Fiduciary Duties in Company Law: A German Perspective

Rainer Kulms＊

Max Planck Institute for Comparative and International Private Law

Abstract: As Chinese practitioners and scholars ponder the scope of fiduciary obligations under the country’s company law, this paper offers a comparative perspective from German law. Although German corporate law has not rejected legal transplants, the common law trust has never been accepted as an organizational device for administering third-party funds or doing business. Nonetheless, the German judiciary has developed a sophisticated concept of fiduciary obligations where the statutes remain silent. This paper explores the application of fiduciary obligations to limited partnerships, limited liability companies, and stock corporations. It takes a membership perspective to ascertain the legal relationships between a corporation and its shareholder-members and among fellow-shareholders,as business entities evolve from personalistic to capitalistic settings.Fiduciary obligations also inform the relationship between the corporation and its directors and corporate officers. Although German law does not classify directors and corporate officers as the shareholders’ direct trustees,shareholders stand nonetheless to benefit from the way directors and corporate offices discharge their duties towards the respective corporate entities. Moreover, criminal law rules on embezzlement operate to protect the corporation and the monies it administers from overly risky business projects.

Keywords: German company law, limited liability companies, stock corporations;directors’ duties of loyalty and care, criminal law liability for embezzlement

Introduction

Fiduciary Concepts

China’s Company Law imposes obligations of fidelity and diligence on directors, supervisors,and senior managers: Art. 149 (8) admonishes directors or senior managers not to commit acts inconsistent with the obligation of fidelity.①See Art. 147 of China’s Company Law. The following English version has been used: https://www.ilo.org/dyn/natlex/docs/ELECTRONIC/92643/108008/F-186401967/CHN92643%20Eng.pdf).The Code of Corporate Goνernance of Listed Companiesissued by China’s Securities Regulatory Commission extends this concept to controlling shareholders or actual controllers: They shall assume fiduciary duties towards the company and the other shareholders.②Art. 63 of The Code of Corporate Goνernance for Listed Companies (Announcement No. 29 [2018] of the China Securities Regulatory Commission-Code of Corporate Goνernance of Listed Companies [2018 Reνision] [Effective]). On the role of the CSRC’s enforcement practice in fleshing out the concept of loyalty and diligence, see Guangdong Xu/Tianshu Zhou/Bin Zeng/Jin Shi, Directors’ Duties in China, 14 Eur. Bus. Org. L. Reν. (EBOR) 57-95 (2013) (p. 84 et seq.).Art. 147 et seq. of China’s Company Law have been characterized as the“proclamation of orthodox corporate fiduciary duties,”③Nicholas C. Howson, Fiduciary Principles in Chinese Law. In: Criddle/Miller/Sitkoff (eds.), The Oxford Handbook of Fiduciary Duties (Oxford 2019), 603-622 (at p. 613).although skepticism remains whether the practice will readily follow suit④Jiangyu Wang, : Huang/Howson, (eds.), Enforcement of Corporate and Securities Law-China and the World (Cambridge 2017), 185-206 (at 191 et seq.): Courts are expected to encounter difficulties in accommodating a legal transplant that has its origins in common law jurisdictions.⑤See Xu/Zhou/Zeng/Shi, 14 Eur. Bus. Org. L. Reν. (EBOR) 57-95 (2013) (at pp. 61 et seq.).As fiduciary duties and the business judgment rules make their way into China’s civil law system it will be useful to reflect on their intellectual underpinnings and to offer a comparative survey from a jurisdiction which has used fiduciary concepts to transgress the limitations of statutory law.

Fiduciary duties in corporate law have their origins in trust law.⑥For a survey see Julian Velasco, in: Criddle/Miller/Sitkoff, Handbook, 61-78 (at p. 64 et seq.).Modern trust cases call for an inquiry into whether fiduciary duties indicate the existence of a (legal) relationship, point to the availability of a remedy where contract law does not help.⑦See the analysis, in: Jonathan Garton/Rebecca Probert/Gerry Bean, Moffat’s Trust Law-Texts and Materials (7th ed. Cambridge 2020), at p. 740 et seq.,748.; see also: Alexander Styhre, What we talk about when we talk about fiduciary duties: the changing role of a legal theory concept, 13 (2) Management and Organizational History, 113-139 (2018) (at p. 118 et seq.) on fiduciary duties as an instrument to define non-contractual responsibilities of directors and managers.The duties of loyalty and care stand for a principal-agent relationship⑧For a detailed analysis see: Robert Cooter/Bradley J. Freedman, The Fiduciary Relationship: Its Economic Character and Legal Consequences, 66 N.Y.U. L.Reν. 1045-1075 (1991), at p. 1048 et seq.which goes beyond common law notions of agency.⑨Robert Sitkoff, The Economic Structure of Fiduciary Law, 91 Boston U. L. Reν. 1039-1049 (2011), at p. 1040 et seq.Principal-agent relationships are notorious for incomplete contracting and hidden information problems.11But trust law and corporate law have come to broaden trustee and manager activities by conditioning them on the observance of fiduciary principles.⑾“Modern fiduciary duties” are understood as crucial for managing

11 Ibid., at p. 1042 et seq.investor money for the benefit of beneficiaries and clients with conflicting interests.①See: UNEP Finance Initiative/Principles for Responsible Investment, Fiduciary Duty in the 21st Century-Final Report (October 2019), at p. 21 et seq. (available at https://www.unepfi.org/publications/investment-publications/fiduciary-duty-in-the-21st-century-final-report/).Mandatory and default rules operate to establish deterrence mechanisms for the agent not to neglect the best interests of the principals.②Sitkoff, at p. 1043.

Historically, remedies for the breach of fiduciary duties were based in equity to restore the plaintiff to his rightful position.③See the “catalog of fiduciary remedies” in: Samuel L. Bray, in: Criddle/Miller/Sitkoff, Handbook, , 449-467 (at p. 451 et seq.).Fiduciary duties have evolved into providing beneficiaries with a remedy where they would have been unable to claim specific performance since they were not privy to the contract.④Thilo Kuntz, Transnational Fiduciary Law: Spaces and Elements, 5 UCI J. Transn’tl. & Comp. L. 47-83 (2020) (at p. 78 et seq.), Cf. Paul B. Miller, Justifying Fiduciary Remedies, 63 (4) Uniνersity of Toronto Law Journal 570-623 (2013), at p. 604 et seq.When Pistor Xu assessed the importance of fiduciary duty concepts for transition countries, they noted that under Delaware’s corporate law and its extensive default rules, fiduciary duties operate to contain the impact of the freedom of contract enjoyed by other shareholders.⑤Katharina Pistor/Chenggang Xu, in: C. Milhaupt (ed.), Global Markets, Domestic Institutions-Corporate Law and Goνernance in a New Era of Cross-Border Deals (New York, 2003), 77-107 (at p. 78 et seq.)Conversely, German company law, with its extensive set of mandatory rules for corporations, was considered to instrumentalize the equivalent of fiduciary duties to alleviate the perceived or real harshness of mandatory rules.⑥Ibid., at p. 94 et seq.On the other hand, traditional fiduciary duty concepts have made substantial inroads into German corporate law, as the courts clarify the notion of the duty of care owed by corporate officers.⑦See Mathias Janke, Gesellschaftsrechtliche Treuepflicht (Frankfurt/Main 2003), at p. 33 et seq., 199 et seq.This suggests that duties of loyalty and care operate as a flexible instrument to both substitute and expand legislative concepts and to stimulate the evolution of legal rules through case law where the statute is silent.⑧For a comparative survey see Kuntz, 5 UCI J. Transnat’l. & Comp. L. 47-83 (2020) (at p. 79 et seq.).Nowadays, fiduciary concepts determine the relationship between the company and the shareholder, and among shareholders themselves.⑨For a survey see Maximilian Mann, Abdingbarkeit und Gegenstand der gesellschaftsrechtlichen Treuepflicht (Berlin 2018), p. 26 et seq.Moreover, they supply shareholders with remedies for specific performance, damages, or disgorgement of profits where traditional concepts of contract law are of no avail. Fiduciary concepts also inform the relationship between a company and its corporate officers.⑩Michael Hoffmann-Becking (ed.), Münchener Handbuch des Gesellschaftsrechts Band 4-Aktiengesellschaft (5th ed. 2020) (-Rieckers), § 17 19 et seq.Although German Company Law does not qualify corporate officers as the shareholders’ trustees, corporate officers are under a fiduciary obligation towards their corporate entity as they administer and invest third-party monies.11Hoffmann-Becking (-Hoffmann-Becking), § 25 38.Moreover, corporate officers must be mindful of the fiduciary obligations which the company owes to its shareholders.12Lutter/Hommelhoff, GmbH-Gesetz (20th ed. 2020) (Kleindiek), Anh. zu § 6 18 et seq., BGH, judgment of 22 September 2020, NZG 2020, 1343 et seq.,Oberlandesgericht (OLG, Regional Appellate Court) Rostock, judgment of 21 April 2006, OLG-NL 2006, 250 (251), Hoffmann-Becking (-Hoffmann-Becking),§ 25 38 et seq.The board of directors and corporate officers must protect shareholder interests if they want to escape censure from the shareholders and the supervisory board.13See Hoffmann-Becking (Hoffmann-Becking), § 29 28 et seq.

German partnership law and the corporate law rules for limited liability companies and stock corporations do not presume the existence of a trust-like relationship as such.①For a subtle distinction between contractual duties and fiduciary liability see Miller, 63 (4) Uniνersity of Toronto Law Journal 570-623 (2013), at p. 604 et seq.Rather, they assess whether an existing legal relationship generates scenarios where a “heightened duty of care” (gesteigerte Treuepflicht) is apposite.②Cf. Hüffer/Koch, Aktiengesetz (München 15th ed. 2021) (-Koch), § 93 28.This allows for a flexible approach as normal duties of care under a bilateral private law contract gradually intensify on their trajectory from long-term relationships to corporate settings. The doctrinal starting point for ascertaining the scope of potential fiduciary obligations is “membership.”③See BGH, judgment of 22 January 2019, NZG 2019, 702 (703). See infra sub II.“Membership” triggers specific fiduciary obligations among the members of a corporate entity, between the corporate entity and its members and vice-versa, and members stand to benefit from the discharge of such duties as corporate officers owe to their corporation. In the context of “membership,” fiduciary obligations present a highly flexible concept. They may vary according to the type of the corporate form.④Baumbach/Hopt, Handelsgesetzbuch (München 40th ed., 2021) (-Roth), § 109 23.Fiduciary obligations supply workable standards where-as in closed or family companies⑤See Lorenz Holler/Maximilian Mann, Die gesellschaftsrechtliche Treuepflicht in der Familiengesellschaft, NZG 2021, 402 et seq.-the disciplinary effect of the market for corporate control is ineffectual or nonexistent.⑥Cf. Brigitte Haar, Die Personengesellschaft im Konzern-Priνatautonomie zwischen Vertrag und Organisation (Tübingen 2006), 95 et seq., 101 et seq.If a corporate entity has strong “capitalistic” elements, an analogy with large corporations with dispersed shareholders is appropriate.⑦See BGH, judgment of 19 November 1984, NJW 1985, 972 (973).

In exploring directors’ duties, German law makes a distinction between the duty of legality and the duties of loyalty and “heightened care” (or care with fiduciary elements).⑧See Hoffmann-Becking (-Hoffmann-Becking), § 25 31 et seq., Lutter/Hommelhoff (-Kleindieck), § 43 10 et seq., 19.The duty of legality focuses on the prohibition of misappropriations and conflicts of interest. Directors must prevent the corporation from committing breaches of law. In discharging their duties of loyalty and care, directors will be judged based on the business judgment rule.⑨Marcus Lutter, Die Business Judgment Rule und ihre praktische Anwendung, ZIP 2007, 841 (842 et seq.); Lambertus Fuhrmann et al., Gesetzliche Beurteilungs- und Ermessensspielr?ume als “spezial-gesetzliche Business Judgment Rule”, NZG 2020, 1368 et seq.Directors’ fiduciary obligations arise in the context of the duty of loyalty and care. This “heightened duty of care” (or duty of care with fiduciary elements) is conditioned on factual scenarios and is mostly judge-made.⑩For a detailed analysis see Holger Fleischer/Frauke Wiedemann, Kodifikation und Derogation von Richterrecht, AcP 209 (2009), 597-627.

