Even if doubts remain concerning the introduction of contractual principles into supposedly nonmarket family institutions, expanding the range of available choices in the domestic sphere is not the same thing as treating family relationships as fungible, market commodities. For instance, family law scholars have explored contract as a potential mechanism for enhancing individual autonomy and for counteracting issues of gender or other social inequality. (152) Depending on their situation, individuals might "use private agreements to reinforce their marital commitment" (153) or to create structures for intimate relationships that fall outside of existing recognized categories. (154)
In some respects, the gradual recognition of contractual bargaining within domestic relationships resembles the process by which courts became willing to enforce shareholder agreements in close corporations, even when those agreements altered central features of corporate law such as the authority of the board of directors. (155) For example, in McQuade v. Stoneham, the New York Court of Appeals refused to enforce an intrashareholder contract that infringed upon the board of directors' ability to manage the corporation according to its sole judgment. (156) Yet, in Clark v. Dodge, decided only two years later, the same court concluded that a shareholder arrangement that protected the investment interest of the minority shareholder only "impinge[d] slightly" upon the board's statutory authority and would be upheld. (157) State corporate law statutes now generally recognize the value of tailored investment agreements and permit shareholders in close corporations to contract with each other, even if those contracts remove certain decisions from the board. (158)
Families, like businesses, are entities composed of individuals who seek to achieve joint purposes, and it seems logical to look to business law to find helpful models for contractual ordering in the family context. (159) As one family law scholar has observed:
The law governing intimate relationships would benefit from exploring the metaphorical and doctrinal analogies between business and intimate affiliations. These analogies bridge the... distinction by drawing connections between private business law and private family law. They also improve upon conventional family law's understanding of family. The exploration remedies long-standing inequities within current family law discourse that are fossilized artifacts of the naturalized construction of intimate relationships. (160) There are a number of specific, structural similarities between close corporations and marriages. First, "close corporations and marriages are intended to be 'long-term, ongoing entities' that require 'stability and predictability to function properly."' (161) Second, each form of social organization requires formal state recognition. (162)
Third, the dissolution of a business "parallels divorce." (163) Moreover, "a close corporation often is a hybrid of family and business that bridges the ... divide by its very existence." (164) Thus, families and businesses can be described as long-term, relational contracts; an analogy that extends to matters of formation, governance, distribution, and dissolution. (165)
From Contract to Context
According to current orthodoxy in corporate law, cogently summarized by the Chief Justice of the Delaware Supreme Court, "[C]ourts need to be mindful of the distinction between status relationships and contractual relationships."166 In the event of a dispute, "the contractual relationship between parties ... should be the analytical focus[,] ... not the status relationship of the parties." (167) Chief Justice Steele's recommended approach assumes that status and contract are defined in opposition to one another and lack legally relevant intersections. (168) The premise of his argument is flawed, at least when applied to family businesses, because it fails to appreciate the extent to which stable status relationships provide the context for a relational business contract.
As an alternative to imposing an artificial barrier between status and contract, the "metaphorical and doctrinal analogies between business and intimate affiliations" (169) developed by family law scholars promise to inform our understanding of businesses as well as families. In particular, an appreciation of the role of status relationships would help to address a deficiency in standard contractual theory--that the classic, arm's length exchange of discrete goods or services bears little resemblance to most real world contracts. Indeed, "as relationalists have demonstrated since the 1960s, contracts involve thicker relationships than those among strangers." (170) Family businesses, where the relationships among shareholders are as thick as blood, are a prime example. (171)
Of course, as long as one includes transaction costs in the model, the concept of relational contract is, itself, perfectly consistent with law and economics. The effort to anticipate all possible future states of the world and to negotiate appropriate contract provisions can become prohibitively expensive: "A contract is relational to the extent that the parties are incapable of reducing important terms of the arrangement to well-defined obligations." (172) In longer term ventures with open-ended goals, contractual incompleteness is unavoidable. (173) Thus, as a matter of transaction cost analysis, close corporations of all stripes can be described as relational contracts. (174)
However, reducing relational contracting to a question of transaction costs is misleading. First, this approach would limit relational contracts to those in which a complete bargain is cost prohibitive. (175) Yet, businesses involve social relationships, and trust may sometimes substitute even for otherwise attainable negotiations. (176) In particular, social connections among investors are a central feature of family businesses. Just as prenuptial agreements are less common in marriages than a rational-actor theory might suggest given the statistical likelihood of an eventual divorce, (177) business contracts among family members may be impeded by similar considerations.
Second, the law and economics version of relational contracting assumes that missing terms should be supplied to further the wealth maximization goals of the business. (178) This assumption can badly mistake the parties' understood bargain. Family businesses are market institutions that aim to make a profit, but they can also provide intrinsic value for family members who find meaning in shared effort, mutual support, and the preservation of family traditions across generations. The norms of family life, as well as economic considerations, shape the choice of investment and the structure of internal governance. (179) When individual investment choices reflect a range of market and nonmarket values and motivations, they cannot be appropriately represented by a simple, utility-maximizing formula. Accordingly, the characterization of family businesses as nothing more than one investment among many that a rational investor may choose, depending upon the expected economic return, (180) fails to account for noneconomic, intrinsic motivations, (181) Much of what the parties care about, and have reason to care about, in a family business is either invisible to economic analysis or, like dark matter, can only be detected through its impact on the price mechanisms economists choose to study.
The broader point should be unremarkable: economic analysis produces many useful insights but has inherent limitations based on the questions it chooses to ask. As the Nobel laureate Ronald Coase explains, economic analysis involves "comparisons of the value of production, as measured by the market." (182) Yet, for broader policy determinations, he acknowledges that "it is, of course, desirable that the choice between different social arrangements for the solution of economic problems should be carried out in broader terms than this and that the total effect of these arrangements in all spheres of life should be taken into account." (183) In other words, we should not confuse formal analytic rigor with true insight, (184)
Even economic analysis that considers the impact of trust on transaction costs retains the assumption that individuals join collective associations to advance their own ends. (185) On this view, trust is nothing more than a "subclass of ... risk ... in which the risk one takes depends on the performance of another actor." (186) Thus, there is little reason to expect that a more fine-tuned approach to transaction costs will produce an optimal solution to problems of shareholder oppression or other conflicts in family businesses. To understand conflict in family firms, we need to consider the influence of family life and the role identifications that can motivate participation in a family business, (187)
If courts fail to appreciate the structural importance of family relationships, those blinders can affect the outcome in a variety of civil, and even criminal, legal disputes involving family businesses. Consider, for instance, the majority and dissenting opinions in United States v. Chestman, in which a stockbroker appealed his conviction for aiding and abetting the misappropriation of inside information, (188) The central issue on appeal was whether fiduciary duties of nondisclosure could be extended to a family member in a family-owned business who was not an active participant and held no formal position. (189) According to the majority, "[k]inship alone does not create the necessary relationship" and the disclosure did not serve any business purpose. (190) Absent "an express agreement of confidentiality," the husband "did not defraud [his wife or her family] by disclosing news of the pending tender offer to [the stock broker]." (191)