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CONFLICT OF INTEREST AND DISCLOSURE UNDER COMPANY LAW:
A CONTINENTAL-EUROPEAN PERSPECTIVE ON LEGAL ORIGINS

Forthcoming in Journal of Corporate Law Studies (April issue 2016)

PHILIPP MAUME*

Much has been written about legal origins and the dichotomy between common law and civil law.
Theories about the link between legal origins and economic development, in particular of the
securities markets, have been stipulated (and often rejected). This article adds another piece to the
legal origins puzzle. It does not claim that the legal origins hypothesis is correct. However, it argues
that despite all criticism the distinction between civil law and common law remains valid. In
particular, civil law based jurisdictions put less emphasis on the disclosure of conflicts of interest.
This can be traced back to the absence of an overarching principle of fiduciary duties under classical
civil law. Using the German law on stock companies, this article demonstrates that the legal heritage
can still be identified in today’s company laws.

Unedited author copy.

Not to be circulated without author’s consent.

1
A. INTRODUCTION
We are living in a globalised world. Modern technology facilitates the movement of capital
and foreign direct investment. Information is disseminated almost instantaneously, and
English is today’s accepted language of international trade. The convergence of business laws
is a logical consequence, and the convergence of company laws is a much discussed topic
amongst practitioners and academics.1 In this setting, a typical phenomenon is legal
transplanting, which describes the implementation of a rule or a set of rules from a foreign
legal framework into domestic laws. This transplanting typically originates in the Anglo-
American world and is characterised by its common law heritage.2 But we can also see an
influx of continental ideas into the Anglo-American frameworks, for example the separation
of management and control in company boards or the increasing importance of stakeholder
concerns.3
However, a full convergence of business laws has not been achieved yet, and maybe never
will. After every major corporate failure, after every boom and bust policymakers discuss
amendments to address gaps and flaws in the framework. The major changes in US law
triggered by the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010 are good
examples. Similarly, in the European Union, initiatives about new EU Directives on company,
securities and financial intermediaries’ laws have been initiated. New uniform European
companies are under discussion.4 Other global issues are corporate social responsibility, the
duty of ‘legality’, and their implementation into domestic laws. All these discussions –
triggered by market events, by harmonisation policies and by the changing perception of the
role of companies in society – naturally focus on domestic laws which are shaped by the
respective country’s legal origin and legal culture.
Much has been written about legal origins and the dichotomy between common law and civil
law. Theories about the link between legal origins and economic development, in particular of
the securities markets, have been stipulated (and often rejected).5 Two major criticisms of this
aspect of the ‘law matters’ debate can be identified. First, there is no sharp distinction
between civil law and common law systems. Legal frameworks in various countries exhibit
elements of both legal traditions, making the classification of civil law or common law

* Ph.D. (Augsburg Univ.), S.J.D. (La Trobe Univ.), Assistant Professor at TUM School of Management,
Technische Universität München, Munich, Germany. I would like to thank the anonymous reviewer for several
helpful comments. The usual disclaimers apply.
1
See, generally, M Siems, Convergence in Shareholder Law (Cambridge, Cambridge University Press, 2008).
2
For legal transplanting and the role of legal families in the company law context, see H Spamann,
‘Contemporary Legal Transplants: Legal Families and the Diffusion of (Corporate) Law’ [2009] Brigham Young
University Law Review 1813.
3
S Thomsen, ‘The Convergence of Corporate Governance Systems to European and Anglo-American
Standards’ (2003) 4 European Business Organization Law Review 31.
4
See the current discussion on the proposed Societas Unius Personae, see I Wuisman, ‘The Societas Unius
Personae’ (2015) 12 European Company Law 34.
5
This ‘law matters’ thesis was originally created by La Porta, Lopez-de-Silanes, Shleifer and Vishny, see R La
Porta et al, ‘Legal Determinants of External Finance’ (1997) 52 Journal of Finance 1131; R La Porta et al, ‘Law
and Finance’ (1998) 106 Journal of Political Economics 1113; R La Porta et al, ‘What Works in Securities
Laws?’ (2006) 61 Journal of Finance 1.
2
arbitrary.6 Secondly, the champions of the ‘law matters’ movement were not able to identify
specific rules which are fundamentally different in the two legal families. Company laws are
converging, and the regulation of securities markets is fairly standardised in all developed
countries.7 So what are the rules that make the difference?8 Thirdly, the ‘legal origins’
hypothesis as formulated by La Porta et al9 focused too strongly on the financial sector.
Corporate and bankruptcy laws, for example, are relatively young and usually statute-based,
which means it would be difficult to use these laws as a basis for arguments concerning a
court-centered legal system.10
This article adds another piece to the legal origins puzzle. It does not claim that the legal
origins hypothesis is correct. However, it argues that the distinction between civil law and
common law is valid for some overarching principles. The fiduciary principle is a legal
ground rule in common law, and that is no equivalent principle in civil law. As a
consequence, civil law jurisdictions find it difficult to establish a coherent system of
disclosure rules. These differences can still be identified in today’s statutory laws. This is
demonstrated by the evolution of company directors’ duty of loyalty (including the disclosure
of conflicts of interest). The duty of loyalty does not only protect shareholders, but the market
as a whole,11 making the duty an apt example for the application of the law matters thesis.12
The duty of loyalty is a topic of significant current relevance because there is a trend
internationally to be more conscious and rigorous in the treatment of loyalty violations and
conflict of interest situations.13 Rules on disclosure are particularly well suited for this
analysis because the negative effects of information asymmetries on decision making and
market development (e.g., adverse selection, the market for lemons, and moral hazard)14 have
been well researched, and information disclosure is considered an appropriate way of

6
M Siems, ‘Legal Origins: Reconciling Law & Finance and Comparative Law’ (2007) 52 McGill Law Journal
55, 62-70.
7
See the recommendations given by the International Organization of Securities Commissions (IOSCO),
‘Objectives and Principles of Securities Regulation’ (last revised June 2010; available at www.iosco.org,
accessed on 8 September 2015). The members of IOSCO regulate about 95 per cent of the world’s securities
markets.
8
E.g., JC Coffee, ‘Law and the Market: The Impact of Enforcement’ (2007) 156 University of Pennsylvania Law
Review 229, 43.
9
See supra n 5.
10
K Dam, The Law-Growth Nexus: The Rule of Law and Economic Development (Washington DC, Brookings
Institution Press, 2006), 7.
11
See R Clark, Corporate Law (New York, Little, Brown, 1986), 141.
12
Cheffins named the duty of loyalty and the disclosure of information as two areas that promote the confidence
of shareholders and investors, see B Cheffins, ‘Does Law Matter? The Separation of Ownership and Control in
the United Kingdom’ (2001) 30 The Journal of Legal Studies 459, 463-5. Other areas are the regulation of
insider conduct, the regulation of voting rights, minority rights such as an oppression remedy, and a properly
functioning judicial system.
13
KJ Hopt, ‘Comparative Corporate Governance: The State of the Art and International Regulation’ (2011) 59
The American Journal of Comparative Law 1, 38-9.
14
There is a vast body of literature on information asymmetries, see e.g. G Akerlof, ‘The Market for Lemons:
Quality Uncertainty and the Market Mechanism’ (1970) 84 Quarterly Journal of Economics 488; B Black, ‘The
Legal and Institutional Preconditions for Strong Securities Markets’ (2001) 48 UCLA Law Review 781; M Pauly
and S Nicholson, ‘Adverse consequences of adverse selection’ (1999) 24 Journal of Health Politics, Policy and
Law 921.
3
addressing information asymmetries.15 The conclusion of the comparison between German
laws on disclosure and their common law equivalent is that legal origin is still a pertinent
factor in the shape of today’s business laws regarding the duty of loyalty and the regulation of
conflicts of interest.
After these opening remarks, Section B of this article will analyse the concept and heritage of
the fiduciary principle in contrast to the good faith principle in general. It will demonstrate
that although the idea of stricter duties in situations of trust and reliance is universal, common
law and civil law jurisdictions can take fundamentally different dogmatic paths to create these
duties. More specifically, Section C will consider the common law rules on directors’ duties
of loyalty and disclosure and compare them to the German statutory law and case law. It is
argued that the lower standards under German law are a logical consequence of the absence of
an overarching fiduciary principle. Section D concludes with the implications for further
research and policymaking.

B. THE FIDUCIARY PRINCIPLE IN COMMON LAW AND CIVIL LAW

1. The Common Law Roots
The concept of directors’ fiduciary duties was developed under UK company law. It is based
on the law of partnerships and in particular on the trust roots of company law.16 The
underlying idea of trust and reliance and acting in other peoples’ interests can even be traced
back to the Code of Hammurabi in ancient Babylon, old Judeo-Christian traditions and
China.17
The term ‘fiduciary’ is used in reference to situations which are in some respects
similar to trusts,18 where one person is obliged to act like a trustee.19 Fiduciary law follows
property law and the principles of equity.20 In the words of Frankel, “[t]he fiduciary – the
service provider – holds the ‘legal title’ to entrusted property and power. The entrustor – the
true owner – holds the ‘beneficial ownership’ of the property and power. The courts protect
the beneficial owner from violations by the fiduciary.”21 The result is a ‘bifurcation’22 of

15
A different issue which is not addressed in this article is what information is necessary for investors and what
the best way of conveying this information might be.
16
See, e.g., BC Hunt, The Development of the Business Corporation in England 1800-1867 (Harvard, Harvard
University Press, 1936); C Gerner-Beuerle and EP Schuster, ‘The Evolving Structure of Directors’ Duties in
Europe’ (2014) 15 European Business Organization Law Review 191, 206, with further references.
17
JF Johnston Jr., ‘Natural Law and the Fiduciary Duties of Business Managers’ (2005) 8 Journal of Markets
and Morality 27, 29.
18
The seminal decision for the relationship between beneficiary and trustee is Keech v Sandford [1726] EWHC
J76 (Ch).
19
LS Sealy, ‘Fiduciary Relationships’ [1962] Cambridge Law Journal 69, 72. Of course the precise application
of the fiduciary principle and the applicable remedies vary between jurisdictions which form part of the common
law family. The purpose of this article, however, is to trace overarching principles.
20
For more details, see Tamar Frankel, ‘Towards Universal Fiduciary Principles’ (2014) 39 Queen’s Law
Journal 391, 401-4.
21
Ibid, 403.
22
Ibid.
4
property rights. The beneficial owners are entitled to enforce their rights against the trustee
who becomes the legal owner of the property. A misapplication of assets merits a proprietary
claim.23
In fiduciary relationships, because of the fiduciary’s position of dominance and control
over some aspect of the life or property of the beneficiary, the latter must necessarily trust the
fiduciary to give proper consideration to the beneficiary’s interest, and put the beneficiary’s
interests ahead of his or her own interest. In these situations, the fiduciary is held to a
particularly high standard of behaviour. This moral theme is an important part of fiduciary
law, and loyalty, fidelity, faith and honour form its basic vocabulary.24 Other contractual
relationships in which fiduciary duties regularly apply are, for example, doctor and patient,25
solicitor and client,26 partners in a business partnership.27 These expand the original trust law
based scope of application. More broadly, fiduciary may be classified into two categories –
status-based fiduciaries (such as principal/agent),28 which usually involves a high level of
discretion for the fiduciary, and fact-based fiduciaries (because of the trusting relationship),29
although the two categories overlap.30 Today, fiduciary duties are usually applied in situations
in which one party cannot but trust the other party.31 This encompassing nature and wide
scope of application makes the fiduciary principle one of the most important concepts in
equity. It is extremely versatile, as it can include factual situations that have not been foreseen
and categorised.32
The downside of this versatility is that the actual scope is difficult to ascertain.
Fiduciary duties are among the most elusive concepts in common law. The interstitial nature
and flexibility of equity doctrines also make it difficult to isolate specific duties stemming
from the general principle of fiduciary relationships. The case law driven rules on fiduciaries