This paper will survey the relevant statutes for corporate activities and will then focus on the“membership” notion as a starting point for analyzing fiduciary elements among members, between members and their corporate entity and vice versa. The analysis will then assess the scope of fiduciary obligations owed by the directors to their respective entities when they invest monies put at the disposal of the corporation. A section on tort law and criminal law liabilities of directors concludes.

Codified Law

Statistics

Analyzing fiduciary concepts of German Company Law requires an exercise in statistics.Businesses which have chosen the corporate form include family-controlled entities, and corporations listed on the stock exchange with dispersed shareholders. The impact of court-designed rules hinges on the economic relevance of specific corporate forms and their contribution to the German GDP. Stock corporations figure prominently among the country’s enterprises with the highest turnover.①See Gr??te deutsche Unternehmen nach ihrem weltweiten Umsatz im Gesch?ftsjahr 2019/2020 (available at https://de.statista.com/statistik/daten/studie/12917/umfrage/rangliste-der-500-groessten-unternehmen-deutschlands/).However,when it comes to analyzing the total turnover of German companies, family-controlled businesses take a share of 52 percent,②Stiftung Familienunternehmen, Die νolkswirtschaftliche Bedeutung νon Familienunternehmen (5th ed. 2019) at p. 6. (available at https://www.familienunternehmen.de/media/public/pdf/publikationen-studien/studien/Die-volkswirtschaftliche-Bedeutung-der-Familienunternehmen-2019_Stiftung_Familienunternehmen.pdf).employing 58 percent of the country’s workforce.③Holger Fleischer, Vergleichendes Familiengesellschaftsrecht am Beispiel abberufener Familiengesellschafter-Gesch?ftsführer, GmbHR 2021, 113-120 (at p.113).As of January 1, 2020,14,193 stock corporations (AG’s-Aktiengesellschaften) and 363 partnerships limited by shares (KGaG’s-Kommanditgesellschaften auf Aktien) did business.④Udo Kornblum, Bundesweite Rechtstatsachen zum Unternehmens- und Gesellschaftsrecht (Stand 1.1.2020), GmbHR 2020, 677, 678.But they were by far outnumbered by 1,329,277 limited liability companies (GmbH’s-Gesellschaften mit beschr?nkter Haftung).⑤Ibid.During the past decade (2010-2020), the total number of stock corporations declined by 19.3 percent;⑥Ibid., at p. 687.that of limited liability companies increased by 30.8 percent⑦Ibid., at p. 686.and that of limited partnerships by 17.7 percent.⑧Ibid., at p. 685.The share of stock corporations listed at a stock exchange has been declining.⑨Institut der Deutschen Wirtschaft K?ln, Unternehmensfinanzierung-Was sind die Gründe für die rückl?ufigen B?rseng?nge? IW-Trends 3. 2017 (available at https://www.iwkoeln.de/fileadmin/publikationen/2017/363282/IW-Trends_2017-03-05_Demary_Roehl.pdf).Forty percent of the corporations listed at the stock exchange are either family-owned or controlled.⑩Stiftung Familienunternehmen, B?rsennotierte Familienunternehmen-Bedeutung, Merkmale, Performance (2019), at p. 57 (available at https://www.familienunternehmen.de/media/public/pdf/publikationen-studien/studien/Boersennotierte-Familienunternehmen-in-Deutschland_Studie_Stiftung-Familienunternehmen_2019.pdf).Seventy-eight percent of the limited liability companies are family-owned.11Ibid., at p. 12.

Statutory Concepts

The German legal divide is between private and public business entities. German law does not operate with a unitary statutory instrument for business activities with corporate elements. Planning for business activities takes place in the context of theCommercial Code(Handelsgesetzbuch)12For an English translation see: https://www.gesetze-im-internet.de/englisch_hgb/englisch_hgb.pdf.for (limited)partnerships, theLimited Liability Companies Act(GmbH-Gesetz)13For an English translation see: https://www.gesetze-im-internet.de/englisch_gmbhg/.and theStock Corporation Actfor listed and non-listed corporations (Aktiengesetz).14For an English translation see: https://www.gesetze-im-internet.de/englisch_aktg/.In view of the prevalence of family-owned companies and non-listed stock corporations the crucial question is whether the case law has succeeded in replicating market-oriented standards for tightly-knit structures.15Cf. Haar, at p. 96 et seq.

Legal doctrine has not dispensed with the emphasis on personalistic elements of partnerships.16See Haar, at p. 95 et seq., also for closed companies with personalistic structures: Walter Bayer, Empfehlen sich besondere Regelungen für b?rsennotierte und geschlossene Gesellschaften? Gutachten E zum 67. Deutschen Juristentag (München 2008).Historically, shareholders of stock corporations were classified as members of an entity which shielded from outside risks.①From the perspective of legal history: Andreas Dieckmann, Gesamthand und juristische Person (Tübingen 2019), 131 et seq.As a corollary, membership in a listed corporation did not necessarily imply comprehensive protection against the encroachment of shareholders’ financial interests.②For the historic development of shareholder rights and litigation see: Karsten Schmidt, Gesellschaftsrecht (K?ln 3rd ed. 1997), 602 et seq., Mathias Habersack,Die Aktion?rsklage-Grundlage, Grenzen und Anwendungsf?lle, DStR 1998, 533 et seq.; Theodor Baums/Astrid Keinath/Daniel Gajek, Fortschritte bei Klagen gegen Hauptversammlungsbeschlüsse? Eine empirische Studie, Frankfurt, Zeitschrift für Wirtschaftsrecht 2007, 1629 (1639 et seq.), Theodor Baums/Florian Drinhausen/Astrid Keinath, Anfechtungsklagen und Freigabeverfahren, Eine empirische Studie, Zeitschrift für Wirtschaftsrecht 2011, 2329 (2332 et seq.).Nonetheless, the judicial focus on quasi-fiduciary structures has evolved into reading extensive duties of care with fiduciary elements into the law of stock corporations, both listed and unlisted.③See infra sub II.2.This suggests a potential for a fiduciary dynamic which is finely tuned to the organizational features of the respective business entity. There are (personalistic) limited liability companies with tightly-knit family structures which resemble limited partnerships. Conversely, limited partnerships may assume the capitalistic structures of a public (listed) company so that an analogy with the law for limited liability companies or elements of stock corporation law is apposite.④See BGH, judgment of 11 September 2018, NZG 2018, 1226 et seq., OLG Celle, judgment of 26 August 1998, NZG 1999, 64 (65).It is now common ground that fiduciary elements operate as a constraint on the abuse and encroachment of membership rights in stock corporations.⑤See Wolfgang Richter, Der Kapitalmarkt und sein Gesellschaftsrecht-überlegungen zu einem kapitalmarktgem??en Gesellschaftsrecht b?rsennotierter Gesellschaften -, ZHR 172 (2008), 419-457 (432 et seq-). Münchener Kommentar zum Aktienrecht (München 5th ed. 2021) (-Sch?fer), § 243 AktG 53 et seq.,Bürgers/Fett, Kommanditgesellschaft auf Aktien (München 2nd ed. 2015) (-Wieneke/Fett), § 10 39.

Fiduciary Elements in Partnership Law.Under German law, civil code and commercial law partnerships stand for the most basic, rudimentary form of business organizations. At the outset, these partnerships remain faithful to traditional notions of contract law. Partners, including general and limited partners, conclude a partnership contract for the duration of the partnership. It is instructive to trace the line of cases in Germany’s jurisprudence of the past century when it came to explaining why fiduciary concepts in a partnership setting are different from the contractual duty of good faith under the law of obligations (S. 242 of theGerman Ciνil Code[“Treu und Glauben”]).⑥Section 242 (Performance in good faith): “An obligor has a duty to perform according to the requirements of good faith, taking the customary practice into consideration” (English translation available at https://www.gesetze-im-internet.de/englisch_bgb/englisch_bgb.html#p0731).The predecessor of the current GermanBundesgerichtshof,⑦The Bundesgerichtshof (BGH) is the country’s highest court in private and criminal law matters.theReichsgericht, recognized more than 100 years ago,that the partners of a civil code partnership may not place their personal interests over those of the partnership, which takes precedence.⑧RG (Reichsgericht) judgment of 13 April 1912, LZ 1912, 545.The partners were found to be under a duty to refrain from taking actions detrimental to the partnership.⑨RG, judgment of 16 January 1913, JW 1913, 429 (430).The language of theReichsgericht’sreasoning is still couched in the good faith language of S. 242 of theCiνil Code. But it is clear that theReichsgerichtwas ushering in an emancipation from traditional law of contract concepts when it referred to a “heightened”duty of loyalty and care in a partnership scenario.⑩RG, judgment of 7 February 1930, RGZ 128, 1 (16): the principles of good faith apply to company law with an exceptional degree, accord: judgments of 11 November 1933, RGZ 142, 213 (216) and of 8 April 1943, RGZ 171, 51 (54) (also a relationship of mutual confidence between partners).German standard legal doctrine now classifies the corporate duty of loyalty and care with fiduciary elements as customary law, although the exact confines remain unclear.①See the analysis in Mann, 26 et seq.Nonetheless, this is a workable definition as long as courts and legal theory reject a contractual opt-out of this corporate duty with fiduciary elements.②See Mann, at p. 105 et seq., cf. Baumbach/Hopt (-Roth), § 109 23 for (limited) partnerships.

