uropean corpor ecg ernance institute Fiduciary Duty in Transitional Civil Law Jurisdictions Lessons from the Incomplete Law Theory Law Working Paper Katharina pistor October 2002 Columbia law School Chenggang Xu London school of economics Political science (LSE) and CEPR C Katharina Pistor and Chenggang Xu 2002. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit per- mission provided that full credit, including C notice. This paper can be downloaded without charge from: http://ssrn.com/abstractid=343480 www.ecgi.org/wp
Law Working Paper N°. 01/2002 October 2002 Katharina Pistor Columbia Law School Chenggang Xu London School of Economics & Political Science (LSE) and CEPR © Katharina Pistor and Chenggang Xu 2002. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. This paper can be downloaded without charge from: http://ssrn.com/abstract_id=343480 www.ecgi.org/wp Fiduciary Duty in Transitional Civil Law Jurisdictions Lessons from the Incomplete Law Theory
european corporate governance instituto ECGI Working Paper Series in Law Fiduciary Duty in Transitional Civil Law Jurisdictions Lessons from the Incomplete Law Theory* Working Paper N. 01/2002 October 2002 Katharina pistor enggang Au *We are indebted to Dimitri Gavriline, Moscow(Russia), and Professor Stanislaw Soltysinski Warsaw(Poland) for locating relevant case law. We would also like to thank participants at the authors' workshop and the conference on"Global Markets, Domestic Institutions: Corporate Law ind governance in a new era of cross-border deals"held at Columbia law school in October 2001 and April 2002 respectively. Special thanks to our commentator at the conference, Reinier Kraakman, and to the participants at the seminar on Politics, Law and Development and NYU Law School, in particular to the chair of that seminar, Lewis Kornhauser. All remaining errors are those of the authors o Katharina Pistor and Chenggang Xu 2002. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including C notice, is given to the source
ECGI Working Paper Series in Law Working Paper N°. 01/2002 October 2002 Katharina Pistor Chenggang Xu Fiduciary Duty in Transitional Civil Law Jurisdictions Lessons from the Incomplete Law Theory* *We are indebted to Dimitri Gavriline, Moscow (Russia), and Professor Stanislaw Soltysinski, Warsaw (Poland) for locating relevant case law. We would also like to thank participants at the authors’ workshop and the conference on “Global Markets, Domestic Institutions: Corporate Law and Governance in a New Era of Cross-Border Deals” held at Columbia Law School in October 2001 and April 2002 respectively. Special thanks to our commentator at the conference, Reinier Kraakman, and to the participants at the seminar on Politics, Law and Development and NYU Law School, in particular to the chair of that seminar, Lewis Kornhauser. All remaining errors are those of the authors. © Katharina Pistor and Chenggang Xu 2002. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source
Abstract In Anglo-American law, fiduciary duty is the core legal concept to address conflicts among directors/managers and shareholders. The concept is developed and constantly refined by courts in the process of adjudication. By contrast, most civil law jurisdictions, including many transition economies, either lack the procedural rules that would enable parties to bring such cases to courts, or have not developed a sufficient body of case lay to determine the contents and meaning of this concept. This paper asks, whether courts should be allocated the right to define and enforce fiduciary duty principles. Based on our theory of the incompleteness of law, this paper argues that when law is highly incomplete, but the expected harm can be contained and does not cause externalities, allocating lawmaking and law enforcement to courts is optimal. Breaching fiduciary duty is such an area, as harm is typically limited to shareholders of a given company. While courts in transition economies may have difficulties living up to the task of exercising lawmaking rights in this area, we propose that there are few alternatives and that encouraging an active learning process should therefore be encouraged. We investigate emerging case law on the duty of loyalty in Poland and Russia and draw some comparisons to German case law Keywords: incomplete law, transition economies, fiduciary duty, law enforcement JEL Classifications K10 K23 K40. K42 P3 Katharina pistor Columbia Law school 435 West 116th Street New York NY 10027 United States phone:212-854-0068,fax:212-854-7946 e-mail: kpisto@law. columbia. edu Chenggang Xu Department of Economics London School of Economics Political Science(LSE) Houghton Street London wc2a 2AE United Kingdom phone:+44-207-7955-7526,fax:+44-207-7831-1840 e-mail: cxu@lse. ac uk
Abstract In Anglo-American law, fi duciary duty is the core legal concept to address confl icts among directors/managers and shareholders. The concept is developed and constantly refi ned by courts in the process of adjudication. By contrast, most civil law jurisdictions, including many transition economies, either lack the procedural rules that would enable parties to bring such cases to courts, or have not developed a suffi cient body of case law to determine the contents and meaning of this concept. This paper asks, whether courts should be allocated the right to defi ne and enforce fi duciary duty principles. Based on our theory of the incompleteness of law, this paper argues that when law is highly incomplete, but the expected harm can be contained and does not cause externalities, allocating lawmaking and law enforcement to courts is optimal. Breaching fi duciary duty is such an area, as harm is typically limited to shareholders of a given company. While courts in transition economies may have diffi culties living up to the task of exercising lawmaking rights in this area, we propose that there are few alternatives and that encouraging an active learning process should therefore be encouraged. We investigate emerging case law on the duty of loyalty in Poland and Russia and draw some comparisons to German case law. Keywords: incomplete law, transition economies, fiduciary duty, law enforcement JEL Classifications: K10, K23, K40, K42, P3 Katharina Pistor Columbia Law School 435 West 116th Street New York NY 10027 United States phone : 212-854-0068 , fax : 212-854-7946 e-mail : kpisto@law.columbia.edu Chenggang Xu Department of Economics London School of Economics & Political Science (LSE) Houghton Street London WC2A 2AE United Kingdom phone : +44-207-7955-7526 , fax : +44-207-7831-1840 e-mail : c.xu@lse.ac.uk
