A Second Look at Special Close Corporation Legislation

Texas Law Review, Vol. 58, p. 1207, 1980

62 Pages Posted: 29 May 2009

See all articles by Dennis S. Karjala

Dennis S. Karjala

Arizona State University College of Law

Date Written: 1980


Fifty years have passed since commentators first called for special legislation designed to meet the problems of close corporations. Statutory results vary considerably. This Article critically analyzes these approaches and argues that a modem general incorporation statute, rather than a close corporation law supposedly tailored to its special needs, better serves the close corporation. Not only have legislators not yet drafted the right close corporation law, the entire endeavor displays fatal conceptual flaws and should be abandoned.

The North Carolina approach is the less ambitious and merely includes in its general incorporation law a section recognizing the validity of unanimous written shareholder agreements. This approach, however, is unlikely to supply any additional benefits in a jurisdiction that otherwise adopts the flexible approach of the Model Act.

The Delaware approach grants these corporations special treatment, either in sections scattered throughout the general law but applicable only to the defined close corporation, or in the more integrated form of a separate act or division of the general law. This approach to the resolution of close corporation problems is fundamentally misconceived because special legislation, however, is unnecessary. Most of the problems it seeks to solve result from the rigid interpretations courts once gave to corporation statutes, but the flexibility of modem statutes has cured this rigidity. To the extent that statutory problems remain, the best solution lies in legislation specially designed to meet the perceived problem rather than in wholesale rewriting of the corporate law applicable to small businesses.

A third approach to the resolution of close corporation problems is reflected in the Model Business Corporation Act I. It, as amended in, is sufficiently flexible to meet the needs of small businesses without additional legislation aimed specifically at close corporations. This permits all corporations as much contractual freedom as is consistent with public policy, best meets the needs of small businesses.

Keywords: Close Corporations, Model Business Corporation Act, Corporate Law

Suggested Citation

Karjala, Dennis S., A Second Look at Special Close Corporation Legislation (1980). Texas Law Review, Vol. 58, p. 1207, 1980. Available at SSRN: https://ssrn.com/abstract=1411464

Dennis S. Karjala (Contact Author)

Arizona State University College of Law ( email )

Box 877906
Tempe, AZ 85287-7906
United States
480-965-4010 (Phone)
480-965-2427 (Fax)

HOME PAGE: http://www.public.asu.edu/~dkarjala

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