Limited Liability Companies—The Statutory Model.S. 2 oftheLimited Liability Company Actstill requires a contract between the founding shareholders for the establishment of the company.③Section 2 of the Law on Limited Liability Companies (Form of articles of association):“(1) The articles of association require a notarial form. They must be signed by all the shareholders.(1a) The company may be formed under a simplified procedure if it has no more than three shareholders and one director. The model protocol proνided in the Annex must be used to form a limited liability company under the simplified procedure. No further proνisions which derogate from the law may be laid down.The model protocol also serνes as the list of shareholders. In all other respects, the proνisions set out in this Act concerning the articles of association shall apply mutatis mutandis to the model protocol.(2) The articles of association may be signed by authorized representatiνes only on the basis of a power of attorney established or authenticated by a notary.”Section 3 of the Law on Limited Liability Companies (Content of articles of association):“(1) The articles of association must stipulate the following:1.The company’s business name and the place of its registered office,2.The purpose of the enterprise,3.The amount of the share capital,4.The number and nominal νalues of the shares to which each shareholder subscribes against payment of the capital contribution into the share capital (original capital share).(2) If the enterprise is to be formed for a specific term or if other obligations νis-à-νis the company are to be imposed on the shareholders in addition to payment of a capital contribution, these proνisions must also be included in the articles of association.”But it is obvious that the contract for the establishment of a limited liability company attains a legal quality different from that of a bilateral contract under the law of obligations: The interpretation of the contract for the establishment of a limited liability company (i.e., the articles of association) will have to observe objective standards; the intent of the founding shareholders is normally irrelevant.④BGH judgments of 16 December 1991, BGHZ 116, 359 (364), 27 September 2011, NZG 2011, 1420, Lutter/Hommelhoff, GmbH-Gesetz (20th ed. 2020) (-Bayer),§ 2 19 et seq.TheLimited Liability Actallows for freedom of contract. But due to the fact that many limited liability companies are family businesses, many articles of association and shareholder agreements limit the free transferability of shares.⑤See Heribert Heckschen/Jannick Weitbrecht, überfremdungsschutz im GmbH- und Aktienrecht, NZG 2019, 721 et seq.The Limited Liability Statuteprovides for a catalog of minimum rights that shareholders enjoy, e.g., minority rights, rights to receive information, and the right of first refusal if legal capital is raised. But generally, the statute is silent on duties of loyalty and care which shareholders might owe to the company or to other fellow-shareholders. There is no provision for procedural rights to challenge a decision of the general meeting of shareholders before a court of law. Practitioners have resorted to so-called side contracts, establishing a complicated relationship between the law of obligations and company law.⑥See Peter Ulmer, Verletzung schuldrechtlicher Nebenabreden als Anfechtungsgrund im GmbH-Recht? NJW 1987, 149 et seq., Hartmut Wicke,Schuldrechtliche Nebenvereinbarungen bei der GmbH-Motive, rechtliche Behandlung, Verh?ltnis zum Gesellschaftsvertrag, DStR 2006, 1137 et seq.The director (Gesch?ftsführer) of a limited liability company must discharge his duties towards the company with the care of a prudent businessman.⑦See s. 43 (1) of the Limited Liability Company Act: “The directors shall conduct the company’s affairs with the due care of a prudent businessman.”This entitles aGesch?ftsführerto a certain degree of discretion, similar to the US business judgment rule.⑧Lutter/Hommelhoff (-Kleindiek), § 43 23 et seq.On the other hand, theGesch?ftsführerof a limited liability company must file for insolvency,once he has become aware of the company’s illiquidity or over-indebtedness: Failure to do so will expose the director to personal liability, making it difficult to negotiate rescuing plans in the vicinity of insolvency.①See s. 64 of the Limited Liability Companies Act (Liability for payments following illiquidity or over-indebtedness): “The directors shall be obligated to compensate the company for payments made after the company has become illiquid or after it is deemed to be oνer-indebted. This shall not apply to payments which, after this point in time, are compatible with the due care of a prudent businessman. The directors shall be under the same obligation in regard to payments to shareholders if these led to the company becoming illiquid, unless this was not recognizable whilst obserνing the due care referred to in the second sentence. Section 43 (3) and (4) shall apply mutatis mutandis to any claim for compensation.”

Stock Corporation Act—Legislative Assumptions.The organizational model which informs theStock Corporation Actis still the stock corporation listed at a stock exchange. The traditional listed corporation is two-tier, with the supervisory board policing executive officers for breaches of liability.②See ss. 76 et seq., 95 et seq. of the Stock Corporation Act.Contrary to US corporate statutes, German law conditions the organizational benefits of a stock corporation with legal personality on severe restrictions of the freedom of contract.③The courts will recognise, however, side-agreements under the law of obligations: BGH, judgment of 22 January 2013, NZG 2013, 220 (221) (reviewing the case law).An opt-out of mandatory law is virtually impossible.④See s. 23 (5) of the Stock Corporation Act: “The by-laws may deνiate from the regulations of the present Act only where this has been expressly permitted.Supplementing the by-laws by additional determinations is permissible unless the present Act proνides conclusiνely for the matter.”But family and mid-size businesses are exempt from the listing regime and certain accounting rules.⑤See Peter Kindler, Die Aktiengesellschaft für den Mittelstand Das Gesetz für kleine Aktiengesellschaften und zur Deregulierung des Aktienrechts, NJW 1994, 3048 et seq., Bernd B?sert, Das Gesetz für kleine Aktiengesellschaften und zur Deregulierung des Aktienrechts --Ein überblick über Hintergrund und Inhalt -, DStR 1994, 1423 et seq., Andreas Lohner, Die ?kleine AG“ im Aktiengesellschaftsrecht (Regensburg 2002), at p. 56 et seq.

TheStock Corporation Actrefrains from specifying extensively the scope of fiduciary duties owed in the context of a corporation. Contrary to theLimited Liability Company Act, there are, however,some provisions which might be read as a reference to a fiduciary scenario which needs to be fleshed out by the courts. S. 53a of theStock Corporation Actenshrines the non-discrimination principle for the benefit of shareholders which is supplemented by situation-specific fiduciary obligations.⑥S. 53a Stock Corporation Act (Equal Treatment of Shareholders): “Subject to the same pre-requisites being giνen, stockholders are to be treated equally.”S. 117⑦S. 117 Stock Corporation Act (Obligation to provide compensation for damages):“(1) Anyone who intentionally compels, by exploiting his influence on the company, a member of the management board or of the superνisory board, an officer of the company νested with full commercial power of attorney (Prokurist), or an authorised agent to act to the detriment of the company or its stockholders shall be under obligation to proνide compensation to the company for the damage it has suffered as a result. Such party shall also be under obligation to compensate the stockholders for the damage they haνe suffered as a result, insofar as they haνe suffered damage aboνe and beyond the damage that has been caused them by the damage caused to the company.(2) In addition to that person, the members of the management board and of the superνisory board shall be liable as joint and seνeral debtors if they haνe acted in dereliction of their duties. Where it is in dispute whether they haνe exercised the due care of a prudent manager faithfully complying with his duties,the onus of proof shall be upon them. The obligation of the members of the management board and of the superνisory board to proνide compensation shall not arise νis-à-νis the company and also not νis-à-νis the stockholders if the action taken is based on a lawful resolution adopted by the general meeting. The fact that the superνisory board has endorsed the action does not preclude the obligation to proνide compensation.(3) In addition to that person, furthermore, those parties shall be liable as joint and seνeral debtors who haνe obtained an adνantage by the action causing damage, should such parties haνe intentionally instigated the influence being exerted.(4) Section 93 (4), third and fourth sentences, shall apply mutatis mutandis to the release from the obligation to proνide compensation νis-à-νis the company.(5) The company’s claim to compensation may also be asserted by its creditors inasmuch as they are unable to obtain satisfaction from the company. The company’s waiνing its claims to compensation, or concluding a compromise regarding these claims, shall not serνe to release it from the obligation to proνide compensation to the creditors, nor will it be so released from this obligation by the fact that the action is based on a resolution adopted by the general meeting. Where insolνency proceedings haνe been opened for the company’s assets, the insolνency administrator or the insolνency monitor shall exercise the right of the company’s creditors for the duration of said proceedings.(6) The claims goνerned by the present regulations shall become statute-barred within fiνe (5) years.(7) The aboνe regulations shall not apply if the member of the management board or of the superνisory board, the officer of the company νested with full commercial power of attorney (Prokurist), or the authorized agent has been compelled to take the action causing damage by either of the following being exercised:1. The power of direction based on a control agreement, or2. The power of direction of a principal company (section 319) into which the company is integrated.”provides for a duty to pay damages to the corporation and to shareholders if members of the board of directors or the supervisory board acted under undue the influence on the corporation, thereby causing damage to the corporation. Similarly, a controlling shareholder may not cause a dependent corporation to undertake a disadvantageous business transaction unless the corporation receives compensation for the disadvantages caused (S. 311 et seq.).

S. 93 of theStock Corporation Actis the core norm for fleshing out directors’ duties.①S. 93 Stock Corporation Act (Duty of the members of the management board to exercise skill and care, liability and responsibilities):“(1) In managing the affairs of the company, the members of the management board are to exercise the due care of a prudent manager faithfully complying with his duties. No dereliction of duties shall be giνen in those instances in which the member of the management board, in taking an entrepreneurial decision,was within his rights to reasonably assume that he was acting on the basis of adequate information and in the best interests of the company. The members of the management board are to respect the secrecy of any confidential information and secrets of the company, particularly trade secrets or business secrets, of which they haνe become aware in the context of their actiνities in the management board. The obligation set out in the third sentence shall not apply νis-à-νis an audit and enforcement panel recognized pursuant to section 342b of the Commercial Code (HGB) in the context of an audit performed by this panel.(2) Members of the management board acting in dereliction of their duties are liable as joint and seνeral debtors to compensate the company for any damage resulting therefrom. Where it is in dispute whether or not they exercised the due care of a prudent manager faithfully complying with his duties, the onus of proof shall be on them. Where the company has taken out insurance to protect a member of the management board against risks arising from his professional actiνities for the company, the insurance policy is to proνide for a deductible of at least ten (10) percent of the damage, up to a minimum of one hundred and fifty (150) percent of the annual fixed remuneration of the member of the management board.(3) The members of the management board shall be under obligation to proνide compensation, particularly, in these instances in which, in contraνention of the present Act,1. Contributions are restituted to the stockholders,2. Stockholders are paid interest or participate in the profits,3. Treasury shares of stock in the company or in some other company haνe been subscribed to, purchased, accepted in pledge, or redeemed,4. Shares of stock are issued prior to the issue price for them haνing been fully paid in,5. The company’s assets are distributed,6. Payments are made in contraνention of section 92 (2),7. Remunerations are granted to the member of the superνisory board,8. Loans are granted,9. Shares of a new issue are issued in the context of the conditional capital increase, and this is done outside of the purpose specified therefor or prior to the equiνalent νalue haνing been fully paid.(4) The obligation to proνide compensation shall not arise νis-à-νis the company where the action taken is based on a lawful resolution adopted by the general meeting. The fact that the superνisory board has endorsed the action does not preclude the obligation to proνide compensation. The company may waiνe its claims to compensation, or conclude a compromise regarding these claims, only once three (3) years haνe elapsed since the arisal of the claim, and only in those cases in which the general meeting approνes this being done and no minority, the aggregate of whose shares is at least equiνalent to one tenth of the share capital, raises an objection and has it recorded in the minutes. The limitation in time shall not apply where the party obligated to proνide compensation is unable to pay his debts as they become due and concludes a compromise with his creditors in order to aνert insolνency proceedings or if the compensation obligation is proνided for in an insolνency plan.(5) The company’s claim to compensation may also be asserted by its creditors insofar as they cannot obtain satisfaction from the company. Howeνer, this shall apply in cases other than those goνerned by subsection (3) only in those instances in which members of the management board haνe grossly νiolated their duty to exercise the due care of a prudent manager faithfully complying with his duties; subsection (2), second sentence, shall apply mutatis mutandis.The obligation to proνide compensation shall not be canceled νis-à-νis the creditors by a waiνer by the company or by its concluding a compromise, nor shall the fact that the action is based on a resolution adopted by the general meeting cancel this obligation. Where insolνency proceedings haνe been opened for the company’s assets, the insolνency administrator or the insolνency monitor shall exercise the right of the company’s creditors against the members of the management board for the duration of said proceedings.(6) The claims goνerned by the present regulations shall become statute-barred, in the case of companies that were listed on a stock exchange at the time at which the dereliction of duties occurred, after ten years; in the case of other companies after fiνe years.”The members of the board of directors have to discharge their duties with the care of a prudent businessman when they take action for the benefit of the corporation. From the perspective of legal theory, members of the board of directors are under a double set of duties. They have to observe a catalog of statutory duties of legality and of loyalty and care. In addition, the judge-made law on a “heightened duty of care” imposes a specific set of fiduciary obligations, tailored to the respective corporate business situation. S. 161 of theStock Corporation Act②S. 161 of the Stock Corporation Act (Declaration pursuant to the Corporate Governance Code):“(1) The management board and the superνisory board of a company listed on the stock exchange shall declare annually that the recommendations of the Goνernment Commission on the German Corporate Goνernance Code published by the Federal Ministry of Justice and Consumer Protection (BMJV) in the official section of the Federal Gazette (Bundesanzeiger) haνe been and are being complied with, or which of the Code’s recommendations haνe not been applied or are not being applied and the reasons therefor. The same shall apply to the management board and the superνisory board of a company which has exclusiνely issued other securities than shares of stock for trading on an organized market in the sense of section 2 (11) of the Securities Trading Act (WpHG)and the issued shares of stock of which are traded, on the company’s own initiatiνe, only νia a multilateral trading facility in the sense of section 2 (8), first sentence, no. 8 of the Securities Trading Act(2) The declaration shall be permanently made accessible to the public on the company’s website.”requires listed corporations to comply with theGermanCorporate Goνernance Code,①German Corporate Goνernance Code (16 December 2019) (available at https://www.dcgk.de//files/dcgk/usercontent/en/download/code/191216_German_Corporate_Governance_Code.pdf).or, alternatively, explain why such code is not observed. Principle A.I.4.of the latestGerman Corporate Goνernance Codeexpects the board of directors to establish internal control procedures and appropriate risk management systems. Principle E.19.1 addresses potential conflicts of interest. Directors must declare an interest, subscribe to a non-compete clause, and refrain from asserting business opportunities due to the corporation. It remains to be seen how the courts will translate this catalog of not formally mandatory rules into fiduciary obligations. The members of the board of directors have to be mindful of the criminal law prohibitions against embezzling shareholder funds. Ultimately, this will translate into a prophylactic (fiduciary) obligation not to engage in high-risk projects without a proper risk assessment.②See infra sub IV.