23
See, generally, R Goode, ‘The Recovery of a Director’s Improper Gains: Proprietary Gains for Infringement of
Non-Proprietary Rights’, in: E McKendrick (ed), Commercial Aspects of Trusts and Fiduciary Obligations
(Oxford, Clarendon Press, 1992).
24
Tamar Frankel, ‘Fiduciary Law’,(1983) 71 California Law Review 795, 829-30.
25
Breen v Williams (1996) 186 CLR 71. The fiduciary relationship between doctor and patient highlights that the
fiduciary duties are primarily founded in the position of trust and vulnerability, and less in formally holding
property on behalf of another person. For the vulnerability issue, see Deborah DeMott, ‘Beyond Metaphor: An
Analysis of Fiduciary Obligations’ [1988] Duke Law Journal 879, 902 with further references.
26
Boardman v Phipps [1967] 2 AC 46.
27
Meinard v Salmon, 164 N.E. 545 (N.Y. 1928).
28
This article follows the legal genealogy, which means that the idea of disclosure can be traced back to 19th
century company law in England, and was later backed by insights from economics and psychology, see G
Walker, ‘Securities Regulation, Efficient Markets and Behavioural Finance: Reclaiming the Legal Genealogy’
(2006) 36 Hong Kong Law Journal 481. For economic justification of disclosure and the principal/agent
problem, see, e.g., EF Fama, ‘Agency Problems and the Theory of the Firm’ (1980) 88 Journal of Political
Economy 288; EF Fama and MC Jensen, ‘Separation of Ownership and Control’ (1983) 26 Journal of Law and
Economics 301; MC Jensen and WH Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and
Ownership Structure‘ (1976) 3 Journal of Financial Economics 305.
29
For references, see P Latimer and P Maume, Promoting Information in the Marketplace for Financial Services
(Heidelberg/Cham/New York, Springer, 2015) 92.
30
A Tuch, ‘Investment Banks as Fiduciaries: Implications for Conflicts of Interests’ (2005) 29 Melbourne
University Law Review 478, 482.
31
Frankel, supra n 20, 398.
32
K Pistor and C Xu, ‘Fiduciary Duty in Transitional Civil Law Jurisdictions: Lessons from the Incomplete Law
Theory’ in Curtis Milhaupt (ed), Global Markets, Domestic Institutions: Corporate Law and Governance in a
New Era of Cross-Border Deals (New York, Columbia University Press, 2003) 77.
5
also suffer from the fact that judges typically seek practical justice whilst scholars search for
theories.33 The existence and the precise ambit of fiduciary duties may be called a judicial
guess, but courts use the term ‘fiduciary’ to extract good faith and fair dealing.34 Although
one can identify common core principles, these principles apply with greater or lesser force in
different situations involving various types of parties and relationships. This challenge was
addressed by the famous statement of the US Supreme Court Justice Frankfurter: “[T]o say
that a man is a fiduciary only begins the analysis; it gives direction to further inquiry. To
whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he
failed to discharge his obligations?”35 In other words, the law governing fiduciary duties
addresses two questions: First, in what circumstances does the duty apply? Second, what is
the fiduciary required to do?36
Even the language used to describe the basic principle can be ambiguous, for example
in relation to company managers. Some commentators use the term ‘fiduciary duties’ to
describe the combination of the duties of care and loyalty imposed on managers. 37 Sometimes
the term is alternatively used to stress the particularly strict duties owed by the managers,
distinguishing it from normal care and honesty and aligning it with the idea of a duty of
loyalty.38 For the purposes of this article, the terms ‘fiduciary duty’ and ‘duty of loyalty’ are
used interchangeably, in contrast to the duty of care.

2. The Duty of Loyalty under Civil Law

(a) Is it Appropriate to Compare Civil Law and Common Law?
A comparison of the common law based fiduciary duty of loyalty with its civil law
equivalents is the obvious next step. Such a comparison is difficult because there is no ‘one’
civil law that can be the subject of comparison, but a variety of civil law frameworks in
different countries. In addition, some jurisdictions (for example, Scotland) can be considered
a mix of civil law and common law traditions. At first glance, these uncertainties seem to
support the argument that the idea of legal origins in the ‘law matters’ context is inherently
flawed.39 However, a closer examination demonstrates that this is not the case.

33
C Conte, ‘From Only the Bottom-Up? Legitimate Forms of Judicial Reasoning in Private Law’ (2015) 35
Oxford Journal of Legal Studies 1.
34
DeMott, supra n 25, 879-81. This uncertainty was described as a ‘concept in search of a principle’, see A
Mason, ‘Themes and Prospects’, in: P Finn (ed), Essays in Equity (Sydney, LBC, 1985) 246.
35
US Securities and Exchange Commision v. Chenery Corp., 318 U.S. 80, 85-86 (1943).
36
DeMott, supra n 25, 882.
37
I Anabtawi and L Stout, ‘Fiduciary Duties for Activist Shareholders’ (2008) 60 Stanford Law Review 1255,
1262: “One of the most basic concepts in corporate law is that of fiduciary duties. With modest variations, these
duties fall into two broad categories: the duty of loyalty and the duty of care.”
38
See, e.g., H Fleischer, ‘Legal Transplants in European Company Law – The Case of Fiduciary Duties’ (2005)
2 European Company and Financial Law Review 378, 382: “Courts and academic writers agree that the
director’s paramount fiduciary obligation is to subordinate his individual and private interests to his duty to the
corporation whenever the two conflict.”
39
See the discussion in Section A of this article.
6
(aa) Common Law Path Dependence
The reasons underlying the relative diversity of civil law are best explained in the historical
context of common law and civil law. The theory of path dependence asserts that today’s and
tomorrow’s decisions are dependent or at least strongly influenced by events and decisions in
the past.40 This dependence can be the result of structures (e.g., the typical structure of
ownership influencing the structure of corporate law), or of rules (e.g., the legal framework,
often in response to crisis, shaping structure and governance of the company).41
In the general common law context, path dependence is fuelled by the doctrine of stare
decisis and the influence of British law and culture since the 18th century.42 With the British
Empire spanning the globe, its colonies adapted the common law framework in full. Existing
countries, which were forced into submission by colonial forces (e.g., India), adapted a part of
the legal framework and added these rules to their domestic legal system.43 Decisions made
by UK courts provided legal authority in the colonies, even after their independence. For
example, the UK Privy Council remained the highest court for appeals under New Zealand
laws until 2003. In addition, the stare decisis doctrine made it less likely that courts in the
colonies developed their own legal rules. Even in respect of the countries that broke away
from the Empire early (e.g., the US), the roots of the legal system remained British and most
of the lawyers had been educated in the former motherland. Thus, British case law retained a
high level of persuasive power.
The diffusion of the fiduciary duty of loyalty is a good example for rule driven path
dependence. Although its intricacies may vary between common law based jurisdictions,44 the
major principles align and can be traced to the same origin, which is the UK law of trusts.

(bb) The Diversity of Civil Law Based Jurisdictions

In comparison to the common law world, the members of the civil law family are relatively
diverse.45 The idea of having a single civil law (or a continental European law) is, in the
words of Vischer, similar to “grouping sea otters and ostriches merely because at some stage
they both evolved from some primitive vertebrae.”46
A larger variety of divergent civil law jurisdiction is already caused by the historical
development. The roots of European civil law jurisdictions go back to the reception of Roman

40
LA Bebchuk and MJ Roe, ‘A Theory of Path Dependence in Corporate Ownership and Governance’ (1999) 52
Stanford Law Journal 127.
41
Bebchuk and Roe, supra n 40, 155.
42
OA Hathaway, ’Path Dependence in the Law: The Course and Pattern of Legal Change in a Common Law
System’ (2000-2001) 86 Iowa Law Journal 601, 622.
43
RJ Daniels et al, ‘The Legacy of Empire: The Common Law Inheritance and Commitments to Legality in
Former British Colonies’ (2011) 59 The American Journal of Comparative Law 111; Siems, supra n 6, 71-2.
44
For example, the different scope of the no-conflict rule, the no-profit rule and the corporate opportunities
doctrine in the UK and in the US, see Fleischer, supra n 38, 395.
45
M Vranken, Fundamentals of European Civil Law (Annandale, Federation Press, 2nd ed. 2010) 23.
46
B Vischer, ‘The Fiduciary in Continental Europe’ [1999] Trust & Trustees 13, 14.
7
law in the middle ages, resulting in the ius commune. From this starting point, the national
frameworks moved in different directions, with the Napoleonic codifications being a major
(but not the only) milestone.47 It is true that most civil law jurisdictions relate to one of the
two major origins of modern civil law tradition, France and Germany.48 But even if we
narrowed down the debate to these two origins, the modern civil law world would not have
one, but two origins. The respective major codifications, the French Code Civil (CC) and the
German Bürgerliches Gesetzbuch (BGB), share many principles, but also exhibit significant
differences.49 This implicates a broader variety of legal frameworks than in the common law
world. It is also often overlooked that the classical common law countries share one language.
The civil law world speaks a range of languages, making it much more difficult to use court
decisions from other countries as authority and impeding the flow of ideas. Further, it needs to
be taken into account that civil law does not accept the stare decisis, which means that courts
are more likely to develop diverging or new approaches to legal problems.
Another difference is that it is difficult to classify a country as being of French or
German origin. Although many countries have close ties to the French or German code, no
country has a code that is identical to the French or German model.50 Even in countries that
introduced exact copies of the respective codes (for example, Germany and Japan)51 the
number of differences to the ‘original’ has grown over the years. This development has been
emphasized by the harmonisation of national domestic laws by European Union laws, which
has of course hardly influenced civil law based jurisdictions outside Europe. Thus, the best
outcome would be the assertion of a certain ‘closeness to a specific code’, which is not a very
effective standard.52
However, these deliberations should not hide the fact that there are sharp distinctions
between civil law and common law jurisdictions, for example the aforementioned absence of
stare decisis under civil law. If an analysis of such a feature (or its absence) is shared by all
(or most) civil law jurisdictions, it can be justified for this particular context to speak of ‘the
civil law’ in general. In other words, the high level of diversity among civil law jurisdictions
is not an issue in respect of the law matters thesis. The issue is about features which are either
shared or missing in all civil law jurisdictions. The fiduciary principle is such a feature, as it
will be shown in the next paragraph.