Fiduciary Duty in Transitional Civil Law Jurisdictions Lessons from the Incomplete law Theory Katharina pistor Chenggang Introduction Fiduciary duty is a core concept in Anglo-American corporate law for delineating the rights and responsibilities of directors and managers, as well as dominant shareholders vis-a-vis minority shareholders. Yet its precise meaning is difficult to discern without reference to a large body of case law. Judge-made law has over time carved out a subset of specific obligations and standards of conduct derived from this principle. Most widely accepted are the duty of care and the duty of loyalty, where the duty of loyalty refers to situations in which conflict of interest is present. The meaning of each of these obligations is explained by referring to a subset of more specific obligations. Some of these obligations have been codified This is true in the US, for example, for the duty to disclose material information to investors and shareholders. Those that have not. or where codification still left sufficient room for I The Securities and Exchange Act includes numerous provisions that could be regarded as a pecification of directors duties vis-a-vis their investors. Similarly, state takeover rules specify the standards of behavior of directors in a takeover situation. Yet, most of these provisions remain rather ambiguous and require further specification by courts
Fiduciary Duty in Transitional Civil Law Jurisdictions Lessons from the Incomplete Law Theory Katharina Pistor and Chenggang Xu Introduction Fiduciary duty is a core concept in Anglo-American corporate law for delineating the rights and responsibilities of directors and managers, as well as dominant shareholders vis-à-vis minority shareholders. Yet its precise meaning is difficult to discern without reference to a large body of case law. Judge-made law has over time carved out a subset of specific obligations and standards of conduct derived from this principle. Most widely accepted are the duty of care and the duty of loyalty, where the duty of loyalty refers to situations in which conflict of interest is present. The meaning of each of these obligations is explained by referring to a subset of more specific obligations. Some of these obligations have been codified.1 This is true in the US, for example, for the duty to disclose material information to investors and shareholders. Those that have not, or where codification still left sufficient room for 1 The Securities and Exchange Act includes numerous provisions that could be regarded as a specification of directors’ duties vis-à-vis their investors. Similarly, state takeover rules specify the standards of behavior of directors in a takeover situation. Yet, most of these provisions remain rather ambiguous and require further specification by courts
ambiguity as to the scope and meaning of the law, are derived by courts in the process lJuaication Thus, in Anglo-Saxon countries, courts are in charge of determining the boundaries of managers' obligations to shareholders boundaries. which are inherently difficult to circumscribe exhaustively. As Clark puts it, this general duty of loyalty is a residual concept that can include factual situations that no one has foreseen and categorized"( Clark 1986: 141). The broad and encompassing nature of Fiduciary Duties appears to be a crucial factor in explaining the importance it has acquired in Anglo-American jurisdictions( Clark 1986: Coffee 1989, Eisenberg 2000 Johnson et al. 2000). It has allowed courts to take account of the changing nature of the business enterprise while maintaining at least the semblance of undisputed principles for determining what is right and what is wrong in corporate conduct As many have pointed out, the corporate law in the U.S., especially in Delaware has developed from a(fairly) prohibitive, or mandatory law into an enabling corporate law, which allows shareholders to opt out of many legal provisions and substitute their own contractually determined arrangements( Coffee 1989);(Black and Kraakman 1996). Nevertheless, shareholders (or rather those controlling the process of charter and by-law making) have not been able to opt out of the principle of fiduciary duty, which has gained in importance as the law has become more enabling (Coffee 1989). The contrast with corporate law in many civil law jurisdictions is stark. German law, for example, explicitly states that all provisions of the corporate law are mandatory, except where otherwise stated, and courts have not played an Compare Sec. 23 of the German Law on Joint Stock Companies(AktG)
4 ambiguity as to the scope and meaning of the law, are derived by courts in the process of adjudication. Thus, in Anglo-Saxon countries, courts are in charge of determining the boundaries of managers’ obligations to shareholders – boundaries, which are inherently difficult to circumscribe exhaustively. As Clark puts it, “this general duty of loyalty is a residual concept that can include factual situations that no one has foreseen and categorized” (Clark 1986:141). The broad and encompassing nature of Fiduciary Duties appears to be a crucial factor in explaining the importance it has acquired in Anglo-American jurisdictions (Clark 1986; Coffee 1989; Eisenberg 2000; Johnson et al. 2000). It has allowed courts to take account of the changing nature of the business enterprise while maintaining at least the semblance of undisputed principles for determining what is right and what is wrong in corporate conduct. As many have pointed out, the corporate law in the U.S., especially in Delaware, has developed from a (fairly) prohibitive, or mandatory law into an enabling corporate law, which allows shareholders to opt out of many legal provisions and substitute their own contractually determined arrangements (Coffee 1989); (Black and Kraakman 1996). Nevertheless, shareholders (or rather those controlling the process of charter and by-law making) have not been able to opt out of the principle of fiduciary duty, which has gained in importance as the law has become more enabling (Coffee 1989). The contrast with corporate law in many civil law jurisdictions is stark. German law, for example, explicitly states that all provisions of the corporate law are mandatory, except where otherwise stated,2 and courts have not played an 2 Compare Sec. 23 of the German Law on Joint Stock Companies (AktG)