Breach of Fiduciary Obligations—Statutory Remedies

In supplying remedies for breaches of fiduciary obligations, German law maintains the doctrinal divide between partnerships and business entities with legal capacity, i.e., limited liability companies and stock corporations. Partnerships with a personalistic character may sue a partner in breach of fiduciary obligations towards the partnership.③See OLG Karlsruhe, judgment of 16 December 2005, BeckRS 2006, 2269. For an assessment of the current status quo and the obstacles that had to be overcome in developing a concept for judicial protection of partners: Jens Koch, Empfiehlt sich eine Reform des Beschlussm?ngelrechts im Gesellschaftsrecht?,Gutachten F zum 72. Deutschen Juristentag (München 2018), F 74 et seq. For a comment on the judicial acknowledgment of partners’ rights to sue, see Haar,97 et seq.If a majority of partners disregard minority rights,the partnership can be sued to set aside a vote of the partners.④See OLG Düsseldorf, decision of 10 December 1982, OLGZ 1983, 191 (193 et seq.), judgment of 23 November 2017, RNotZ 2018, 191 (193 et seq).Damages can be envisaged once the principle of non-discrimination has been infringed.⑤Baumbach/Hopt, (-Roth), § 109 HGB 36.The courts have recognized a so-calledactio pro socio, where a partner can sue a managing partner for breach of his duties towards the partnership,⑥Nonetheless, an actio pro socio will be abusive and hence, a breach of fiduciary obligations owed towards co-partners, if it infringes their membership status:BGH, judgment of 22 January 2019, NZG 2019, 702.provided that the action will require the managing partner to make a payment of damages to the partnership.⑦BGH judgments of 17 June 1953, BGHZ 10, 91 (102 et seq.), 27 September 1957, BGHZ 25, 47 (50 et seq.), Baumbach/Hopt (-Roth), § 109 HGB 32 et seq.It should be noted that litigation in closely-knit ownership structures in family businesses is likely to provoke the end of activities which crucially depend on cooperative behavior of participants.

Traditionally, German law has been reluctant to facilitate shareholder empowerment through litigation. The statute on limited liability companies is silent on remedies to redress breaches of the duty of care with fiduciary elements, leaving it to the courts to flesh out rules for fiduciary remedies.⑧Walter Beyer/Sven M?ller, Beschlussm?ngelklagen de lege lata und de lege ferenda, NZG 2018, 801 (806 et seq.), Hartmut Rensen,Beschlussm?ngelstreitigkeiten in der GmbH (Baden-Baden 2014), 25 et seq. See also: Koch, at p. F 70 et seq.This is also applied to (limited) partnerships which resemble limited liability companies or stock corporations.⑨BGH, judgment 11 September 2018, NZG 2018, 1226 et seq.Over the years, courts have instrumentalized the corporate duty of care (Treuepflicht)to expand shareholders’ rights.⑩See the detailed analysis by Holger Fleischer, Mitgliedschaftliche Treuepflichten: Bestandsaufnahme und Zukunftsperspektiven, GesRZ 2017, 362 et seq.Statutory remedies under theStock Corporation Actare available by analogy to limited liability companies and to (limited partnerships) with capitalistic features,11See Koch, supra FN 8, at F 74 et seq.including theactio pro socio.①OLG K?ln, judgment of 5 November 1992, NJW-RR 1994, 616 et seq., Lea K. Kumkar, Die actio im GmbH-Recht, NZG 2020, 2012 et seq., Lutter/Hommelhoff(-Bayer), § 13 51. Filing an actio pro socio is, however, subject to fiduciary constraints: see BGH, judgment of 22 January 2019, NZG 2019, 702.Moreover, the legislator has cautiously moved to expand shareholders’rights under theStock Corporation Act.②See Gerald Spindler, Haftung und Aktion?rsklage nach dem neuen UMAG, NZG 2005, 865 et seq., Beyer/M?ller, supra FN 85, NZG 2018, 801 (802 et seq.).

Under S. 245 (1) of theStock Corporation Act, a shareholder can apply to the court to have a vote of the general meeting set aside or declared null and void. The action for a declaration of nullity or for setting aside a vote must be directed against the corporation.③If shareholders sue, the corporation will be represented by the board of directors and the supervisory board. If the board of directors or an individual director sue, the supervisory board will represent the corporation. The board of the directors will represent if the action has been brought by a member of the supervisory board (s. 246 (2) of the Stock Corporation Act). The right to have a vote of the general meeting of shareholders quashed or declared null and void extended to resolutions appointing members of the supervisory board (s. 250 (1) of the Stock Corporation Act). A declaration for nullity will be issued where the resolution disregards mandatory provisions of codetermination or stock corporation laws. This includes, inter alia, a resolution which appoints a member who already holds a total of ten posts on supervisory boards of corporations under a statutory duty to establish such a board (s. 250 (1) (4) of the Stock Corporation Act). With respect to actions against resolutions appointing members of the supervisory board, shareholders, members of the board of directors and the supervisory board or the boards as an entity, workers’ councils or trade unions represented in the corporation or a dependent enterprise have standing (s.250 (2) of the Stock Corporation Act).Nullity may be invoked if substantial procedural requirements have been disregarded, or the vote conflicts with the essentials of a stock corporation, rules on creditor protection, or public policy (S. 241 of theStock Corporation Act). A shareholder may challenge a resolution which is the result of an agreement between the dominant shareholder and the board of directors.④BGH, judgment of 1 February 1988, NJW 1988, 1579 et seq.A dominant shareholder may not fabricate a shareholder resolution as an instrument of self-dealing.⑤Cf. Pierre-Henri Conac/Luca Enriques/Martin Gelter, Constraining Dominant Shareholders‘ Self-Dealings, The Legal Framework in France, Germany and Italy, 4 Eur. Comp. & Fin. L. Reν. 491 (514) (2007).

S. 148 of theStock Corporation Actis reminiscent of a derivative suit mechanism, but overly burdensome for the individual shareholder:⑥Klaus Ulrich Schmolke, Die Aktion?rsklage nach § 148 AktG, ZGR 2011, 398 (410).Shareholders who own one percent of the legal capital of a corporation or a total of shares of € 100,000 or more, may apply to the court for permission to file a claim for damages against a member of the board of directors or the supervisory board on behalf of the corporation irrespective of whether the general meeting of shareholders has passed a resolution in favor of litigation.⑦On this Klagezulassungsνerfahren (“l(fā)awsuit admission procedure”): Pierre-Henri Conac/Luca Enriques/Martin Gelter, 4 Eur. Com. & Fin. L. Reν. 491 (507)(2007).

To provide for fiduciary remedies for limited capitalistic partnerships, practitioners have resorted to writing the procedural requirements of stock corporation law into the respective contracts for the establishment of such limited partnerships.⑧BGH, judgment of 19 October 2009, DStR 2009, 2495-The courts have condoned this, but have shied away from allowing a general analogy with the shareholder litigation remedies under stock corporation law.⑨See BGH, judgments of 17 July 2006, DStR 2006, 1711, and of 19 October 2009, DStR 2009, 2495.Instead, one of the procedural remedies available to partners who argue about the scope of fiduciary obligations in a capitalistic partnership is an application for a declaratory judgment that the vote taken disregarding the dissenting partner is valid (or not).⑩BGH, decision of 26 March 2007, NJW-RR, 2007, 1477 (1478). See Lutter/Hommelhoff (-Bayer), Anh zu § 47, 30 et seq., 40 et seq.A declaratory judgment will not issue, however, if the majority plans to infringe the core of membership rights of a minority partner.11Cf. BGH judgment of 24 November 2008, BGHZ 179, 13 (21) (Schutzgemeinschaftsνertrag II).

The Membership Perspective: Duties of Loyalty and Care with Fiduciary Elements

From Beginnings in Partnership Law to Limited Liability Companies

As members of a partnership have pooled money to engage in joint business activities, they are mutually dependent, and owe each other a heightened degree of confidence which transcends the standard of care and good faith under a normal bilateral contract. The heightened degree of mutual confidence in a partnership results in specific behavioral duties of advancing the business purpose of the partnership,①BGH, judgment of 8 May 1989, NJW 1989, 2687 (2688).but also to refrain from actions that might be detrimental to the interests of another partner.②See BGH, judgment of 22 January 2019, NZG 2019, 702 (703).At this stage, the notion of duty of care with fiduciary elements kicks in. German partnership law recognizes a core of membership rights of the partner which neither the partnership nor the other members may infringe.③BGH, judgment of 10 October 1994, NJW 1995, 194 (195 et seq.), cf. Haar, at p. 96 et seq.Conversely, a partner may be required to approve steps undertaken to advance the interests of a partnership, although the envisaged measure may be detrimental to his own financial interests.④BGH, judgment of 10 October 1994, NJW 1995, 194 (195 et seq.).TheBundesgerichtshofhas relied on an analogy to extend these principles to limited liability companies. Although established as an entity with judicial capacity, the personalistic structure of a limited liability company frequently replicates the tightly-knit structure of a (commercial)partnership where members play an active role in determining the business strategy of their enterprise.Thus, the shareholders of a limited liability company owe a heightened duty of care and loyalty (or a duty of care with fiduciary elements) not only to the company as an entity with legal capacity, but also to their fellow member-shareholders.⑤BGH, judgment of 5 June 1975, BGHZ 65, 15 (19).This may translate into a duty to not block business measures supported by a majority of shareholders for the benefit of the company even though the minority shareholders may suffer financially. However, the imposition of any such a duty to take action is predicated on a proportionality assessment.⑥Oberlandesgericht (OLG, regional court of appeal) München, judgment of 28 July 2008, NZG 2009, 25 (26 et seq.), see also Jens Koch, Empfiehlt sich eine Reform des Beschlussm?ngelrechts im Gesellschaftsrecht? Gutachten F zum 72. Deutschen Juristentag (München 2018), F 92 et seq.A breach of this duty may give rise to a claim for damages which the affected shareholder can initiate in his individual capacity.⑦See BGH judgments of 14 May 1990, NJW 1990, 2627 (discriminatory measures), 30 September 1991, DStR 1992, 150 et seq. (hidden distribution of profits).This would also be the case when the statutory balance between shareholder rights and management powers has been disregarded,resulting in an unjustified salary for a shareholder-manager.⑧BGH, judgment of 11 December 2006, NZG 2007, 185 (186).