47
Frankel, supra n 20, n 39.
48
The third source, the Scandinavian civil law family, did not spread to non-European jurisdictions and is
therefore not considered in this article.
49
Two other codes that are often mentioned as paradigmatic are the Italian Codice Civile and the Swiss
Zivilgesetzbuch, see for example U Mattei, ‘Basic Issues of Private Law Codification in Europe: Trust’ (2001) 1
Global Jurist Frontiers 1, 2.
50
Siems, supra n 6, 71.
51
For example, the Japanese Civil Code was a copy of a draft version of the BGB, see for an overview S
Kanamori, ‘German Influences on Japanese Pre-War Constitution and Civil Code" (1999) 7 European Journal of
Law and Economics 93.
52
Siems, supra n 6, 71.
8
(b) The Contractual Basis of the Duty of Loyalty
Some scholarly publications assert that fiduciary principles (or fiduciary duties) exist in both
common law and civil law based jurisdictions.53 This is not wrong, but neither is it accurate.
In the words of Bebchuk and Roe, “all advanced countries may recognize and accept a certain
fiduciary principle, but countries A and B might implement it radically differently.”54
Certainly civil law based jurisdictions recognise situations in which one party puts a higher
level of trust and reliance on another party, which gives rise to particular duties and
obligations. However, historically continental European legal systems did not contain
anything which could be strictly compared or identified with the status of a trustee or
beneficiary.55 Due to legal transplanting this sharp distinction has blurred in the last decades
in some jurisdictions. A recent exception is the new Czech Civil Code which was introduced
in 2012 which contains rules on trust in ss 1448-1474.56 However, the classical legal
genealogy suggests an absence of a set of trust-based fiduciary duties in civil law
jurisdictions.
The term ‘fiduciary’ stems from Roman law, which is – to different degrees – the
source of both common law and continental European law. The pactum fiduciae was an
agreement based on which property (or some other transferable right) had been completely
transferred from one person to another person. The new owner had full rights regarding the
property, but was under a contractual restraint from exercising these rights as he saw fit.57
This mechanism is known under German law as fiduziarische Treuhand, which can be loosely
translated as fiduciary trust. It is particularly popular when using property as credit collateral.
In these cases, the owner may only sell the property if the debtor is in default, in combination
with the obligation to transfer back ownership as soon as the loan has been repaid.58
At first glance, this civil law understanding of fiducia (or Treuhand) appears similar to
the common law notion of trust and fiduciary. However, the significant difference is that,
unlike under common law, the conceptual basis is not the ‘bifurcation’ of property (which
means the trustee and the beneficial owner). In contrast, the continental European fiduciary
relationship is typically regulated under contract and statute.59 There are several reasons
contributing to this deviation. First, unlike the law in the UK, continental law has not gone
through a refinement of trust law since the late middle ages. The law of trusts is one of the

53
For example in the context of directors’ duties in the French and in the German context, see Fleischer, supra n
38; Gerner-Beuerle and Schuster, supra n 16.
54
Bebchuk and Roe, supra n 24, 154. Similarly C Kumpan and CP Leyens, ‘Conflicts of Interest of Financial
Intermediaries’ (2008) 5 European Company and Financial Law Review 72, 83.
55
A Drucker, ‘Trusts on the Continent of Europe’ (1955) 4 International and Comparative Law Quarterly 550,
1.
56
An English version of the Code can be retrieved on the website of the Czech Department of justice, see
http://obcanskyzakonik.justice.cz/, accessed on 8 September 2015). Asked by the author of this article, a Czech
academic explained this conceptual oddity with the fact that one of the persons tasked with drafting the Code
“spent some time in Canada”.
57
Drucker, supra n 55.
58
For introduction (in German language), see J Gernhuber, ‘Die fiduziarische Treuhand’ [1988] Juristische
Schulung 355.
59
Frankel, supra n 20, 407-412; Kumpan and Leyens, supra n 54, 83.
9
most important creations of the law of equity,60 but a duality of common law and equity never
emerged in continental Europe. As a result, none of the traditional civil law codes includes a
chapter on trusts.61
Secondly, the continental European jurisdictions typically rely on the idea of codification,62
which means that most contractual relationships are regulated under statute, with the
possibility to deviate from the statutory rules by consensual agreement in some cases. If, for
example, a lawyer acts on behalf of his client, his obligations do not flow from a trust-like
situation, but from the rules set out in the statute. The evolution of this statute can be driven
by various factors, for example by the date of enactment (modern statutes tend to have a
different spin than statutes which were enacted in the 1920s), the political climate, current
social developments, or even famous court cases. The result of this complex process can be a
strict standard for a particular contractual relationship which is comparable to common law
fiduciary duties, or a more lenient approach where the civil law ‘fiduciary’ is hold to a lower
standard. In other words, the legislature driven civil law approach takes into account the
various aspects of the contractual relationship and will try to regulate it accordingly, but it
lacks the clarity and simplicity of the fiduciary principle.
Thirdly, continental European law widely rejects the idea of bifurcated property.63
While the common law system may lead to uncertainties about a purported owner's true extent
of ownership and may conceal the true decision makers, the transfer of ownership under civil
law is absolute; there are no ‘ifs and buts’.64 In the civil law system, if a party to a contract
who receives ownership of trust property is unfaithful, remedies will flow from contract law.
Due to these differences the law of trusts never gained ground in continental Europe.
Of course the civil law recognises a requirement of loyalty in situations that require
trust and reliance and there may be conflicts of interest, but the conceptual starting point is
different. A judge in a common law based jurisdiction would compare a factual situation to
situations which have already been classified as fiduciary in the past. If the judge is of the
opinion that the application of fiduciary duties is justified, the established rules would apply.
A civil law judge will analyse the rules of the contract under the respective statute in the first
step. These rules may or may not impose loyalty duties such as disclosure of conflicts of
interest. The judge may be of the opinion that the relationship requires disclosure even though
it is not prescribed under the statute. In this case, he or she may try to construe the contractual
relationship between the parties, or try to find analogies65 to comparable types of contract

60
H Hansmann and U Mattei, ‘The Functions of Trust Law: A Comparative Legal and Economic Analysis’,
(1998) 73 New York University Law Review 434, 438-40.
61
Mattei, supra n 49.
62
See Vranken, supra n 45, 41. Again, the Scandinavian countries present a special case as they do not rely on
codification.
63
So called ‘unitary theory of property rights’ which has its roots in Napoleonic France, see Hansmann and
Mattei, supra n 60, 441-2 with further references.
64
Frankel, supra n 20, 400.
65
Analogy is a legal reasoning technique; see JR Murray, ‘The Role of Analogy in Legal Reasoning’ (1981-
1982) 29 UCLA Law Review 833. The German legal understanding is that an analogy is the application of a
statutory provision (or part thereof) to a situation beyond its ambit. It requires a regulatory a gap which was not
intended by the legislator and a highly comparable fact setting.
10
which require disclosure, or even apply the good faith principle as a last resort. However, the
results are much less predictable than under common law with its established principles of
fiduciary relationships, loyalty duties and disclosure.

(c) A Special Case: Hybrid Jurisdictions

The question is how hybrid jurisdictions fit into this picture. Hybrid jurisdictions possess
elements of common law and civil law traditions. These characteristics are not caused by legal
transplants, but by duality of both legal heritages that is usually caused by historical
developments. Scots law is such a special case because it was originally based on a mix of
Northern and Roman legal traditions and the ius commune.66 Since the Acts of Union 1707,
Scotland has shared most of its legislature with the rest of the United Kingdom, providing a
strong influence of common law based ideas. Another important example is company law in
China which is to a large extent a mixture of various legal influences (and not just of German
origin).67
It is very difficult to make general statements about these jurisdictions in the context
of this article because the level of influence of civil law and common law ideas may be quite
diverse. As a rule of thumb, the test could be whether an equity-based trust law comparable to
English law was developed in the respective country. If this is the case, this jurisdiction will
more likely have fiduciary duties of loyalty and disclosure as legal ground rules. It is likely
that jurisdictions without an equity law system did not develop a distinct trust law. However,
this tentative distinction is not a sharp one. Every hybrid jurisdiction would need to be
analysed separately. The purpose of this article is not to provide a thorough analysis of legal
origins, but to demonstrate that legal origins still have influence of the design of today’s
company laws. Thus, hybrid jurisdictions will not be covered in the further analysis.

