The Contractual Foundation of Family-Business Law

Abstract

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.

Keywords: Closely Held Businesses, Contract, Family-Business Law, Corporate Law