Stock Corporations

Originally, the capitalistic structure of stock corporations was believed to exclude any shareholder duties of specific care and consideration for fellow-shareholders.⑨See on the history of the action to set aside a resolution of the shareholders‘ meeting: Markus Emmerich, Die historische Entwicklung νon Beschlussνerfahren und Beschlusskontrolle im Aktienrecht im Gesellschaftsrecht der Neuzeit unter besonderer Berücksichtigung des Aktienrechts (Berlin (2000), 131 et seq. For a survey of the development of German cases: Marcus Wandrey. Materielle Beschlusskontrolle im Aktienrecht-Eine Untersuchung der beweglichen Schranken des Aktion?rsstimmrechts (München 2012), 54 et seq.Moreover, the judicial emphasis on the personalistic structure of the limited liability and the closely-knit web of overlapping business between its shareholders seemed to foreclose an extension of the fiduciary analogy to stock corporations.①See e.g., BGH, judgment of 16 February 1976, BeckRS 1976, 31115257.Nowadays, courts and scholars acknowledge that shareholders owe a heightened duty of care (or a duty of care with fiduciary elements) to the corporation and other fellow-shareholders.②See Janke, at p. 229 et seq.From a comparative law perspective, it is interesting to see how this interpersonal duty of care to fellow-shareholders was deduced. In a first step, courts noted that if a corporate body had a specific internal structure, it could not be convincingly argued that a legal form should dominate the substance of identical governance structures. Thus, a heightened duty of care (or a duty of care with fiduciary elements) between shareholders of the small corporation with tightly-knit structures came to be recognized.③BGH, judgment of 1 February 1988, BGHZ 103, 184 (190 et seq.).Once the shareholders in small, personalistic corporations had become exposed to a heightened-duty analysis, the courts began to reflect upon the legal and economic situation of individual shareholders, especially minority shareholders in larger corporations. The heightened duty of care was so construed as to protect the core rights of minority shareholders. The leitmotif of minority protection via a heightened duty of care (or a duty of care with fiduciary elements) is to protect the financial interests of shareholders who might otherwise be exploited by maneuvers of the majority and an obedient board of directors.④BGH judgments of 25 November 2002, NZG 2003, 280 (281) (Macotron) and 25 November 2002, NZG 2003, 216 (219) (Hypobank).Over the years, this re-defined duty with fiduciary elements has become a flexible instrument, which can also be adjusted to the specific economic situation of a stock corporation⑤BGH judgment of 5 July 1999, NZG 1999, 1158 (1159) (Hilgers); OLG Stuttgart, judgment of 23 July 2003, NZG 2003, 1025 (1027).or a limited liability company,⑥BGH, judgment of 12 April 2016, NZG 2016, 781 (782) (Media-Saturn).so that minority shareholders may also owe a comparable duty to the majority in a situation of financial distress.⑦BGH, judgment of 20 March 1995, BGHZ 129. 136 (151 et seq,).

Fiduciary concepts now operate to clarify the relationship between shareholders, especially between majority and minority shareholders. The corporate entity is under a fiduciary obligation to ensure that a shareholder of a limited liability company or stock company can exercise his or her membership rights.⑧See BGH, judgments of 19 September 1994, BGHZ 127, 107 (111 et seq.) (BMW), of 9 June 1954, BGHZ 14, 25 (38), 1 February 1988, BGHZ 103, 184 (194).On the other hand, fiduciary obligations are frequently invoked in order to compel shareholders into acceptance of restructuring plans for a corporate entity in financial distress.⑨See infra sub II.3.b.

Corporate Membership Duties and Self-interest

Basics

In determining the exact scope of a shareholder’s fiduciary obligation towards his or her corporation,German corporate law doctrine makes a distinction between the exercise of altruistic (i.e., corporationrelated) and self-interested membership rights. The exercise of the latter serves the personal business interests of the latter, unrestrained by the business purpose and the focus of the corporation⑩See Hoffmann-Becking (-Rieckers), § 17 24 et seq.. Selfinterested membership rights will only conflict with general fiduciary obligations towards the corporation if they are exercised in a gross, abusive manner.①Ibid., at § 17 25.This may be the case if a majority shareholder attempts to change the agenda of the general meeting of shareholders to engineer the appointment of a new board of directors likely to implement a business measure which is detrimental to the corporation and the minority shareholders.②Kammergericht (Regional Appellate Court) Berlin, ruling of 3 December 2012, NZG 2003, 441 (443 et seq.) (Ampere).Likewise, blocking the general meeting of shareholders by asking an excessive number of questions③Landgericht (District Court) München, judgment of 28 May 2010, WM 2010, 1699 (1701 et seq.). See also s. 131 (2) of the Stock Corporation Act which allows for a stipulation in the corporate charter to avert an abusive exercise of the shareholder’s right to obtain information and BGH, judgment of 8 February 2010,NJW 2010, 1604 (1605 et seq.).or filibustering can constitute a breach of a fiduciary obligation.④Hoffmann-Becking (-Rieckers), § 17, 25.

These principles also apply to limited liability companies. Although corporations and limited liability companies observe the majority rule,⑤OLG Hamm, judgment of 9 December 1991, DStR 1992, 992.the personalistic structure of a limited liability company triggers fiduciary obligations to the extent that shareholders must take positive action for the benefit of the corporate entity.⑥BGH judgment of 5 June 1975, BGHZ 65, 15 (19), OLG Hamm, DStR 1992, 992; OLG K?ln, judgment of 9 March 1999, NZG 1999, 1167)TheBundesgerichtshofhas accepted that the prohibition not to compete with a partner’s partnership (S.11See the cautious approach in: BGH, judgment of 16 February 1976, BeckRS 1976, 31115257 (Audi/NSU) and the balancing analysis in the BGH’s judgment of 1 February 1988, BGHZ 103, 184 (194 et seq.).2 of theCommercial Code⑦S. 112 of the Commercial Code:“(1) Without the consent of the other partners, a partner may neither conduct any business in the partnership's branch of commerce nor participate as a general partner in another similar commercial partnership.(2) Consent to participation in another partnership shall be deemed to be granted if the other partners know at the time of entering the partnership that the partner is participating as a general partner in another partnership and nonetheless do not expressly stipulate that he giνe up such participation.”) can be extended by analogy to the personalistic structure of a limited liability company.⑧BGH, judgment of 5 December 1983, BGHZ 89, 162 (166).But it seems that this analogy is subject to an important qualification: A shareholder of a limited liability company is under a fiduciary obligation not to compete with their company only if he or she holds a majority position or has the means to control the company.⑨Lutter/Hommelhoff (-Bayer), § 14 39.Moreover, the majority or controlling shareholders breach the fiduciary obligation not to compete if they acquire a majority holding in a competitor; a mere investment in a minority participation is insufficient.⑩Ibid.

It cannot be overlooked that the personalistic origins of the duty of care with fiduciary elements inject an element of uncertainty into the legal analysis of corporations with dispersed shareholders,where the interconnectedness of personal business interests is less important.11See the cautious approach in: BGH, judgment of 16 February 1976, BeckRS 1976, 31115257 (Audi/NSU) and the balancing analysis in the BGH’s judgment of 1 February 1988, BGHZ 103, 184 (194 et seq.).This advises caution whenever a fiduciary obligation is argued to establish a positive duty to take action.12Hoffmann-Becking (-Rieckers), § 17 21.Thus, a duty of care with fiduciary elements predominantly translates into limitations on the exercise of membership rights. A majority shareholder may not infringe on the core shareholder rights of the minority.13See the observations in the BGH judgment of 1 February 1988.In such a scenario, the corporation has to ensure that minority shareholders can exercise their membership rights properly.①BGH, judgment of 9 June 1954, BGHZ 14, 25 (38).Minority shareholders are entitled to receiving qualified information on the protocols of a shareholder meeting as far as their own questions and the answers of board members are concerned.②BGH, judgment of 9 September 1994, BGHZ 127, 107 (111) (BMW).As a corollary, the majority may not instrumentalize the general meeting of shareholders to appoint a specific accountant who appears to be biased with respect to the scrutiny of the annual statement.③BGH, judgment of 22 November 2002, NZG 2003, 216 (219) (Hypobank).On the other hand, a minority shareholder may not abuse quorum requirements for the sheer sake of blocking. Below this threshold, however, there is no duty to protect fellow-shareholders from a negative fall-out from their membership in the corporation.④BGH, judgment of 16 February 1976, BeckRS 1976, 31115257 (Audi/NSU).The (economic) scope of membership rights is defined by the business activities and the purpose of the corporation which the shareholders have associated with by buying shares.⑤BGH, judgment of 22 June 1992, NJW 1992, 2167 (2171) (IBH).

Financial Distress Scenarios

The courts have been frequently asked to clarify the scope of fiduciary obligations for shareholders in a situation of financial distress or in the vicinity of insolvency which could be averted by implementing a restructuring plan (including additional financial contributions).⑥See list of cases in Lutter/Hommelhoff (-Kleindiek), § 43 36 and Hoffmann-Becking (-Rieckers), § 17 29.The courts decline to impose a general (fiduciary) obligation to “save” a corporate entity in a distress scenario.⑦Accord: Lutter/Hommelhoff (-Kleindiek),Moreover,there is no duty of care to consider financial problems of fellow-shareholders unless they translate into direct negative effects for the corporate entity and its activities as stipulated in the corporate charter.⑧BGH, judgment of 22 June 1992, NJW 1992, 3167 (3171) (IBH).Nonetheless, dissenting shareholders have been found to be under a fiduciary obligation to support a restructuring plan submitted by the majority of their fellow-shareholders. The duty to accept and support a restructuring plan for an ailing corporate entity has been deduced from the fiduciary obligations owed to fellow-shareholders. At the outset, such a duty will only be triggered if the restructuring plan is not too speculative⑨See BGH, decision of 2 July 2007, NZG 2007, 860 (assessing the fiduciary obligations of a limited partner in a situation of financial distress of a limited partnership); for limited liability companies with a personalistic structure BGH, judgment of 25 September 1986, BGHZ 98, 276 (280 et seq.).and promises a realistic chance of a recovery.⑩See OLG K?ln, judgment of 9 March 1999, NZG 1999, 1166.A minority shareholder is entitled to project-related information from fellow-shareholders; but their fiduciary obligations do not justify a “fishing expedition” for limitless information11Kammergericht Berlin, judgment of 2 January 2001, NZG 2001, 508 (509).. The focus is on the economic survival of the corporation, not on potential insolvency creditors and their claims against an insolvency estate.12BGH, judgment of 14 February 2019, NJW 2019, 1289 (1291).

TheBundesgerichtshofhas held that the impending, foreseeable illiquidity of a property fund organized as a capitalistic partnership justifies the preparation of a restructuring plan.13BGH, judgment of 9 June 2015, DStR 2015, 2188 (2190).The fiduciary obligation of a dissenting partner is triggered if the injection of additional capital (as requested by a majority of partners) is a more appealing venue of action than the dissolution of the partnership due to a shortage of fresh funds.①BGH, judgment of 19 October 2009, DStR 2009, 2495 (2497 et seq.) (“Restructure or Leave”).In such a scenario, the dissenting partner is under a duty not to block the vote which requires a minimum quorum of accepting partners for an injection of fresh funds. If the dissenting partner fails to oblige, his or her (negative) vote cast will be deemed void.②BGH, judgment of 21 July 2008, NZG 2008, 783 (785) (limited liability company).Conversely, if the corporate entity does not face severe economic disadvantages which dominate personal motives of the shareholders, a dissenting shareholder is under no fiduciary obligation to accept the restructuring plan or give reasons for rejecting it.③BGH, judgment of 12 April 2016, NZG 2016, 781 (782) (Media-Saturn).