3. The Fiduciary Principle as a Legal Ground Rule

(a) Ground Rules, Natural Law and the Fiduciary Principle
It is the author’s view that the fiduciary principle constitutes a ground rule for common law
jurisdictions. Legal ground rules are basic legal norms that are ‘sticky’ and therefore shape the
style of a legal and economic system.68 They are not restricted to particular legal questions,
but permeate the whole framework, shielding them from legal, economic and social change.
For example, in company law, such ground rules can be of a substantive nature (e.g., the level
of contractibility) or of procedural nature (e.g., the availability of judicial review for
individual shareholders).69 As the idea of ground rules is a theoretical construct, there is no
conclusive test to determine whether a particular concept is a legal ground rule or not. As
66
For detailed discussion, see JD Wilson, ‘Historical Development of Scots Law’ (1896) 8 Juridical Review 217.
67
Siems, supra n 6, 66.
68
K Pistor, ‘Legal Ground Rules in Coordinated and Liberal Market Economies’ in: KJ Hopt et al (eds),
Corporate Governance in Context (Oxford, Oxford University Press, 2005), 249, 254; S Whittaker and R
Zimmermann, Good Faith in European Contract Law (Cambridge Cambridge University Press, 2000) 39-41.
69
Pistor, ibid, 258.
11
discussed at the beginning of this Part of the article, the concept of fiduciaries is applied in a
large variety of fact settings in various areas of law, which means it can be considered as
‘sticky’. A second important indicator is the absence of the fiduciary principle under civil law,
which means it is only characteristic for the common law.
On the other hand, the fiduciary principle is not natural law, as submitted by
Johnson.70 Similar to legal ground rules, there is no precise definition of natural law.71 In its
classical conception it can be described as a philosophical system of legal and moral
principles purportedly deriving from a universalized conception of human nature or divine
justice rather than from legislative or judicial action.72 It can be traced back to ancient Greek
and Roman philosophers.73 In a more modern interpretation, natural law seeks to organize the
ideal element in law, to furnish a critique of old received ideals and provide a basis for
formulating new ones, and to yield a reasoned canon of values and a technique of applying
it.74 Either way, natural law exhibits an element of universality. But as we have seen, the idea
of fiduciaries is not universal because it does not exist as an overarching principle in the civil
law family. The idea that in some situations a party is subject to a stricter moral standard
because it wields power over someone else may well be considered universal. However, the
fiduciary principle is a mere technique of creating this protection in the common law. The
same result can be achieved by a civil law based statutory or contractual solution as discussed
in the previous paragraph.

(b) Good Faith as a Civil Law Ground Rule

Civil law also recognizes the idea of fairness and balance between the parties. It is usually
achieved by the good faith (bona fide) doctrine which is entrenched in most civil law
jurisdictions.75 Most civil codes have one or more general good faith provisions.76 Good faith
has been described as “clearly one of the unique expressions of continental legal culture”.77
The good faith principle is so deeply entrenched in the civil law framework that it can be
considered a legal ground rule.78

70
Cf Johnston, supra n 17.
71
For more detailed analysis of natural law, see RP George, ‘Natural Law’ (2008) 31 Harvard Journal of Law &
Public Policy 171.
72
Black’s Law Dictionary (West, 9th ed 2009).
73
For example, to Aristotle, MS Shellens, ‘Aristotle on Natural Law’ (1959) Natural Law Forum 72.
74
Black’s Law Dictionary, supra n 72, citing R Pound, The Formative Era of American Law (New York, Little
Brown & Co, 1938), 28.
75
See, generally, S Litvinoff, ‘Good Faith’ (1997), 71 Tulane Law Review 1645, 1660; MW Hesselink, ‘The
Concept of Good Faith’ in: Hartkamp et al (eds), Towards a European Civil Code (Alphen aan den Rijn,Wolters
Kluwer, 4th edn, 2010), 619; T Hassan, ‘The Principle of Good Faith in the Formation of Contracts’ (1980-1981)
5 Suffolk Journal of Transnational Law 1, 4-14.
76
For example, Code Civil [Civil Code] (France) Art 1134; Bürgerliches Gesetzbuch [Civil Code] (Germany) §
242 ‘BGB’); Code Civil [Civil Code] (Switzerland) Art 2; Civil Code (Québec) Art. 6; Civil Code (Philippines)
Art 19.
77
G Teubner, ‘Legal Irritants: Good Faith in British Law or How Unifying Law Ends up in New Divergences‘,
(1998) 61 Modern Law Review 11, 19.
78
Pistor, supra n 68, 259-63.
12
 In contrast, a general principle of good faith is not part of the common law tradition.
For example, UK law does not impose any general duties of good faith or fairness in
commercial dealings.79 Lord Mansfield’s attempt in the 18th century to introduce a governing
good faith principle in all contracts and dealings under then British law was not successful.
The absence of a general duty of good faith or fairness is one of the reasons for the frequent
choice of common law to govern commercial contracts.80 In the early 20th century, US courts
started to recognize that there is in every contract an implied covenant of good faith and fair
dealing.81 However, in the company law context, the Delaware Court of Chancery held that
“although good faith may be described colloquially as part of a ‘triad’ of fiduciary duties that
includes the duties of care and loyalty, the obligation to act in good faith does not establish an
in-dependent fiduciary duty that stands on the same footing as the duties of care and
loyalty.”82 In Australia, several court decisions have confirmed the existence of good faith in
contracts.83 These decisions have attracted much academic disapproval and have not been
confirmed by the High Court of Australia.84 So, although US and Australian courts appear to
be more inclined to accept the principle of good faith than their UK counterparts, they have
not established an overarching principle of good faith.

(c) Good Faith as the Basis of Disclosure Obligations

For commentators with a common law background, the application of the good faith principle
is sometimes uncertain. In the words of Litvinoff,
“the emphasis once placed upon the individual end pursued by each of the parties to a contract has been
shifted to the end pursued in common by all of them, as if every contract were a joint venture … where
the idea of opposed interests dividing the parties must yield to the idea of a certain union of interests
among them, … which, in a way, opens a door to the judicial modification of contracts.”85

The question, despite its undoubtedly wide ambit, is whether the good faith principle capable
of filling the gaps that are left by the absence of the fiduciary principle in the civil law
system? The answer is no. It is certainly correct that the good faith principle gives courts a
wide discretion to restrain the rights of a party under the contract or to impose new ancillary
obligations. Civil law jurisdictions do not apply the concept of equity, so good faith is the
dogmatic gateway for ideas of reasonableness, fairness and honesty. To this extent, the good

79
See Latimer and Maume, supra n 29, 106-9. The relevant test is usually the absence of bad faith. See also E
Mackkaay, ‘Good Faith in Civil Law Systems – A Legal-Economic Analysis’ (Cirano Scientific Series 2011s-
74, available on SSRN, accessed on 8 September 2015) 7.
80
Latimer and Maume, supra n 29, 107.
81
For an overview, see RS Summers, ‘The General Duty of Good Faith - Its Recognition and Conceptualization’
(1982) 67 Cornell Law Review 810.
82
Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362 (Del. 2006), 370.
83
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Burger King Corp v
Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558.
84
M Warren, ‘Good Faith: Where Are We At?’ (2010) 34 Melbourne University Law Review 344. The High
Court recently left open the question whether there is an implied term of good faith in employment contracts, see
Commonwealth Bank of Australia v Barker [2014] HCA 32.
85
Litvinoff, supra n 75, at 1658, quoting R Demogue, Traîte des Obligations en général (Paris, Arthur
Rousseau, 1931) 1.
13
faith principle is wider than the fiduciary principle because it is not limited to situations of
trust and reliance.
Good faith does not allow the courts to bend the law as they see fit. It can only be
applied if the strict application of the law would lead to untenable results.86 In particular, the
courts need to take into account the contractual framework, as the good faith doctrine should
not alter the allocation of typical risks under the contract. Moreover, unlike the fiduciary
principle, good faith is not a rule which is applicable in particular comparable situations and
results in a set of remedies. From this point of view, the good faith doctrine is weaker than the
fiduciary principle because it is typically used to alter unjust results of the statutory law, but
not to introduce a distinct set of rules (cf. the fiduciary principle). As Pargendler put it,
“…good faith and the fiduciary principle embody distinct gap-filling methods. But while fiduciary
duties are untailored defaults that supply the terms that most parties in a certain fiduciary situation
would have wanted, the doctrine of good faith mandates the application of a tailored gap-filling method
that fills in contractual gaps with the terms that the parties before the court would have contracted
for.”87

The good faith principle can be utilised as a conceptual basis for disclosure obligations in
principle.88 The idea of pre-contractual disclosure is rooted, for example, in the German
doctrine of culpa in contrahendo (‘fault in conclusion of a contract’) and the French doctrine
of abus de droit (‘abuse of rights’).89 Culpa in contrahendo is based on the idea of good faith
in negotiations.90 It has not only been incorporated in many continental law countries but has
influenced various legal codes throughout the world.91 Culpa in contrahendo states that parties
are under contractual obligations during negotiations even though they may have not yet
entered into a contract. Although the principle has been applied by the courts for decades, it
was not implemented into the German civil code until 2002. Italy also has expressly
prescribed a duty to act in good faith during the formation of a contract.92 However, despite
the existence of these pre-contractual obligations, there is no general principle that one party
is under an obligation to provide the other party with information.93 In particular, the good
faith principle cannot establish a general rule that a conflict of interest needs to be disclosed.
In sum, the fiduciary principle in the common law system has a narrower scope of
application than the good faith doctrine in the civil law system, but more far-reaching
implications. Thus, the two concepts may overlap, but remain distinctly different. In
86
There is a vast body of literature on the methodology behind the application of the German § 242 BGB. The
seminal treatise is F Wieacker, Zur rechtstheoretischen Präzisierung des § 242 BGB (Tübingen, Mohr Siebeck,
1956); for the most comprehensive overview, see D Looschelders and D Olzen in Staudinger, Kommentar zum
Bürgerlichen Gesetzbuch (Berlin, Sellier-de Gruyter, 2015) § 242, para 101-145.
87
M Pargendler, ‘Modes of Gap Filling: Good Faith and Fiduciary Duties Reconsidered’ (2008) 82 Tulane Law
Review 1315.
88
Latimer and Maume, supra n 29, 109-10.
89
A good overview of precontractual disclosure and civil law is provided by A Musy, ‘The Good Faith Principle
in Contract Law and the Precontractual Duty to Disclose’ (2001) 1 Global Jurist Advances 1.
90
See F Kessler and E Fine, ‘Culpa in Contrahendo, Bargaining in Good Faith, and Freedom of Contract: A
Comparative Study’ (1964) 77 Harvard Law Review 401.
91
Hassan, supra n 75.
92
Codice Civile [Civil Code] (Italy) Art 1337 (‘While carrying out the negotiations and the formation of
contract, the parties must act according to good faith.’).
93
Latimer and Maume, supra n 29, 110.
14
particular, good faith cannot fill the potential gaps that may exist in civil law jurisdictions in
relation to the absence of strict duties regarding loyalty and disclosure.

