A German Perspective of U.S. Fiduciary Duties

In the United States and Germany, fiduciary duties play a major role on different levels. In the U.S., fiduciary duties’ main justification is in providing protection to shareholders amidst the separation of ownership and control. Therefore, shareholders generally do not owe fiduciary duties to each other. In Germany, a broader rationale applies, i.e., limiting the general powers of influence as well as possibilities of influence of basically everyone within a company. Consequently, every shareholder generally owes fiduciary duties.

In U.S. law, fiduciary duties were early framed as a “punctilio of an honor the most sensitive”. Meinhard v. Salmon, 249 NY 458, 464 (N.Y. 1928). Likewise, in Palmiter, Partnoy, and Pollman’s Business Organizations (3rd ed.), fiduciary duties are characterized as the “’golden rule’ in business firms”. Id. at 23. Overall, fiduciary duties are applied to protect those who delegate power and authority to someone else. They divide into the duty of care and the duty of loyalty. In a partnership, every partner owes fellow partners fiduciary duties. This is different in corporations where shareholders are generally not considered to owe each other fiduciary duties.

In German law, however, fiduciary duties are a compression of general contractual obligations, which may impose duties to act, to promote, to refrain harm from, and to be loyal to the company and the shareholders. Overall, they exist regardless of the type of company. This may result in shareholders having to actively exercise their statutory rights. However, it is controversial what the overall rationale of fiduciary duties is. The predominant view is that these duties are essentially required to limit the general powers of influence and possibilities of influence of someone on the rights and interests of others. Their content and scope depend on the individual circumstances, such as the articles of association, the purpose of the company, or the structure of the association.

Why are U.S. and German law different in that regard? One central reason may be that in the U.S., prevailing atomized shareholder structures do not require any legal obligations among shareholders, which is decisively different from the German background. German corporations have traditionally had strong majority shareholders with fewer free-floating shares. Consequently, the minority had to be protected from the majority.

At the same time, the German approach is somehow similar to the rationale underlying fiduciary duties in the U.S.: although shareholders do not delegate authority and power among each other, both jurisdictions generally regard shareholders as an essential target of protection. Under U.S. law generally, the influence and potential harm is the point of attachment of fiduciary duties. Unsurprisingly, it is the influence on the company which justifies controlling shareholders to owe fiduciary duties. But it has to be considered that even a minority shareholder may use her statutory rights and authority, i.e., influence, over the rights and interests of fellow shareholders. Overall, shareholder influence is materially the same regardless of the controlling nature, which is why even the influence of a minority shareholder may require some limitations.

Fiduciary duties among shareholders, then, may constitute a potential tool to protect shareholders and the company from other shareholders. This can be illustrated by the King v. Mylan deal. Mylan Pharma. intended to buy King Pharma. and Mr. Icahn, a major shareholder of Mylan, opposed because he believed the offered bid for King was too high. To avoid this, Mr. Icahn stopped the deal and a shareholder of King named Perry Corp. bought nearly 10 % of Mylan. This conciliated enough influence on the general meeting. Perry subsequently entered into a swap with a bank that did not bear any economic risk or benefit of the shares. As a consequence, Perry remained formally the shareholder with voting rights, but the position was economically emptied out.

The sole purpose of Perry’s actions was to rule out Mr. Icahn. There was no consideration of whether the deal was beneficial for Mylan or other shareholders. Assuming the deal was overall not beneficial for Mylan, Perry’s actions ultimately harmed not only the company but also Mr. Icahn. Fiduciary duties in this case potentially could have stopped Perry from voting in favor of the deal; it would generally be obliged to promote, to refrain harm from, and to be loyal to the company and its fellow shareholders.

In sum, there is room to think about fiduciary duties among shareholders in a U.S. context. Because all individual circumstances determine the extent and scope of these duties, an appropriate and balanced application is ensured. Likewise, shareholders being bound by fiduciary duties in a non-controlling context may only impose legal obligations in exceptional circumstances, as in the exceptional Mylan v. King deal.