The Rise of the Close Corporation and the Making of Corporation Law

Abstract

Who makes corporation law? The study of corporation lawmaking has been a lively area in recent years, but scholars have limited their studies by focusing on only one kind of corporation law, the law of the public corporation. This article takes a new approach to the question through a legal historical case study of the law of the close corporation. Corporation statutes in the first half of the twentieth century were crafted by legislatures to fit public, not close, corporations. Close corporation participants found the standard-issue mechanisms provided by these statutes unsatisfactory, however, and sought instead to organize their firms through private agreements among themselves. Such agreements were common, but courts would void them if they diverged too far from corporation law's statutory norms. This gave rise to a process in which close corporations adopted, and judges later approved (or disapproved) a range of agreements and arrangements designed to privately order the close corporation. In the end, this incremental back-and-forth produced a common law of close corporations. Only after the development of this common law of close corporations did legislators change corporation statutes to further legitimize close corporations' special agreements. This account challenges our understandings of how corporate law is made, for it shows that close corporation law was made not only by legislators, courts, and interest groups, but by close corporation participants themselves. This Article thus not only illuminates understudied areas of corporation law and legal history, it provides us a new account of the production of a vital area of modern American law. t J.D., Ph.D., Assistant Professor of Law, Temple University Beasley School of Law. I thank Jane Baron, David Hoffman, Duncan Hollis, Daniel Holt, Robert Illig, Naomi Lamoreaux, Jonathan Lipson, Douglas Moll, Mark Rahdert, Robert Thompson, Wyatt Wells, and the participants at Temple University's Faculty Workshop for helpful comments and for saving me from many errors (the ones that remain are my responsibility), Josette Oakley for excellent research assistance, and Temple University Beasley School of Law for a Summer Research Grant. Berkeley Business Law Journal