According to standard law and economics, minority shareholders in closely held corporations must bargain against opportunism by controlling shareholders before investing. Put simply, you made your bed, now you must lie in it. Yet most courts offer a remedy for shareholder oppression, often premised on the notion that controlling shareholders owe fiduciary duties to the minority or must honor the minority’s reasonable expectations. Thus, law and economics, the dominant mode of corporate law scholarship, appears irreconcilably opposed to minority shareholder protection, a defining feature of the existing law of close corporations.
This Article contends that a more nuanced theory of contract—freed from the limiting assumptions of standard law and economics—offers a persuasive justification for judicial protection of vulnerable minority shareholders. Moreover, although courts often describe the shareholder relationship in fiduciary terms, contract theory provides a more coherent explanation of current doctrine. The “contractarian” objection to shareholder protection poses a false choice between fairness and autonomy: by enforcing the implicit contractual obligations of good faith and fair dealing, courts protect minority shareholders from oppression and, at the same time, advance the values of private ordering.