UnderStock Corporation Law, minority shareholders have been admonished not to frustrate rescue plans with a reasonable chance of success,④See OLG München, decision of 16 January 2014, BeckRS 2014, 3022.if the alternative is the commencement of insolvency proceedings.⑤BGH, judgment of 20 March 1995, BGHZ 129, 136 (151) (Girmes).In such a scenario, the shareholder’s duty of care (with fiduciary elements) towards the corporation in distress does not require a positive approval of the (dissenting) shareholder. Abstention in the general meeting of shareholders is sufficient.⑥See OLG München, decision of 16 January 2014, BeckRS 2014, 3022.Votes cast in breach of fiduciary obligations are void.⑦Hoffmann-Becking (-Rieckers), § 17 31.On the other hand, rescue plans prepared by the majority of shareholders may not operate to infringe membership rights of minority shareholders and their position in the restructured corporation:If the general meeting of shareholders accepts both, a reduction of the legal capital and a subsequent increase, the issue of new shares must enable minority shareholders to maintain the previous distribution ratio among the majority and minority.⑧BGH, judgment of 5 July 1999, NZG 1999, 1158 (1159) (Hilgers).Thus, a restructuring of the legal capital should not be instrumentalized to deliberately weaken the voting power of the minority or eject minority shareholdersde facto.⑨Cf. Kammergericht Berlin, judgment of 9 March 2020, DNotZ 2021, 231(235).

Controlling Shareholders and Fiduciary Obligations

Below the threshold of tort law, the German law on conglomerates does not impose a general duty on the parent company to compensate for losses which arise within its conglomerate.⑩See OLG Stuttgart, judgment of 4 August 2020, BeckRS 2020, 33585, Holger Fleischer/Stefan Korch, Okpabi v Royal Dutch Shell und das deutsche Deliktsrecht in Konzernlagen, ZIP 2021, 709 (712 et seq.).But the law provides for some protection in the aftermath of business decisions of the controlling shareholder which ignore the interests of his (minority) fellow-shareholders11: S. 311 of theStock Corporation Act12addresses a scenario where the controlling shareholder of a corporation or a partnership limited by shares undertakes a transaction or measures, disadvantageous to the dependent corporate entity. In

11Seegenerally: Hoffmann-Becking (- Krieger), § 70 17 et seq.

12 S. 311Stock Corporation Act(Limitations restricting the exertion of influence):

“(1) Where no control agreement exists, a controlling enterprise may not use its influence to instigate a controlled stock corporation or public partly limited partnership to enter into a legal transaction detrimental to it, or to take or refrain from measures resulting in a disadνantage, unless the disadνantages are compensated.

(2) Where the compensation has not in fact been proνided in the course of the financial year, then it must be determined at the latest at the end of the financial year in which the controlled company suffered the disadνantage when and by which adνantages the disadνantage is to be compensated. The controlled company is to be granted a legal claim to the adνantages determined to serνe as compensation.”fleshing out quasi-fiduciary obligations for controlling shareholders, S. 311 of theStock Corporation Actrequires the controlling shareholder to refrain from such activities unless the resulting disadvantages are compensated. A transaction is disadvantageous under S. 311 of theStock Corporation Act, if it reduces or jeopardizes the assets or returns of a corporate entity due to its dependence on the controller shareholder-enterprise.①BGH, judgment of 31 May 2011, BGHZ 190, 7 (15 et seq.).These requirements are metinter alia, if the controlling shareholder causes the dependent corporation to assume the risks of prospectus liability from an offer of shares previously held by the controlling shareholder. The financial loss sustained by the dependent corporate entity is thede factorepayment of legal capital without receiving any compensatory benefits.②Ibid.Similarly, the controlling shareholder-enterprise is liable to minority shareholders if a merger has been so engineered as to encroach upon minority shareholder rights abusively.③OLG K?ln, decision of 14 December 2017, NZG 2018, 459 (463) (Strabag).

A breach of the obligations under S. 311Stock Corporation Actdoes not nullify the transactions undertaken by the controlling shareholder. Instead, the controlling shareholder has to remedy the disadvantages until the end of the current business year. According to S. 317Stock Corporation Act,④S. 317 Stock Corporation Act (Liability and responsibilities of the controlling enterprise and its legal representatives):“(1) Where a controlling enterprise instigates a controlled company, with which no control agreement is in place, to enter into a legal transaction causing a disadνantage to it, or to take or refrain from taking a measure and this causes a disadνantage to the controlled company, without the controlling enterprise in fact compensating it for this disadνantage by the end of the financial year or granting to the controlled company a legal claim to an adνantage intended to serνe as compensation, then the controlling enterprise is under obligation to compensate the company for the damage resulting therefrom. The controlling enterprise shall also be under obligation to compensate the stockholders for the damage they haνe suffered as a result insofar as they haνe suffered damage aboνe and beyond the damage that has been caused them by the damage caused to the company.(2) The obligation to proνide compensation shall not arise where eνen a conscientious manager faithfully complying with his duties of an independent company would haνe also entered into the legal transaction or would haνe taken, or refrained from taking, the measure.(3) Besides the controlling enterprise, those of the legal representatiνes of the enterprise shall be liable as joint and seνeral debtors that haνe instigated the company to enter into the legal transaction or to take the measure.(4) Section 309 subsections (3) to (5) shall apply mutatis mutandis.”a duty to pay compensation is only triggered if the disadvantages have not been remedied until the end of the current business year. The right to compensation against the controlling shareholderenterprise can be enforced by the dependent corporate entity, but also by its shareholders, provided they have suffered individual losses, independent of those indirectly sustained through the losses of their dependent corporate entity. If the dependent corporate entity decides to commence litigation against the controlling shareholder-enterprise, an individual shareholder is not barred from bringing a separate suit.⑤BGH judgment of 30 June 2020, NZG 2020, 1025 (1027).The controlling shareholder-enterprise and its statutory representatives are jointly and vicariously liable for compensating the dependent corporate entity and its shareholders. S. 317 (2) of theStock Corporation Actexempts from the duty to compensate if the business judgment rule has been observed: If a manager of an independent corporate entity would have taken the same measures or entered in to the respective transactions by observing the standard and care of a prudent businessman,there is no duty to compensate.⑥See BGH, judgment of 3 March 2008, MMR 2008, 392 (393): the ex-ante perspective is decisive for determining whether the business judgment rule has been observed.

The jurisprudence on S. 317 of theStock Corporation Actreflects the evidentiary problems of both,the dependent corporate entity and an individual minority shareholder to document their claims against the controlling shareholder. It is sufficient that they establish aprima faciecase against the controlling shareholder.①BGH judgment of 31 May 2011, Grigoleit, Aktiengesetz (2nd ed. 2020), § 317 19.

The Executives’ Perspective on the Duty of Loyalty and Care with Fiduciary Elements

The Managing Director (Gesch?ftsführer) of a Limited Liability Company

The Statutory Concept

An assessment of the duties owed by aGesch?ftsführerof a limited liability company cannot be dissociated from empirics: Most limited liability companies in Germany are family-owned with strong personalistic features.②See Stiftung Familienunternehmen, B?rsennotierte Familienunternehmen - Bedeutung, Merkmale, Performance (2019), at p. 12.Frequently, theGesch?ftsführeris both a shareholder and a member of the controlling family. Moreover, under theLimited Liability Act,shareholders are entitled to give instructions to theGesch?ftsführerwhich must be executed if they are not in clear breach of law.③See Horst Konzen, Gesch?ftsführung, Weisungsrecht und Verantwortlichkeit in der GmbH und GmbH & Co. KG, NJW 1989, 2977 (2984 et seq.)In such a scenario, minority shareholders and creditors take a special interest in how theGesch?ftsführerdischarges his duties. Nonetheless, there is general agreement that theGesch?ftsführerowes duties only to his corporate entity (with legal capacity). He may incur liability towards his corporate entity if he disregards shareholder interests.④Kammergericht Berlin, judgment of 24 February 2011, CCZ 2011, 235 (236 et seq.).Thus, the shareholders of a limited liability company are only indirect beneficiaries of theGesch?ftsführer’s lawful discharge of duties. Direct liability to shareholders will only arise if theGesch?ftsführeris found to be criminally liable or has to accept personal liability under tort law.⑤See III.1.e.

The statute classifies theGesch?ftsführeras the representative of the corporate entity. This corporate law status is usually supplemented by a private law service contract which fleshes out the duties owed under corporate law, adding specific consultations mechanisms when an investment envisaged by theGesch?ftsführerexceeds a certain threshold.⑥See the model contract in Formularbuch Recht und Steuern (München 9th ed. 2019) (-Schwedhelm/Wollweber), A.6.26.Thus, even if aGesch?ftsführercomplies with his statutory duties in his capacity as the legal representative of a limited liability company, he may nonetheless be in breach of obligations owed under the private law service contract.⑦See generally BGH, judgment of 12 June 1989, NJW-RR 1989, 1255 et seq.On the other hand, if the meeting of shareholders has recalled aGesch?ftsführerfrom his post as the legal representative of the limited liability company, this does not automatically terminate the private law contract for services to be rendered to the corporate entity.

The Duty of Legality

The statutory language on the duties owed by theGesch?ftsführertoward the limited liability company is neither comprehensive nor very informative. S. 43 (1) of theLimited Liabilited Actrequires theGesch?ftsführerto exercise his function with the due care of a prudential businessman.①S. 43 Limited Liability Act (Directors’ Liability):“(1) The directors shall conduct the company’s affairs with the due care of a prudent businessman.(2) Directors who breach the duties incumbent upon them shall be jointly and seνerally liable to the company for any damage arising.(3) In particular, they shall be obligated to compensate where payments haνe been made in contraνention of section 30 from those company assets which are required to maintain the share capital or the company’s own shares haνe been purchased in contraνention of the proνisions set out in section 33. The proνisions set out in section 9b (1) shall apply mutatis mutandis to a claim for compensation. Where compensation must be paid to satisfy the company’s creditors, the directors’ obligation shall not be abrogated on account of the fact that they acted in compliance with a resolution passed by the shareholders.(4) The claims based on the aforementioned proνisions shall become statute-barred after fiνe years.”Failure to do so will trigger liability towards the limited liability company (S. 43 (2) of theLimited Liability Act).According to S. 43 (3) of theLimited Liability Act, this liability is for having disregarded the mandatory provisions on legal capital and capital maintenance rules. Legal doctrine classifies the duty imposed by S. 43 (1) of theLimited Liability Actas a “duty of legality”: it establishes a duty of properly guiding the enterprise.②Lutter/Hommelhoff (-Kleindiek), § 43 10 et seq.This is to incentivize theGesch?ftsführerto advance the business interests of the limited liability company, but it also defines a mandate under which corporate compliance with mandatory law has to be ensured.③See BGH, judgment of 7 May 2019, NJW 2019, 2164 (2165).

Compliance with the duty of legality requires theGesch?ftsführerto seek expert opinion to make an informed judgment on an envisaged business transaction.④BGH, judgments of 14 May 2007, NJW 2007, 2118 (2120), 27 March 2012, NZG 2012, 672 (673 et seq.).TheGesch?ftsführermay not commit a breach of law which—like bribery—might generate financial benefits for the corporation.⑤Cf. OLG Celle, judgment of 21 December 2005, NJOZ 2006, 1563 (1565).It is a breach of the duty of legality if theGesch?ftsführerwere to disregard the statutory distribution of powers in a limited liability company.⑥OLG Naumburg, judgment of 23 May 1954, GWR 2014, 413.In a conglomerate structure of limited liability companies, theGesch?ftsführerof the controlling holding company has to be mindful of the dependent companies,from the perspective of protecting minority shareholders,⑦This includes limited partnerships and their limited partners, when the limited liability company is the general partner and the Gesch?ftsführer of the limited liability company de facto administers the limited partnership: BGH, judgment of 22 September 2020, NZG 2020, 1343 (1344 et seq.).but also for the purpose of avoiding liability for infringing the interests of the dependent company.⑧See the factual scenarios in: OLG Düsseldorf, judgment of 8 November 2019, NJOZ 2020, 1033, and BGH, judgment of 18 June 2013, BGHZ 197, 304, and the comment by Gregor Bachmann, Die Haftung des Gesch?ftsführers für die Verschwendung von Gesellschaftsverm?gen, NZG 2013, 1121.

