This Article argues that legal protections for minority investors in close corporations should be interpreted as default rules. Currently, such protections are mandatory and thus impose on investors a uniform norm of conduct that restricts their freedom to bargain. Courts and scholars advocating such protections have so far been unwilling to permit their waiver primarily because of the difficulty of distinguishing between a knowledgeable waiver and an ignorant omission.

A price-based approach solves that puzzle, however, by using the consideration paid by investors to illuminate their intentions. By permitting waiver only where there is clear evidence that the minority received a discounted purchase price, such an approach avoids the risk inherent in a system that treats legal protections as mere default rules: that an ignorant minority will be taken advantage of as a result of accidental waiver. Whether or not the investor was truly ignorant, there can be no injustice if she was adequately compensated for the risk of opportunistic behavior by her fellow shareholders. A price-based approach therefore provides knowledgeable parties with the ability to bargain over their preferred allocation of control while retaining legal protections for unsophisticated investors who fail to do so.

Recommended Citation

Illig, Robert C. “Minority Investor Protections as Default Norms: Using Price to Illuminate the Deal in Close Corporations.” American University Law Review 56, no. 2 (December 2006): 275-366.