4. Remedies
A less obvious but nevertheless important implication is the different scope of available
remedies. For breaches of fiduciary duties a number of remedies were developed under
common law and in equity. Similar to the fiduciary principle itself, the main characteristic of
equitable remedies is their flexible application. In the words of the Chancery Court of
Delaware, courts will use a ‘broad discretion to tailor [a remedy] to suit the situation as it
exists.’94 In addition to common law damages, breaches of fiduciary duties can also result in
equitable compensation, account for profits, rescission of contract, constructive trust and
injunctions.95 The precise wording varies between different common law jurisdictions (for
example, doctrines taking on the case name in which they were developed),96 but the
underlying principles are highly comparable. These remedies typically apply for breaches of
directors’ and officers’ duties under common law. Some countries made the respective
equitable remedies available for breaches of the parallel statutory duties,97 whilst others
clarify that the equitable duties have effect in addition to their statutory equivalents (which
entails equitable remedies).98
Again, the situation is different in civil law jurisdictions. For example, the typical
remedy under German law for breaches of contract (cf. § 280(1) BGB) is compensation under
§ 249 BGB. The statutory law does not prescribe a general set of equitable remedies. Other
remedies such as account for profits or the right of rescission are prescribed for particular
conduct (e.g., misrepresentation under §§ 119-124 BGB) or for particular types of contracts
(e.g., consumer contracts under §§ 312-312k BGB), but they do not exist as overarching
principles. The absence of the fiduciary principle is also reflected in the limited availability of
remedies. Again, this is countered by ideas based upon the good faith principle, such as the
prohibition of the abuse of rights under § 242 BGB,99 but only to a certain extent. Thus, the
common law approach is more flexible in terms of whether there was a breach of fiduciary
duties, but also in relation to the appropriate remedy, simply because there is a much wider
range of remedies available.

5. Addressing Conflicts of interest

94
Gilliland v Motorola Inc, 873 A.2d 305, 312 (Del.Ch. 2005), citing Cantor Fitzgerald L.P. v. Cantor, 2001
WL 536911, at 3 (Del.Ch. 2001).
95
For an overview, see B Hannigan, Company Law (Oxford, Oxford University Press, 3rd ed 2012) 275; J
Cassidy, Corporations Law (Annandale, Federation Press, 3rd ed 2010) 241.
96
See, eg, for the doctrines developed by the Delaware Court of Chancery: M Siegel, ‘The Dangers of Equitable
Remedies’ (2009) 15 Stanford Journal of Law, Business and Finance 86.
97
For example, Companies Act 2006 (UK), s 178.
98
For example, the Australian Corporations Act 2001 (Cth), s 195.
99
The abuse of rights doctrine restrains a person from exercising his or her rights if the exercise is abusive, see
Wieacker, supra n 86.
15
The central thesis of this article is that various legal systems provide for different disclosure
obligations depending on their legal origin. This in turn can have implications on the law
matters debate. After laying out the foundations of disclosure and the duty of loyalty, the
ensuing question is: how are conflict of interest situations typically regulated?
Broadly, three approaches can be identified.100 First, as under the law of fiduciaries,
conflicts can result in disclosure obligations. Conflicted agents need to inform their principals
(clients) that they are unable to put their interest ahead of the agent’s own interest. This is a
classical approach to addressing information asymmetries, enabling the principal to make an
informed decision. The advantage of this approach is its flexibility and its low level of
intrusion into the rights of the parties. Its disadvantage is that comprehensive disclosure
obligations can result in disclosure that overburdens the principal with irrelevant information,
making the disclosure less meaningful and less effective.101
Secondly, an appropriate organisational structure can prevent conflicts or alleviate
their impact. Internal policies and procedures can be set up to ensure the conflicts of interests
are identified and evaluated.102 ‘Chinese walls’ can prevent the flow of critical information
between different departments or employees, preventing conflicts. A typical example from
German corporate law is the prohibition to be a member of the management board and the
supervisory board of the same company or of two companies in the same corporate group
under § 100(2) of the German Stock Corporation Act (Aktiengesetz, AktG).103 The problem
about organisational structures is that they are difficult to establish and costly to run. In
addition, this approach only works for organisations such as companies. It is difficult to apply
it to independent advisers or small business structures.
Thirdly, the most intrusive approach, and therefore the ultima ratio, would be to
refrain from action. This can result in undesired economic effects because the actions of a
conflicted person (for example, an intermediary acting for two clients) may be beneficial for
all and even result in useful economies of scale.104 A typical situation under company law
would be that a conflicted director would need to abstain from a board vote which relates to
the conflict.105 Another expression of the principle is the prohibition of insider trading.
Generally, the idea of refraining from action is quite typical under civil law. For example,
under German law, § 181 BGB acknowledges potential problems arising from one person (A)
entering into a contract with another person (B) while acting as an agent for that person (B).106
In this case person A would be involved on both sides of the contract. The approach taken by
§ 181 is that the contract is void unless the agent (A) had permission to enter into the contract,

100
For detailed analysis, see Kumpan and Leyens, supra n 54, 85-92.
101
See Latimer and Maume, supra n 29, 49-52.
102
Kumpan and Leyens, supra n 54, 85.
103
An unofficial translation of the AktG is available at http://www.nortonrosefulbright.com/files/german-stock-
corporation-act-109100.pdf, accessed on 8 September 2015.
104
Kumpan and Leyens, supra n 54, 90.
105
See the Australian Corporations Act 2001 (Cth), s 195 (for public companies only).
106
An unofficial translation of the Civil Code (available at http://www.gesetze-im-
internet.de/englisch_bgb/index.html, accessed on 8 September 2015) refers to this situation as ‘contracting with
oneself’.
16
granted either by statutory law or by the principal (B).107 This may resemble the typical
situation of a director dealing with his or her company. However, the scope of application is
narrow as it only refers to the formation of contracts, but not to decision-making in general
(which would be highly relevant in the company law context, for example decisions of the
board of directors). In addition, due to the absence of a set of equitable remedies, the
implications are quite strict because any contract under § 181 would be void unless the
principal had given his or her consent.
Following the central idea of this article, the existence or absence of the fiduciary
principle should be reflected in the approaches taken in different jurisdictions regarding
conflicts of interests. The logical consequence of the fiduciary principle under common law
should be a strong preference for a disclosure based approach. In contrast, civil law based
jurisdictions would most likely apply a mixed approach, using disclosure obligations,
organisational requirements, obligations to refrain from acting and even a lack of regulation.

6. Summary and Implications

The fiduciary principle is unique to common law jurisdictions. In civil law jurisdictions, the
statutory approach may lead to a disclosure framework which is comparable to the common
law. However, for some contractual situations it may fall short of the common law
framework. If the assumption that the fiduciary principle is a legal ground rule is correct, then
there must be implications in various areas of law.
As stated Section B.1 of this article, the concept of fiduciary duties is highly elusive. It
is difficult to ascertain what its ambit and consequences might be in specific factual scenarios.
Thus, Section III of this article narrows down the scope of the analysis in two ways. First, it
focuses on company law as a core area of modern business laws and the conceptual link to
financial markets regulation. Secondly, the analysis will focus on disclosure of conflicts of
interest, which is a key aspect of fiduciary duties. As a result of this narrowed focus, Part III
of this article explores the shape of a company director’s duty to dislose conflicts of interest
under the common law and under German law as a typical civil law jurisdiction.

C. DIRECTORS’ DUTY TO DISCLOSE CONFLICTS OF INTEREST

1. Duty of Loyalty and Disclosure under Common Law
It is widely argued that, in the earliest companies, a director was a trustee in the full technical
sense,108 and therefore the application of the rules of trust (and thus the rules about
fiduciaries) in respect of company directors is a logical consequence. The analogy between

107
Such permission is typically prescribed in the Articles of Association of a company.
108
Fleischer, supra n 38, 381, with further references. Against that LS Sealy, ‘The Director as Trustee’ [1967]
The Cambridge Law Journal 83, arguing that in several cases from the 18th century the courts distinguished
between trustees and directors, holding the directors accountable while the trustees where exonerated.
17
trustees and directors is straightforward because their positions are, to a certain extent,
comparable. Both have control of funds and property in which others are beneficially
interested.109 However, the main difference is that trustees must preserve the trust property
without exposing it to unnecessary risks, whereas the directors’ objective is to generate return
for the company.110 Nowadays it is therefore undisputed that directors are not trustees in the
technical sense. As agents of the company, they are a classical example of status-based
fiduciaries.
Broadly, the duties owed by company directors and other officers (in particular,
managers)111 to the company can be divided into the duty of care and the duty of loyalty.
Allegations of neglect, mismanagement and improper decision-making are dealt with under
the duty of care (and the business judgment rule).112 The fiduciary duty of loyalty focuses on
motive,113 including matters of fraud, self-dealing, misappropriation of corporate
opportunities, improper diversions of corporate assets and similar matters involving conflicts
between the directors’ interests and the company’s welfare. In line with the general rules on
fiduciaries, directors need to act solely for the benefit of the corporate principal. They are
required to act in good faith and in the best interests of the company, they must not exercise
their powers improperly and they must avoid and disclose all possible conflicts of interest.114
The concept of company directors’ fiduciary duties is a good example of legal path
dependence. Starting in the UK,115 the concept was automatically implemented in the
colonies. As a result, countries such as Australia, Canada and New Zealand recognise
fiduciary duties as parts of their equity and company laws. The concept was also picked up
and applied in the US,116 and was continuously refined by the Delaware Court of Chancery.
Today most common law based jurisdictions have refined their approach to loyalty and

109
JD Cox and TL Hazen, Business Organizations Law (St. Paul, Thomson West, 3rd ed, 2011) 220.
110
See Fleischer, supra n 38, 381; Cox and Hazen, supra n 109. Of course other settings are possible, depending
on the respective trust deed. It is possible that the trustee is under an obligation to generate reasonable returns.
However, this is not the classic configuration of a trust.
111
See L Johnson and D Millon, ‘Recalling Why Corporate Officers are Fiduciaries’ (2005) 46 William and
Mary Law Review 1597.
112
HJ Goldschmid, ’The Fiduciary Duties of Nonprofit Directors and Officers: Paradoxes, Problems, and
Proposed Reform’ (1998) 23 Journal of Corporation Law 631, 646.
113
Anabtawi and Stout, supra n 37, 1263.
114
Bray v. Ford [1896] AC 44. For thorough analysis of all aspects of directors’ conflicts of interest, see The
Law Commission (UK) and the Scottish Law Commission, Company Directors: Regulating Conflicts of
Interests and Formulating a Statement of Duties (Law Com No 261 / Scot Law Com No 173, September 1999),
available at www.lawcommission.justice.gov.uk, accessed on 8 September 2015.
115
At this point in time, Scotland with its originally strong civil law influence had already become a part of the
United Kingdom, sharing most of its company law with England (the territorial scope of the Companies Act
2006 (UK) includes Scotland). The dissemination of the concept of fiduciary duties under company law from
England with London as the main financial hub into Scotland is a logical consequence and is thus not in conflict
with the main thesis of this article.
116
Pepper v. Litton, 308 U.S. 295 (1939); Courts in other states apply the same approach, e.g. Alpert v 28
William St. Corp., 473 N.E.2s 19, 25 (N.Y. 1984); Francis v. United Jersey Bank, 432 A.2d 814 (N.J. 1981). For
discussion of the US case law, see MA Eisenberg, ‘The Duty of Good Faith in American Corporate Law’ (3)
2006 European Company and Financial Law Review 1.
18
disclosure, and many have implemented the duties into their statutory laws.117 In some
jurisdictions, egregious breaches of the duty of loyalty have even been made criminal
offences.118

2. Loyalty and Disclosure under German Company Law

The German Stock Corporation (Aktiengesellschaft, AG) 119 has a two-tier board structure.
This means the management board (Vorstand) runs the company while the supervisory board
(Aufsichtsrat) supervises the management and partakes in the strategic development of the
company: §§ 76, 111 AktG. The duties owed by managers and supervisors are based on two
different concepts. First, managers and supervisors120 are in a contractual relationship with the
company, which means that the general rules of contract apply (§§ 241-432 BGB). Secondly,
they owe stricter duties as member of company organs, which are prescribed under the AktG.
The duties prescribed under the AktG for manager on the one hand and supervisors on the
other hand are different, and therefore they will be discussed separately in the following
paragraphs.