The Duty of Care with Fiduciary Elements

The combination of a statutory duty of legality and a duty of care with fiduciary elements has elevated theGesch?ftsführerto a trustee-like status: Corporate funds and the (economic) well-being of the limited liability company have been entrusted to him, and he has to observe a standard of care higher than the duty of good faith under bilateral contracts.⑨Lutter/Hommelhoff (-Kleindiek), § 43 10 et seq., BGH, judgment of 23 September 1985, NJW 1986, 585 et seq., OLG Naumburg, judgment of 26 March 2013,BeckRS 2014, 15053.From a practical perspective, fiduciary obligations provide the limited company (or rather the insolvency administrator or a representative for minority shareholders) with a flexible ad-hoc tool to rebalance statutory obligations or fill gaps where the statute is silent. Among these figure prominently the fiduciary obligations not to compete with the limited liability company or to exploit business opportunities which have to accrue to the company, but not to theGesch?ftsführerin his personal capacity.①See supra III.1.d.It should be noted that the jurisprudence of theBundesgerichtshofrelies on a fiduciary argument to deduce a duty not to compete for aGesch?ftsführer, where stock corporation law relies on a statutory prohibition for members of the managing board of a stock corporation to compete with their company. This technique is particularly relevant for family and closed enterprises where the decision-making structure is more relevant than the legal form.

The duty of care with fiduciary elements is subject to the business judgment rule. The business judgment rule,②See BGH, judgment of 4 November 2002, BGHZ 152, 280, and Constantin Goette/Maximilian Goette, Managerhaftung: Abgrenzung unternehmerischer Entscheidungen nach Ma?gabe der Business Judgement Rule von pflichtverletzendem Handeln, DStR 2016, 815 (816 et seq.).now codified in both theStock Corporation Actand theLimited Liability Act, was first read by theBundesgerichtshofinto the law of stock corporations,③BGH, judgment of 21 April 1997, BGHZ 135, 244 (253) (ARAG/Garmenbeck).but is now widely accepted as being authoritative for close corporations and family enterprises organized in the form of a limited liability company.④See Gerald Spindler/Andreas Seidel, in: Fleischer/Recalde/Spindler (eds.), Family Firms and Closed Companies in Germany and Spain (Tübingen 2021), 283(287 et seq.).TheBundesgerichtshofhas emphasized that aGesch?ftsführercan only benefit from the business judgment rule if the decision-making is based on all available information and a proper risk assessment: Thus, if aGesch?ftsführerplans to restructure the loans of a limited liability company,an assessment of the impacts from volatile interest markets is necessary.⑤BGH, decision of 14 July 2008. NZG 2008. 751 (752).There is, however, a crucial difference between stock corporations and limited liability companies. The entrepreneurial discretion enjoyed by aGesch?ftsführermay be severely limited by instructions given by the shareholders. To deviate from such instructions would constitute a breach of the (power) structure of a limited liability company.⑥Lutter/Hommelhoff (-Kleindiek), § 43 23.

In an interesting combination between the liability rules for controlling shareholders under stock corporation law and those for theGesch?ftsführerof a limited liability company, theBundesgerichtshofhas extended the business judgment rule to limited capitalistic partnerships. The insolvency administrator of a limited partnership, where a limited liability company was the general partner,had sued theGesch?ftsführerof the limited liability company for non-compliance with the business judgment rule.⑦BGH, judgment of 18 June 2013, NZG 2013, 1021.TheBundesgerichtshofdeclined to classify this claim as contractual, resulting from the legal relationship between the general and limited partners. Instead, the court argued that in acting as the representative of the general partner, theGesch?ftsführerhad also to be mindful of the business interests of the wholly dependent limited partnership,⑧Ibid., at p. 1022.thus clearing the way for fiduciary concepts.

Business Opportunities

Since the 1980s, theBundesgerichtshofhas explored the scope of fiduciary obligations in the context of the prohibition not to compete with the company or corporation.①For a survey see Holger Fleischer, Gel?ste und ungel?ste Probleme der gesellschaftsrechtlichen Gesch?ftschancenlehre, NZG 2003, 985 et seq.While the law for limited partnerships and stock corporation law has codified such a duty, the statute on limited liability companies remains silent. In a 1989 case, theBundesgerichtshofspecified the extent of the fiduciary duty which theGesch?ftsführerowes to the limited liability company: TheGesch?ftsführeris precluded from seizing for his own personal benefit a business opportunity which he became acquainted with while serving for the limited liability company.②BGH, judgment of 8 May 1989, NJW 1989, 2687 (2688).This applies even if the limited liability company had been unable to raise to necessary funds for undertaking the business transaction.Under these circumstances, theGesch?ftsführerwould have been under an obligation to arrange a credit scheme to supply the company with fresh liquidity. If theGesch?ftsführer—in appropriating a business opportunity due to the company—had bought a piece of land, the sanction for a breach of the fiduciary is to hand over the real property to the company.③Ibid.The fiduciary duty not to seize business opportunities which belong to the corporate entity has been applied to all forms of business activities,whether a partnership, limited partnership, limited liability company, or a stock corporation.④See survey in BGH, judgment of 4 December 2012, NJW-RR 2013, 363 (365), Holger Fleischer, Handbuch des Vorstandsrechts (München 2006) (-Fleischer),§ 9 23 et seq., Martin Gelter/Geneviève Helleringer, Opportunity Makes a Thief, Corporate Opportunities as Legal Transplant and Convergence in Corporate Law, 14 (2) Berkeley Bus. L. J. 94 (105 et seq.) (2017).From an economic point of view, the business opportunities doctrine serves to protect the structure of fiduciary relationships. It protects the distribution of property rights between directors and the company and corporation, thereby reducing control costs for shareholders and the risk of opportunistic management behavior.⑤Fleischer, NZG 2003, 985 (992); id., Handbuch des Vorstandsrechts, § 9 25.

Direct Liability for the Gesch?ftsführer—Shareholders ν. The Gesch?ftsführer

German law does not recognize criminal liability for corporate entities.⑥⑦Münchener Kommentar zum StGB (-Joecks/Scheinfeld) (4th ed. 2020), Vorbemerkung zu § 25 16 et seq.Moreover, if theGesch?ftsführeracted as the representative of the limited liability company, his actions or omissions would normally be attributed to the company which would have to assume private law liability.⑧Habersack/Casper/L?bbe, GmbHG-Gro?kommentar (München 3rd ed. 2020), § 35 4 et seq., BGH, judgment of 2 February 1996, BGHZ 132, 30.Although direct liability might be regarded as pushing theGesch?ftsführertowards risk-averse behavior, courts have always accepted thatGesch?ftsführermay be directly liable under tort law.⑨See the surveys over German cases§ 13 341 et seq. Münchener Kommentar zum GmbHG (München 3rd ed. 2018) (-Merkt), Joerg Brammsen/Kathrin Sonnenburg, Gesch?ftsführerau?enhaftung in der GmbH, NZG 2019, 681There is, however, the risk that personal tort liability may be instrumentalized to mend those situations where German law does not recognize tortious liability for the corporate entity behind the individual.

In a case decided in 1989, a limited liability company had ordered construction materials as part of a secured transaction.①BGH, judgment of 5 December 1989, BGHZ 109, 297 (302 et seq.).To guarantee the payment of the purchase price, the limited liability company pledged claims against third parties as a security to the seller. The construction materials were built into houses and, in accordance with German property law, the property of the seller had vanished. The limited liability company went bankrupt, and the seller could not obtain payment from the insolvency estate due to a shortage of funds. The seller then decided to sue theGesch?ftsführerof the now defunct limited liability company for having infringed property rights with respect to the construction materials. TheBundesgerichtshofexplained that theGesch?ftsführerhad acted under a duty of a guarantor with respect to the property of the construction company. Moreover, as theGesch?ftsführerof the limited liability company, he was under a tort law duty to so organize the business of the company that third-party property would not be infringed. Failure to do so will trigger hpersonal liability of theGesch?ftsführer.②Ibid.This holding has been heavily criticized.③For an analysis of the literature and subsequent case law see: Münchener Kommentar zum BGB (München 8th ed. 2020) (-Wagner), § 823 130 et seq.,Oppenl?nder/Tr?litzsch, Praxishandbuch der GmbH-Gesch?ftsführung (München 3rd 2020) (-Ziemons), § 24 15 et seq.But its underlying assumptions are still recognized as valid case law. Thus, aGesch?ftsführeris under a duty to take organizational measures so that on a parking lot—run by the limited liability company—nobody will sustain injuries.④OLG Stuttgart, judgment of 29 April 2008, NJW 2008, 2514 (2515).In more recent holdings, theBundesgerichtshofhas clarified that the personal liability of theGesch?ftsführer(or a member of the board of directors) may only be invoked if tort law has been infringed⑤See also BGH, judgment of 12 December 2000, NJW 2001, 964 (Kindertee).or special legal protection for the assets of third parties (such as insolvency law rules) have been ignored.⑥BGH, judgment of 7 May 2019, NJW 2019, 2164 (2165).TheGesch?ftsführeris under no general duty to protect third parties from financial loss.⑦BGH, judgment of 10 July 2012, NJW 2012, 3439.Liability under unfair trading law will be triggered if theGesch?ftsführer’s actions have contributed to unfair trading practices or if theGesch?ftsführerwas under a specific duty towards third parties to abstain from breaches of unfair trading law.⑧BGH, judgment of 18 June 2014, GRUR 2014, 883 (884).This is the case when a limited liability company establishes an internet platform. Under these circumstances, theGesch?ftsführeris under a duty to examine the compatibility with unfair trading law.⑨Ibid.On the other hand, below this threshold,the mere knowledge that the limited liability company might be breaching unfair trading law does not trigger personal liability of theGesch?ftsführer.⑩Ibid.

The Board of Directors between the Duty of Legality and the Duty of Care with Fiduciary Elements (Stock Corporation Law)

Basic Concepts

Directors, in their capacity as statutory representatives, owe specific duties towards the corporation.German stock corporation law distinguishes between a codified duty of legality and (mostly judgemade) duties of care with fiduciary elements. S. 76 of theStock Corporation Actcharges the board of directors with the responsibility of managing the corporation. This includes a duty to establish an efficient business organization, compliance mechanisms, risk assessment procedures, and early warning systems to detect existential dangers for the corporation. S. 93 of theStock Corporation Actreiterates the duty of legality as directors may not engage the corporation in unlawful actions.

