to define and protect the interests of a large, amorphous, and essentially passive group of shareholders who typically hold diversified portfolios and whose willingness and ability to focus attention on any single investment in that portfolio is limited. Aggrieved shareholders of publicly held firms normally have the exit option available through the liquidity provided by organized securities markets.

Another corporate law addresses the closely held firms that at one time or another elected corporate status. Here, the problem lies in the exercise of control by one group of shareholders to the disadvantage of another group under circumstances in which disadvantaged shareholders, unlike their counterparts in publicly-held firms, typically do not have an easy exit option. This is the corporate under law under which private ordering through bargaining among shareholders has achieved slow but steady gains. It is also the corporate law largely ignored by contemporary legal scholars.

The two corporate laws, and the concerns addressed by each, are quite distinct. Recognizing the distinction is critical in assessing the content as well as the evolution of corporate law. It is also a premise underlying this article, which considers private ordering in closely-held firms and the degree to which partnership law and corporate law have influenced each other.