(a) Company Management and Duty of Loyalty121

(aa) ‘Casuistic’ Approach under the Stock Corporation Act
The management board has direct responsibility for the management of the company (§ 76
AktG). Its members can be compared to executive members of a board of directors. The main
provision for managers’ duties is § 93(1) AktG. The section stipulates a general duty of care
for managers similar to the duty of care under common law. This includes the duty to prevent
harm from the company and to abide by the laws and internal rules (duty of legality).122 The
provision also provides a business judgment rule which was introduced in 2005, indirectly

117
United Kingdom: Companies Act 2006 (UK), ss 175-177; Australia: Corporations Act 2001 (Cth), ss 181-183
and 191; see also the US Model Corporations Act, § 8.30. For an overview of codifications in Europe, see
Gerner-Beuerle and Schuster, supra n 16, 206.
118
For example in Australia, see Corporations Act 2001 (Cth), s 184.
119
Similar to other jurisdictions, German company law sets out two forms of companies, a closely-held private
company (Gesellschaft mit beschränkter Haftung, GmbH) that cannot be listed on a stock exchange, and a public
stock company (Aktiengesellschaft, AG). This Section of the article will focus on the AG because it is usually
seen as the equivalent of the incorporated business entities in the Anglo-American world, exhibiting the
‘classical’ German company characteristics such as the supervisory board or mandatory worker co-
determination. For an introduction to German company law in general, see HD Assmann, B Lange and R Sethe,
‘The Law of Business Associations’, in: J Zekoll and M Reimann (eds), Introduction to German Law (Alphen
aan den Rijn, Kluwer Law International, 2005) 143-78.
120
This article will use the term ‘manager’ for members of the management board only and not for employees in
leading management positions who are not members of the management board. Members of the supervisory
board will be referred to as ‘supervisors’, while the term ‘directors’ refers to managers and supervisors
collectively.
121
A good overview of the German law of directors’ duties including the law of insolvency is provided by V
Klappstein, ‘Directors’ Duties and Liability in Germany’, in: C Gerner-Beuerle, P Paech and EP Schuster,
‘Annex to Study on Directors’ Duties and Liability (prepared for the European Commission, April 2013,
available at http://ec.europa.eu, accessed on 8 September 2015) 326-54.
122
The most spectacular case was the litigation against the former CFO of Siemens AG, see District Court
Munich I, 10 December 2013, File No 5 HK O 1387/10 – Siemens/Neubürger.
19
referring to the best interest of the company. Managers in breach of the duty are liable to
compensate the company under § 93(2).
The AktG does not prescribe a general duty of loyalty, general disclosure obligations
or a duty to avoid conflicts of interest for managers. The only explicit reference to the interest
of the company is prescribed in the business judgment rule in § 93(1). Instead, the AktG
follows a ‘casuistic’ approach, which means that the statute prescribes specific situations (or:
cases) which may relate to conflicts of interest or other circumstances which require the
directors to be loyal. This is a logical consequence of the absence of an overarching principle
of fiduciary duties as discussed in Part 2 of this article. For example, § 93(1) AktG prescribes
a duty of confidentiality and § 88(1) prohibits directors from competing with the company
without the authorisation of the supervisory board, which indirectly includes a duty to
disclose the competing activities. Potential remedies under § 88(2) are compensation or
disgorgement of profits.
The AktG addresses some other situations which are typical for conflicts of interest
but do not require disclosure. If a manager wants to enter into a contract with the company,
the authority to bind the company is transferred from the management board to the
supervisory board: (§112 AktG). Similar to § 181 BGB, § 112 AktG only refers to contracts,
which means it cannot be interpreted as addressing all kinds of conflicts of interest.123 In
addition, § 89(1) prohibits loan agreements between the company and the manager. Loan
agreements between the company and other authorised company officers (Prokuristen) or
close relatives of the managers are subject to approval of the supervisory board (§ 89(2)).
These two rules are good examples for procedural safeguards, which are typical for German
company law.124

(bb) Disclosure Obligations in the German Corporate Governance Code

A recent contribution to the German legal framework is the Deutscher Corporate Governance
Kodex (German Corporate Governance Code, GCGC).125 The GCGC is an industry code on
standards of good corporate governance. It was introduced in 2001 and is reviewed on an
annual basis. The reason for its introduction was to align German corporate practice with
international standards, thus making German companies more attractive for international
investors.126 The driver for the establishment and evolution of the GCGC is not the legislature
or the courts, but the German business community. The code was developed by a commission
consisting of managing and supervisory board representatives of German listed companies

123
M Habersack, in: Münchener Kommentar zum Aktiengesetz (Munich, Verlag C.H. Beck, 4th ed, 2014), § 112
para 8; KK Eßwein, ‘§ 112 AktG: Universalnorm für die Vermeidung von Interessenkonflikten?’ [2015] Die
Aktiengesellschaft 151.
124
Pistor, supra n 68, 272.
125
For more details and various references to the German literature, see J du Plessis and I Saenger, ’An
Overview of German Business or Enterprise Law and the One-Tier and Two-Tier Board Systems Contrasted’ in:
J du Plessis et al (eds), German Corporate Governance in International and European Context (Heidelberg,
Springer, 2nd ed 2012) 30-48. An English version of the GCGC is available at http://www.dcgk.de/en/home.html,
accessed on 8 September 2015.
126
Ibid, 31.
20
and their stakeholders. As an industry code, it does not stipulate binding rules, but
recommendations. However, the management board and the supervisory board of listed
companies need to declare on an annual basis whether they complied with the code (§ 161
AktG). If the company does not comply in full, the declaration would need to contain detailed
information about the level of compliance and the reasons for non-compliance (comply-or-
explain approach).
Under the GCGC, company managers are under an obligation to disclose the
individual annual compensation obtained in their positions (Art 4.2.4). The code prescribes a
duty for directors to act in the best interest of the company (Art 4.1.1), and to avoid and
disclose conflicts of interests (Art 4.3). Thus, the GCGC is much more comprehensive than
the AktG. The result is a framework which is comparable to the duty of loyalty in common
law jurisdictions. However, it cannot be considered a comprehensive approach as it applies
only to the 560 (German) companies listed on the German stock exchanges, of which 80 per
cent apply the GCGC recommendations.127 Given that the total number of AGs in Germany is
about 12,000,128 the vast majority of German AGs do not apply the CCGC recommendations
in respect of disclosure.

(cc) Criminal Disloyalty

The statutory civil rules are complemented by the criminal offence of disloyalty (‘Untreue’)
under § 266 Strafgesetzbuch (Criminal Code, StGB). The provision sanctions a serious
dishonest behaviour by someone who is in charge of taking care of someone else’s assets. It
can apply to company managers and supervisors.129 The maximum sentence is imprisonment
for five years. If a manager is found guilty of disloyalty, the company can also sue for
compensation under § 823(2) BGB in conjunction with § 266 StGB.
Criminal disloyalty in the company law context has attracted increased attention in
recent years as a result of spectacular trials against leading managers of Deutsche Bank AG130
and Siemens AG.131 However, criminal liability in cases of disloyal behaviour is rare because
the law grants the management board a wide discretion as to how to run the company: § 76(1)
AktG. Directors charged with disloyalty need to have acted with the intention to cause
detriment to the company. Courts apply a very high standard of evidence regarding this
intention if the accused did not act for his self-benefit.132 This approach practically rules out

127
For an overview of the GCGC in practice, see A von Werder and J Bartz, ‘Corporate Governance Report
2014: Erklärte Akzeptanz des Kodex und tatsächliche Anwendung bei Vorstandsvergütung und Unabhängigkeit
des Aufsichtsrats’ [2014] Der Betrieb 905, 906.
128
Deutsches Aktieninstitut, DAI Factbook (April 2013), available at www.dai.de, accessed 8 September 2015.
129
Federal Court of Justice, 6 December 2001, File No 1 StR 215/01, reported in BGHSt 47, 187.
130
The arguably most famous case is the trial of the former CEO of Deutsche Bank, Josef Ackermann (Federal
Court of Justice, 21 December 2005, File No 3 StR 470/04, reported in BGHSt 50, 331). For discussion of the
ruling, see F A Gevurtz, ‘Disney in a Comparative Light’ (2007) 55 American Journal of Comparative Law 453.
For discussion of the first instance decision of the District Court Düsseldorf, see Pistor, supra n 68, 267-8.
131
Federal Court of Justice, 29 August 2008, File No 2 StR 587/07, reported in BGHSt 52, 323.
132
Perron in: Schönke/Schröder (eds), Strafgesetzbuch – Commentary (Munich, Verlag C.H. Beck, 29th ed 2014)
§ 266 para 49, 50; Frank Zieschang in: Park (ed), Kapitalmarktstrafrecht (Munich, Verlag C.H. Beck, 3rd ed
2013) § 266 para 36.
21
criminal liability for most cases that do not involve a conflict of interest (for example,
company donations or voluntary employee pay-offs). In addition, the manager’s behaviour
must have resulted in a loss for the company. As a result, situations in which the conflicted
manager is acting for his own benefit as well as for the benefit of the company are not
covered by § 266 StGB. In sum, the scope of application of § 266 in relation to company
managers is relatively narrow. It may result in imprisonment and compensation, but not in
disclosure of conflicts.