Under S. 93 (2) of theStock Corporation Act,directors are jointly and severally liable to the corporation if the standard of care of the prudent businessman has not been observed. In case of doubt, S. 93 (2) places the burden of proof on directors that they have observed the standard of care of a prudent businessman. This is the codification of the business judgment rule. But it should be noted that the business judgment rule does not provide a safe harbor for every action or decision taken by the board of directors.①Hopt/Roth in Gro?Komm AktG (Berlin 5th ed. 2015), § 93 70 et seq,The business judgment rule only applies where the board of directors had discretion to decide between several alternatives of action.②For a criminal law perspective see Sch?nke/Schr?der, Strafgesetzbuch (München 30th ed. 2019) (-Perron), § 266 19b.There has to be a showing that they did exercise their business judgment properly, based on the information and the third-party advice of expert knowledge that did not exist among the board members.③Cf. Münchener Kommentar zum Aktiengesetz (München 5th ed. 2019) (-Spindler), § 93 55 et seq.Therefore, failure to seek expert advice, although necessary, supports the conclusion that discretion was not exercised at all. Although the business judgment rule has been codified in the statute, it is helpful to trace back its origins in German jurisprudence. In a 1997 case, theBundesgerichtshofexpressly acknowledged that the board of directors enjoys a substantial amount of entrepreneurial discretion which is not subject to scrutiny by the supervisory board-unless the board of directors disregards its statutory duties.④BGH, judgment of 21 April 1997, BGHZ 135, 244 (253) (ARAG/Garmenbeck).If an investment decision is well-founded ex ante, directors cannot be held liable by the corporation if the investment fails to generate any return.⑤See Matthias Graumann, Angemessene Informationsgrundlage von Prognosen bei unternehmerischen Entscheidungen, ZIP 2021, 16. For the requirements of a proper exercise of business judgment in the context of restructuring plans see Drinhausen/Eckstein, Beck’sches Handbuch der AG (München 3rd ed. 2018), §17 27 et seq. See also the factual scenarios in BGH, judgment of 22 February 2011, NZG 2011, 549 (550 et seq.), and OLG Koblenz, judgment of 23 December 2014, BeckRS 2015, 712.Subsequently, courts and academia have fleshed out the impact of the business judgment resulting in a catalog of procedures which the board of directors has to observe to escape liability. Closer inspection suggests that the scope of the business judgment rule is limited by fiduciary concepts about directors’ duties with respect to the corporate assets.

Cases after the turn of the century demonstrate that the criminal law sanction of embezzlement(S. 266 of theCriminal Code[Strafgesetzbuch]) have the potential of impacting corporate decisionmaking.⑥See infra sub IV.In 2005, theBundesgerichtshofheld that the expenditure of corporate funds without receiving compensatory counter-services for the benefit of the corporation might constitute embezzlement under S. 266 of theCriminal Code.⑦BGH, judgment of 21 December 2005, NJW 2006, 522 (523) (Mannesmann).If a bank is in financial distress, failure to observe the implications of the business judgment rule constitutes criminal law embezzlement.⑧BGH, judgment of 20 October 2016. NZG 2017, 116 (117) (HSH Nordbank).Entering into a highly risky financial transaction without proper risk assessment may amount to a refusal to exercise a well-informed business judgment at all, and hence, waste corporate funds.①Sch?nke/Schr?der (-Perron), § 266 20a.On the other hand, very few business decisions are without risk.②Münchener Kommentar zum StGB (-Dierlamm), § 266 228 et seq.It remains to be seen how the business judgement rule and the directors’ fiduciary obligations towards managing corporate assets will interact in the future.

Directors’ Duty of Care with Fiduciary Elements

Principle 19 of theGerman Corporate Goνernance Code③German Corporate Goνernance Code (as resolved by the Government Commission on 16 December 2019) (English version available at https://www.dcgk.de//binds the board of directors and the supervisory board on the best interests of the enterprise.④A breach of the principles contained in the German Corporate Goνernance Code does trigger a finding of nullity as neither statutory law or the corporate charter have been infringed: BGH, judgment of 9 October 2018, BGHZ 220, 36 (45).They must abstain from pursuing personal interests or exploiting business opportunities to which the enterprise is entitled. During their appointment, members of the board of directors must observe a comprehensive duty not to compete. Principle 19 is understood to define the fiduciary obligations which the members of the board of directors have to observe while in office. Principle 19 also highlights the specific regulatory technique of the German legislator with respect to fiduciary obligations in stock corporation law.S. 88 of theStock Corporation Actimposes a duty not to compete and provides for a corporation’s claim of damages. S. 93 (1) prescribes the duty of confidentiality for any business information on the corporation that has been disclosed to them during their appointment. Beyond these statutory incidences, fiduciary duties are judge-made law; they originate within the specific context of the board of directors representing the corporation. These duties are rooted in trustee-like concepts for the role of the directors: If the supervisory board approves premiums to board members without any legal basis in their respective service contracts or any additional services rendered, there is a breach of the fiduciary obligation to protect and hold the assets of the corporation.⑤BGH, judgment of 21 December 2005, NJW 2006, 522 (523) (Mannesmann).

Directors’ Tort Liability towards Third Parties

As under the law for limited liability companies, the statutorily defined position of a member of the board of directors does not automatically shield a member from tort liability towards third parties.If a director has breached a law designed for the protection of the shareholders (Schutzgesetz), he will be liable under tort law.⑥Hüffer/Koch (-Koch), § 93 61 et seq.Although a member of the board of directors does not assume the role of a guarantor for the financial interests of a third party,⑦BGH, judgment of 10 July 2012, NJW 2012, 3439 (3441).property rights must be respected⑧BGH, judgment of 24 January 2006, BGHZ 166, 84 (106 et seq.).: If a member of the board of directors of a bank makes an untrue, televised statement on the creditworthiness of one of its clients, this constitutes an illegal interference with client’s business operations and triggers a claim for personal damages against that member.⑨Ibid. See also Alexander Hellgardt, Die deliktische Au?enhaftung von Gesellschaftsorganen für unternehmensbezogene Pflichtverletzungen-überlegungen vor dem Hintergrund des Kirch/Breuer-Urteils des BGH, WM 2006, 1514 (1521 et seq.).Under tort law, members of the board of directors are

files/dcgk/usercontent/en/download/code/191216_German_Corporate_Governance_Code.pdf).directly liable to a third party if they instrumentalize their corporation to promote an investment project that is fraudulentab initiobecause there is no realistic chance of a return.①BGH, judgment of 10 July 2015, GWR 2015, 517.

Controlling Management Behaviour through Criminal Law—Embezzlement

S. 266 of theGerman Criminal Codepunishes the breach of a duty to safeguard pecuniary interests of another, if such duty arises inter alia under a fiduciary relationship and its breach has adversely affected the pecuniary interests of those the fiduciary was responsible for.②See the English translation of s. 266 of the German Criminal Code (Embezzlement) (available at https://www.gesetze-im-internet.de/englisch_stgb/englisch_stgb.html#p2464):(1) Whoeνer abuses the power conferred on them by law, by commission of an authority or legal transaction to dispose of the assets of another or to make binding agreements for another, or whoeνer breaches their duty to safeguard the pecuniary interests of another which are incumbent upon them by reason of law, by commission of an authority, legal transaction or fiduciary relationship, and thereby adνersely affects the person whose pecuniary interests they were responsible for, incurs a penalty of imprisonment for a term not exceeding fiνe years or a fine.(2) Section 243 (2), sections 247 and 248a, and section 263 (3) apply accordingly.The statutory sanction of embezzlement has been criticized for its vagueness,③Münchener Kommentar zum StGB (München 3rd ed. 2019) (-Dierlamm), § 266 3but it is nonetheless the core norm for assessing the fall-out from problematic business decisions which contribute to losses of corporate funds.④Gerd Krieger/Uwe H. Schneider (eds.), Handbuch Managerhaftung (3rd ed. K?ln 2017) (-Krause), § 40.25.S. 266 of theGerman Criminal Codeprotects the enterprise from financial damage which originates from internal business decisions which are taken in exercising managerial discretion.⑤Ibid. See also OLG Celle, judgment of 21 December 2005, NJOZ 2005, 1563 (1564).It is not designed to safeguard the pecuniary interest of the shareholders, but that of the corporate entity as such.⑥Landgericht (LG, District Court) Wiesbaden, judgment of 13 August 2015, NZG 2016, 832.Potential criminal law sanctions come into play once a perpetrator is under a fiduciary obligation to look after the pecuniary interests of others.⑦A breach of s. 266 of the Criminal Code may also be committed by an omission or failure to act: OLG Celle, judgment of 21 December 2005, NJOZ 2006, 1563(1565).These obligations may arise under statutory duties,specific codes of conduct, or a general fiduciary relationship.⑧Krieger/Schneider (-Krause), § 40.26.A member of the board of directors of a bank is not generally precluded from supporting a decision in favor of a loan which may be risky.⑨BGH, judgment of 13 August 2010, BKR 2010, 163 (165) (WestLB).But risk assessment procedures typical for banks and statutory duties under banking law have to be observed,⑩BGH, judgment of 27 January 2021, BeckRS 2021, 7195.before a loan of substantial dimensions is paid out.11Ibid.In exploring a new field for business activities, a profound risk analysis is mandatory which may also include a duty to seek advice from independent experts.12Ibid.Intent under S. 266 of theCriminal Coderequires that the perpetrator not only accept a risk, but also approve of the danger that the risk materializes.13BGH, judgment of 28 May 2013, NStZ 2013, 715 (716).S. 266 of theCriminal Codeis also applicable when a member of the board of directors or theGesch?ftsführerof a limited liability company disregards the distribution of powers between the general meeting of shareholders and the management. If the articles of association of a limited liability company require an approval of secured transaction prior to pledging corporate assets as security, theGesch?ftsführercommits embezzlement if he fails to do so, and the company subsequently faces losses.①LG Kleve, decision of 21 October 2010, BeckRS 2010, 29946.The assumption that a majority of shareholders would have approved will exonerate theGesch?ftsführer.②Ibid.Courts have also employed embezzlement sanctions to protect the structure of conglomerates and dependent corporate entities. The board of directors of a stock corporation which controls a conglomerate commits a breach of fiduciary duties (within the meaning of S. 266 of theCriminal Code) if he or she engineers a transfer of corporate funds to a dependent enterprise in support of restructuring project, although the restructuring project has already failed.③BGH, judgment of 22 November 2005, NJW 2006, 453 (454) (Kinowelt).A centralized cash management system within a conglomerate triggers criminal law concerns if the funds of dependent companies are completed, thereby causing over-indebtedness.④BGH, decision of 31 July 2009, NZG 2009, 1152 (1153).

Conclusion

As the business judgment rule and the prohibition on seizing business opportunities demonstrate,German Company Law does not resist legal transplants from common law orders.⑤For a detailed analysis of US legal transplants in German Company Law, see Jan von Hein, Die Rezeption US-amerikanischen Gesellschaftsrechts in Deutschland (Tübingen 2008), at p. 199 et seq.But as a civil law order, German law has always refused to add the common law trust to the statutory menu of organizational instruments for administering funds or doing business. Nonetheless, German Company Law has brought forth a catalog of “heightened duties” of care or duties of care with fiduciary elements which come very close to fiduciary obligations under Trust Law. Both, the linguistic and doctrinal starting point is the notion of loyalty and fidelity (Treue) which is owed under bilateral contracts. As contracts evolve into long-term relationships and rudimentary types of business organizations in the context of partnerships, the standard duty of care is transformed into a duty of care with fiduciary elements. In classifying these fiduciary obligations as a “heightened duty of care,” the judiciary and legal doctrine remain faithful to the original trajectory of the duty of loyalty from simple bilateral contracts to sophisticated corporate settings. Closer inspection suggests that the duty of care with fiduciary elements has evolved into a highly flexible instrument which the courts apply to factual scenarios where the underlying statutes remain silent.

Judge-made interpretations of the duty of care with fiduciary elements build on an elaborate notion of membership. A corporate entity owes fiduciary obligations to its members so that the interests of minority shareholders will be protected. Conversely, shareholders, in their capacity as members of a corporate entity, have to respect their fiduciary obligations towards their fellow-shareholders and the respective corporate entity. Directors and corporate officers have to discharge their fiduciary obligations towards the corporation as they administer third-party funds. AlthoughGerman CompanyLawdoes not classify directors and corporate officers as shareholders’ trustees with corresponding fiduciary obligations, shareholders stand nonetheless to benefit—somewhat indirectly—from the scrupulous observance of the fiduciary obligations, which directors and corporate officers owe their respective corporate entity. Ultimately, an evolutionary approach towards fiduciary obligations in company law is predicated on the willingness of the judiciary to innovate where the statutes remain silent, while the real world of business calls for the adaptation of established concepts of loyalty and care.