Research Handbooks in Corporate Law and Governance series
Edited by Robert W. Hillman and Mark J. Loewenstein
Chapter 3: Contractual freedom and family business
Although the parties to a prospective business venture should clarify key points before investing—for instance, when capital contributions may be required, how business decisions will be made, how earnings (or losses) will be distributed, and what types of opportunities belong to the business—the resources of contract are limited. The parties cannot anticipate every contingency that might arise in a long-term business relationship. Also, because bargaining is expensive, the costs of negotiating a more complete contract will eventually outweigh the benefits. Moreover, the participants in a closely held business may rely upon trust, even as to matters that could have been specified in advance. In the corporate context, most jurisdictions recognize a need for judicial monitoring of the parties’ relationship to prevent the opportunistic exploitation of gaps in the contractual bargain. For instance, even when they have not negotiated specific protections, minority shareholders can seek relief for oppression, often premised on the notion that controlling shareholders owe fiduciary duties and must honor the minority’s reasonable expectations. While courts will not rescue investors from the consequences of entering a one-sided bargain, neither will courts stand by and allow controlling shareholders to deprive minority shareholders of any return on their investment.
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