(b) Company Supervisors and the Duty of Loyalty

Company supervisors owe the same duty of care under § 93 AktG as managers, including a
duty of confidentiality. The AktG does not prescribe a general duty of loyalty or general
disclosure obligations.133 In contrast to managers, supervisors are not subject to a no-
competition rule (§ 105(2)). This more lenient approach regarding conflicts of interest is
based on the concept that a company supervisor will typically be an outside director or non-
executive director with a separate main occupation. Another expression of this idea is §
100(2), which allows up to ten appointments as supervisor in different companies.
Commentators describe this lenient approach as a certain tolerance against conflicts
(‘Konflikttoleranz’).134 The other specific conflict of interest rules are caused by the
particularities of the German two-tier board system. For example, supervisors cannot be
appointed as managers in the same company and vice versa (§ 105(1)). Former managers may
only change into the supervisory board after a cooling off period of two years (§ 100(2)).
The conceptual differences between the German AktG and the common law principles
become particularly evident where a company supervisor (which would be equivalent to a
non-executive director) has a conflict of interest. For example, on the basis that someone is on
the supervisory board of two companies which are entering into a contract with each other. A
logical approach would be that the supervisor would need to disclose the conflict and then
would only need to abstain from voting in both companies in respect of the respective deal.135
The Federal Court of Justice held that in this situation the supervisor would be liable for
compensation if he or she suggested or voted for a deal that is detrimental for one of the
companies, breaching the duty of care (§§ 116, 93) and the duty to supervise the management
board (§ 111).136 However, the duty to supervise would also prohibit the supervisor from
abstaining from a vote in respect of the deal because he or she needed to exercise this duty
proactively, requiring a vote against the notion and having objections recorded in the

133
For detailed analysis of conflicts of interest and the supervisory board, see J Koch, ‘Begriff und Rechtsfolgen
von Interessenkonflikten und Unabhängigkeit im Aktienrecht’ (2014) 43 Zeitschrift für Unternehmens- und
Gesellschaftsrecht 697; for discussion of good faith and loyalty in the supervisory board context, see M Roth,
‘Outside Director Liability: German Stock Corporation Law in Transatlantic Perspective’ (2008) 8 Journal of
Corporate Law Studies 337.
134
Koch, supra n 133, 700; P Ulmer, ‘Aufsichtsratsmandat und Interessenkollision’ [1980] Neue Juristische
Wochenschrift 1603, 1605.
135
See the Australian Corporations Act 2001 (Cth), s 195.
136
Federal Court of Justice, 21 December 1979, File No II ZR 244/78.
22
minutes.137 As a result, conflicted supervisors would breach their duties to at least one of the
companies if there is a conflict. In other words, whatever the supervisor does, he or she would
breach his or her duties. However, in the eyes of the Federal Court of Justice, this could not be
used to shield the supervisor from liability.138 This is an odd result because the AktG
expressly permits persons to take up to ten supervisor positions in different companies.

(c) Analysis
(aa) Conflicts of Interest and Casuistic Approach
German statutory law contains specific rules on duties owed by managers and supervisors,
and in particular regarding their disclosure obligations. However, statutory company law lacks
the explicit duty to act in the best interests of the company139 and to avoid and disclose
conflicts of interest. Instead, the AktG applies a more casuistic approach, relating to specific
situations that might arise in company practice. Importantly, the legislature had particular
business practice situations in mind which required specific regulation. In the case of the
AktG, it is obvious that the legislature was aware of conflicts of interest in general. However,
it only addresses three particular conflicts, namely where a manager competes with the
company (§ 88), the appointment of a manager as supervisor in the same company (§ 105) or
the same company group (§ 100(2)), and where a manager contracts with the company (§
112). The first conflict is addressed by the obligation to refrain from action, the second
conflict is addressed by making the different position mutually exclusive, and the third
conflict is addressed by an organisational transfer of authority to the supervisory board. This
differentiated approach fits into this article’s thesis about the absence of the fiduciary
principle in civil law jurisdictions. It is a reasonable assumption that the German legislature
would have prescribed more stringent duties of loyalty and disclosure for managers including
a wider duty to disclose conflicts, if the fiduciary principle was as prevalent under civil law as
it is under the common law.
The advantage of this casuistic approach is its uncomplicated application in practice.
For example, if members of the management board resign and consider taking up a position as
a company supervisor, they do not need to consider to what extent they might be in a conflict
of interest. Instead, § 100(2) prescribes an unambiguous cooling off period of two years.
Unfortunately the casuistic approach is only beneficial if the factual situation is covered by
the statute (or where an analogy is possible). In comparison to the typical common law based
company laws, the German law certainly exhibits significant gaps in its statutory framework.
This consequence is not exclusive to German law, but can also be found in other European
137
Ulmer, supra n 134, 1605, with further references
138
Federal Court of Justice, supra n 136.
139
Another implication which will not be discussed in more detail is the consequence of the absence of a written
duty to act in the best interest of the company. The absence of such a duty might give managers a wider
discretion in running the company and taking into account non-financial aspects. For example, the famous
decision Parke v Daily News Ltd (1962) Ch 927 was criticised in the early 1960s for its focus on the financial
interests of the shareholders. Commentators suggested to adapt the more flexible German model instead, see RR
Pennington, ‘Case Notes: Terminal Compensation for Employees of Companies in Liquidation’ (1962) 25
Modern Law Review 715, 719.
23
jurisdictions.140 The ensuing question is whether and to what extent the courts and legal
scholars have been able to close these gaps.

(bb) Towards a Uniform Duty of Loyalty in German Company Law?

Despite the lack of a statutory basis in the AktG, it is widely acknowledged that managers and
supervisors owe a duty of loyalty (‘Treuepflicht’) to the company.141 The Federal Court of
Justice originally justified this view as a relationship of trust and reliance between the
management board and the company.142 Another reason is the management and supervisory
boards’ roles as company organs,143 as well as duties arising under contract law.144 Either
way, the no competition rule in § 88 AktG (only applicable to managers), the duty of
confidentiality in § 93(1) AktG and criminal disloyalty under § 266 StGB are seen as explicit
examples of the duty of loyalty to the company. However, in addition to the lack of a statutory
basis, there is – in stark contrast to the equitable remedies under common law – no established
set of remedies. Breaches of the alleged duty to disclose conflicts of interest would therefore
result in compensation under § 93(2) on the condition that the company proves a causal link
between the lack of disclosure and a company loss. A situation in which the company suffers
no loss whilst the manager makes a profit could become problematic.145 A second approach
would be an analogy to § 88(2), resulting in disgorgement of profits.
Over the years, contributions from comparative legal scholarship and rulings by the
Federal Court of Justice have filled some gaps in this statutory framework.146 This process is
slow because German company law does not provide shareholders easy access to the courts
for breaches of managers’ duties.147 This is in line with the overall reluctance of German law
to allocate control rights and procedural powers to individuals.148 For example, a statutory

140
An excellent overview of different disclosure obligations in Europe is provided by a comparative study of
directors duties from 2013, see C Gerner-Beuerle, P Paech and EP Schuster, ‘Study on Directors’ Duties and
Liability (prepared for the European Commission, April 2013, available at http://ec.europa.eu), 119-25. The
result is that most EU member states recognise some kind of disclosure obligation in their company laws. The
authors’ conclusion is that the duty of loyalty less coherently regulated in the EU member states than the duty of
care.
141
Fleischer, supra n 38, 384-385; Gerner-Beuerle and Schuster, supra n 16, 206.
142
Federal Court of Justice, 28 April 1954, File No II ZR 211/53, reported in BGHZ 13, 188; more recently
Federal Court of Justice, 26 April 2004, File No II ZR 155/02.
143
See H Fleischer in: Spindler/Stilz (eds), Aktiengesetz – Kommentar (Munich, Verlag C.H. Beck, 2nd ed 2010)
§ 93 para 117 (with further references).
144
H Fleischer, ‘Zur organschaftlichen Treuepflicht der Geschäftsleiter im Aktien- und GmbH-Recht’ [2003]
Wertpapier-Mitteilungen 1045.
145
Although it has to be noted that the Federal Court of Justice confirmed the company’s right to terminate the
contract with the director, see Federal Court of Justice, 8 May 1967, File Number II ZR 126/65.
146
It is a typical mechanism for civil law jurisdictions that case law is complementing the meagre statutory
framework on loyalty and disclosure, see Hopt, supra n 13, 38, naming Germany, France, Italy and Switzerland
as examples.
147
Pistor and Xu, supra n 32, 94.
148
Pistor, supra n 68, 270-3.
24
derivative action was not introduced until 2005, which has been of low practical relevance.
Moreover, German statutory law does not provide a substantive class action.149
According to the Federal Court of Justice, managers need to seek advantages for the
company and protect it from detriments.150 Company directors are also prohibited from
accepting benefits from third parties,151 from taking corporate opportunities152 and from
acquiring company resources.153 Despite this case law commentators concede that Germany is
still lacking a substantive body of case law on the duty of loyalty.154 An overarching theory on
related party transactions does not exist either.155 In answer to the question raised at the
beginning of this paragraph, it can be confirmed that despite of the lack of a statutory basis,
there is a general duty of loyalty under German company law. However, it took courts and
commentators decades to develop a theoretical framework and a robust set of cases.

(cc) Towards a General Disclosure Obligation?

Some German scholars go one step further and argue that managers are under a general
obligation to avoid and disclose conflicts of interest.156 This is interesting because, as
discussed, the AktG does not prescribe such a duty, and there is no overarching principle
under general civil law. The first main argument in favour of disclosure obligations is that
only fully informed managers (or supervisors) are able to fulfil their duties to the company
properly. Secondly, German statutory law and the GCGC contain various examples of the
duty of loyalty, including disclosure obligations for particular situations cases. These written
disclosure obligations are mere expressions of the overarching idea that conflicts require
disclosure. Thus, according to this line of scholarship, all managers and supervisors are under
a general duty to disclose all conflicts of interest.

