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.