THE DUTY OF LOYALTY OF MANAGEMENT BOARD MEMBERS

Abstract

The duty of loyalty in German company law requires managers and directors to act in the best interest of the firm. The duty of loyalty was derived and later separated from the rather general notion of good faith. Today, its basis of validity is the influence directors may exercise on the company. The overall concept of duty of loyalty has a constraining function as to the managerial position of power. This makes the duty of loyalty an important instrument of the internal corporate governance system. From a functional point of view, the duty of loyalty serves as a blanket clause that is indispensable for an evermore evolving body of law, as it allows for the necessary flexibility in the application of law. For instance, transactions of managers and directors with their enterprise (self dealing) have to be fair and appropriate and carried out at arm's length. A corporate opportunity must either fall within a firm's scope of business or must be allocated to the firm by concrete circumstances. Privately received information may constitute a corporate opportunity unless a director receives it by virtue of a personal friendship or from a family member.