149
In 2005, a limited model case procedure was introduced for claims relating to breaches of financial markets
laws, see B Haar, ‘Investor Protection Through Model Case Procedures – Implementing Collective Goals and
Individual Rights Under the 2012 Amendment to the German Capital Markets Model Case Act (KapMuG),
(2014) 15 European Business Organization Law Review 83. However, this procedure does not apply to company
law cases in general.
150
Federal Court of Justice, 21 April 1997, File Number II ZR 175/95, reported in BGHZ 135, 244 – ARAG
(’…den Vorteil der Gesellschaft wahren und Nachteile von ihr abwenden…‘).
151
Federal Court of Justice, 2 April 2001, File Number II ZR 217/99
152
Federal Court of Justice, 8 May 1967, File Number II ZR 126/65; Federal Court of Justice, 10 February 1977,
File Number II ZR 79/75.
153
Federal Court of Justice, 28 October 2002, File Number II ZR 353/00.
154
Pistor and Xu, supra n 32, 94; Holger Fleischer, ‘The Responsibility of Management and its Enforcement’, in
G Ferrarini et al (eds), Reforming Company and Takeover Law in Europe (Oxford, Oxford University Press,
2004) 373.
155
See H Fleischer, ‘Related Party Transactions bei börsennotierten Gesellschaften: Deutsches
Aktien(konzern)recht und Europäische Reformvorschläge’ (2014) 69 Betriebs-Berater 2691; W Bayer and P
Selentin, ‘Related Party Transactions: Der neueste EU-Vorschlag im Kontext des deutschen Aktien- und
Konzernrechts’, [2015] Neue Zeitschrift für Gesellschaftsrecht 7.
156
Fleischer, supra n 143, para 122; KJ Hopt, Interessenwahrung und Interessenkonflikte im Aktien-, Bank- und
Berufsrecht’ [2004] Zeitschrift für Gesellschafts- und Unternehmensrecht 1, 25; KJ Hopt and M Roth in:
Hirte/Mülbert/Roth (eds), Aktiengesetz – Großkommentar (Berlin, De Gruyter, 5th ed. 2015) § 88 para 275.
25
 As plausible as these arguments appear from a comparative legal perspective, their
justification under the current German statutory framework is questionable.157 As a starting
point, there is no statutory rule regarding disclosure of conflicts. The legislature obviously did
not see the necessity of disclosure obligations for all conflicts of interest. Given the casuistic
approach it is quite likely that the legislature intentionally refrained from amending the law
accordingly in the last decade. The introduction of the GCGC as a mere industry code is a
good example of this reluctance. This situation is a logical result of the absence of the
fiduciary principle as discussed in Section B of this article, because the German statutory
framework applies other approaches to address conflicts of interest. The resulting patchwork
of disclosure obligations for supervisors has been described as incoherent and indecisive.158
As at the date of publishing there is no Federal Court of Justice decision on the issue.
A ruling from 1955,159 which is sometimes referred to by legal scholars to argue in favour of
disclosure obligations,160 does not apply in this context. The Court found that a member of the
management board was under an obligation to be open towards the members of the
supervisory board. However, in the case in issue the manager had acted against a decision of
the supervisory board and did not disclose his actions that circumvented that decision. It is the
author’s view that the real issue was a breach of the decision of the supervisory board and
thus a breach of the duty of legality under § 93(1). It is very questionable if this specific
background allows the conclusion that managers are under a general obligation to disclose
conflicts of interest.161 Secondly, the decision is quite old and relates to the old AktG which
was introduced in 1937. The current statute is the result of a comprehensive overhaul in 1965
which included significant changes in the governance of companies. Given this change of
framework it is questionable whether a ruling from 1955, which can hardly have a general
application, can still provide clear guidance today.
The German Courts of Appeal also appear to be hesitant to confirm a general
disclosure obligation. The Kammergericht Berlin (Higher Regional Court of Berlin) ruled that
a manager was required to disclose his knowledge about the financial problems of a managed
fund which was marketed by his employer.162 Although the Court accepted disclosure
obligations in this particular case, these were founded in the manager’s duty to prevent harm
to the company under § 93 AktG. That means the Court founded its ruling on the duty of care,
and not on the duty of loyalty. The Higher Regional Court of Düsseldorf ruled that the
principle of good faith (§ 242 BGB) might result in disclosure obligations in particular cases,
but expressly rejected a company manager’s163 general duty to disclose all conflicts of
interest.164 Thus, although there are fair arguments for the existence of general disclosure

157
For a detailed discussion of the different arguments, see Pamela Baumanns, Rechtsfolgen einer
Interessenkollision bei AG-Vorstandsmitgliedern (Bern, Peter Lang, 2004), 37-40.
158
Koch, supra n 133.
159
Federal Court of Justice, 26 March 1955, File No II ZR 57/55, reported in BGHZ 20, 239.
160
For example raised by HM Giesen, Organhandeln und Interessenkonflikt (Berlin, Duncker & Humblot, 2004)
108.
161
See also Baumanns, supra n 157, 46-7.
162
Kammergericht Berlin, 11 March 2005, File No 14 U 137/03.
163
The decision related to a private company without a supervisory board.
164
Higher Regional Court of Düsseldorf, 25 November 1999; File No 6 U 146/98, para 49.
26
obligations for conflicted managers, and although the majority of German commentators
argues in favour of such disclosure obligations, no court of law has confirmed such a general
duty yet. Leading commentators have thus suggested implementing an express duty to
disclose conflicts of interest into the AktG to provide for legal certainty.165 The law remains
unsettled.

3. Conclusion and Consequenes for Policymakers

This chapter confirms the hypothesis that the absence of the fiduciary principle in civil law
jurisdictions can result in a different disclosure regime for company directors. In the case of
Germany, the legislature was aware that conflicts of interest are a problem in corporate
governance. But instead of imposing widespread disclosure obligations, the legislature
applied a casuistic approach, regulating particular situations in which conflicts might occur,
and applying different regulatory approaches. German courts and scholars have realised that
the German company law disclosure framework falls short of its common law counterparts
and thereby short of international standards. A number of Federal Court of Justice decisions,
the introduction of a modern industry code and a barrage of scholarly papers have tried to
close this gap. However, the law remains unsettled and lacking structural coherence.
The wider conclusion of the analysis is that important aspects of legal origins can still
be found in national business laws, in this case in the scope of disclosure obligations under
company law. As discussed in the introduction of this article, the rules on disclosure are a
cornerstone of today’s regulation of companies and financial markets. If a different legal
origin can lead to different disclosure obligations (as suggested by the analysis in this article),
and if disclosure is a key element in the regulation and growth of the financial markets (as
suggested by the vast majority of scholars in economics and in law), then the link between
legal origins and disclosure needs to be taken into account for the ‘law matters’ debate. It is
indeed possible that common law countries were originally more open to the idea of
disclosure than most of their civil law counterparts. This might have resulted in an advantage
in relation to the growth of their financial markets.
Another question is whether this analysis suggests that legal origin might be an
obstacle to the ongoing harmonisation and unification efforts in company law. The answer is
no. The duty of loyalty is a topic of significant current relevance because there is a trend
internationally to be more conscious and rigorous in the treatment of loyalty violations and
conflict of interest situations.166 The dominance of the Anglo-American company laws in the
current debate provides for a convergence towards common law based principles, which
includes comprehensive disclosure regimes under company law. Similar to legal
transplanting,167 such convergence will typically cause contrition. A good example is the EU
Commission’s proposal for the regulation of related party transactions, which relies heavily

165
H Fleischer, ‘Reformperspektiven der Organhaftung: Empfiehlt sich eine stärkere Kodifizierung von
Richterrecht?’ (2014) Der Betrieb 1971, 1973.
166
Hopt, supra n 13.
167
See generally on legal transplants, Teubner, supra n 77.
27
on the concept of disclosure.168 The proposal triggered much criticism among German
scholars.169 The main argument raised by German scholars is that the desired protection of
minor shareholders is already achieved by other mechanisms, for example the German law of
corporate groups, making the proposed Directive unnecessary under German law. However,
despite all criticism about its efficiency, there is no serious doubt that the implementation of
the Directive into German law is technically possible.
But even without the harmonisation efforts under EU law, national jurisdictions are
already converging towards the Anglo-American standard. This is aptly demonstrated by the
German law on directors’ disclosure obligations as discussed above. Triggered by
comparative legal research and industry demands, German scholars have advocated an
unwritten duty of loyalty,170 and the Federal Court of Justice has confirmed several elements
of this duty. It is a fair assumption that the remaining gap will be closed in the not so distant
future, either by new Federal Court of Justice rulings or legislative changes. In other words,
the gap between German company law and Anglo-American company law is closing.171
International scholars and policymakers need to be aware that disclosure is not the
only mechanism for addressing conflicts of interest. Different jurisdictions, in particular with
a civil law background, might prescribe other safeguards against fiduciaries who might be
tempted to abuse their powers. A lack of disclosure obligations does not necessarily mean a
lack of protection. However, this divergence does not suggest that the further harmonisation
of company laws is futile or in serious peril. Policymakers simply need to be aware of these
conceptual differences and need to take them into account when planning the further
harmonisation of company laws, for example on the European Union level.

D. SUMMARY
As set out in Section B of this article, the fiduciary duty of loyalty is a legal ground rule under
common law which is does not exist in a comparable fashion in civil law jurisdictions. The
result is a strong tendency in common law jurisdictions towards addressing conflicts of
interests by imposing disclosure obligations. In contrast, civil law jurisdictions may rely on
disclosure obligations, but will also apply other techniques to address conflicts of interest. In
some situations, conflicts of interest are not addressed at all. These different approaches have

168
European Commission, Proposal for a directive of the European Parliament and the Council amending
Directive 2007/36 EC […], COM(2014) 213, 9 April 2014.
169
See supra n 155.
170
See supra section C.2.
171
A similar development, which will not be discussed in further detail here, occurred in relation to the German
law of financial advisers. After twenty years of diverging decisions on advisers’ disclosure obligations the 11th
Senate of the German Federal Court of Justice confirmed an overarching ‘principle of transparency’, which had
been rejected by German courts for years (see Federal Court of Justice, 3 June 2014, File No XI ZR 147/12). The
problems were caused by the absence of disclosure obligations in German contract law, resulting in varying and
increasingly incoherent court decisions on disclosure obligations. The trigger for this significant turnaround was
the EU Directive on Markets in Financial Instruments, 23/95/EC [2004] OJ L-145 1, Art 19(1), which prescribes
various disclosure obligations for financial service providers.
28
 an effect on the shape of company directors’ duties under common law and civil law. In
particular, the German statutory law on stock companies does not even prescribe a general
duty to act in the best interest of the company or a duty to disclose conflicts of interest. The
German Federal Court of Justice and leading legal scholars have tried to fill these gaps and as
a result a general duty to act in the interests of the company is now acknowledged under
German law. In contrast, it is questionable whether the same is true for a duty to disclose
conflicts of interest.
This article does not claim that the ‘law matters’ thesis is correct. It does not claim that
legal heritage plays a vital role in the development of capital markets either. However, this
article demonstrates that the classical dichotomy of common law and civil law has
implications for the shape of disclosure obligations in common law and civil law based
jurisdictions. In particular, and despite the global convergence of corporate governance, this
legal heritage can still be found in today’s company laws. Scholars from the common law
world have argued that the theory that legal origin matters is inconclusive, on the basis that
there are no substantial differences in today’s business laws which can be traced back to the
country’s legal heritage. This article demonstrated that this claim is false. So does legal origin
matter? The answer is: maybe.

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