The Duty To Act Lawfully: When German Stock Corporations Face Conflicting Laws of Different Jurisdictions

Johannes M. Rowold, Joachim Herz Fellow, on his research project at UCLA School of Law, USA.

Please tell us more about the topic of your doctoral thesis.

My doctoral thesis is in the field of corporate law and supervised by Professor Christoph H. Seibt. It addresses the question what specific duties board members of German stock corporations have when a situation arises in which their company or they themselves face conflicting laws from different jurisdictions.

There are a number of cases where neither international nor domestic law offers a solution to a conflict of laws, with the result that sometimes a breach of either jurisdiction’s law is inevitable. Any natural person in this situation would decide on the basis of a cost-benefit analysis as to what law to break. However, with regard to situations in which the company faces such a conflict, under German corporate law board members owe a “duty to act lawfully” to their corporation. This means they are required not only to obey those provisions that directly pertain to themselves, but also to ensure that the company complies with all legal provisions it is exposed to, even if such compliance is economically less beneficial to the company compared with disobedience. In light of this, it is questionable how board members are required to make a decision in a situation in which a breach of law occurs in either case. 

A practical example of this conundrum can be found in a jurisdictional dilemma typical of the 21st century: the broad US discovery rights and the strict European (and German) privacy laws usually collide with each other when US courts or US authorities request the transfer to them of certain data electronically stored on European servers. The addressees of those requests are threatened with sanctions from the US in the event of non-compliance. However, compliance with requests by non-member states like the US often constitutes an infringement of data protection laws in Europe, which is sanctioned by the imposition of a fine.

Why is this topic currently particularly relevant?

That conflicts like these are highly topical is underscored by the very recent example of Volkswagen AG citing German privacy laws to justify withholding e-mails from US authorities that were investigating numerous cases of the automaker’s use of illegal diesel emissions software. From a legal perspective, it is unclear whether Volkswagen’s management board would have failed in its duty to act lawfully if it had decided to breach German privacy law in order to comply with US law for economic reasons. 

How can this question be resolved?

The resolution of this legal issue depends on the extent of abovementioned board members’ duty to act lawfully: does it require the company to comply with not only domestic but also any applicable (and even foreign) law? If yes, is there a duty to accord primacy to domestic jurisdiction in the case of a conflict? If not, what criteria and considerations must board members consider in reaching their decision in order to avoid liability? Those questions are rarely discussed in German legal literature, which is largely owing to the fact that the doctrinal and conceptual basis of the duty to act lawfully is more or less unclear.

At this point, the comparison with US law comes into play: US corporate law (along with that of many other jurisdictions) also requires directors of corporations to ensure legal compliance of their company (even if such compliance does not make any sense from a purely economic perspective). In German legal literature there are even a few (brief) references to the corresponding debate and practice in US law when the doctrinal basis of the duty to act lawfully is discussed. Furthermore, owing to different US state laws, US corporations could face similar issues not only on a cross-border, but also on a cross-state, basis. Therefore, it seemed very likely that there were a significant number of cases on this issue in US law, and that a corresponding debate on this topic was more developed in that jurisdiction.

After overviewing the US legal literature as far as this was possible from Hamburg, it appeared promising to analyze this corresponding discussion in order to find an answer to my question in German law – not only regarding the doctrinal basis of the duty to act lawfully, but also the main question of the management board members’ duties in cases of international conflicts. Therefore, I decided to make a comparison with US law an integral part of the corresponding chapter in my dissertation.

Why did you choose UCLA School of Law for your research visit?

I chose UCLA School of Law for a research visit because it is a top-ranked law school in the US with a declared research focus on corporate law, which is evidenced by the high international profile of its business law centers. Furthermore, UCLA Law’s library hosts one of the most comprehensive collections of legal material in California and the US. Ultimately, UCLA Law had a specific program for visiting researchers pursuing a PhD degree at their home schools.

In retrospect, this choice indeed turned out to be perfect: not only did the information infrastructure of the library leave nothing to be desired, but in addition I had a faculty sponsor, Professor James Park, who was really interested in my research project and introduced me to fellow scholars from his personal academic network who were considered to be experts in this specific field of corporate law. Thus, I had the opportunity to discuss my findings on this research topic regarding US law with two experts in person. 

This possibility of sharing and discussing ideas with experts from a foreign jurisdiction was, in my opinion, the most valuable part of my visit to ULCA. It makes a huge difference whether you merely read someone else’s publications or whether, in addition, you have the opportunity to address specific issues with that person face to face. In particular, in the case of my research project, there was a broad discussion of the doctrinal basis of the duty of board members to act lawfully, but, contrary to what I had expected, there was no legal dispute directly addressing my specific issue in US law. However, in the course of discussions with Professor Elizabeth Pollman from Loyola Law School Los Angeles and Professor Stephen Bainbridge from UCLA Law, it turned out that there are a couple of similar issues that were dealt with very well. This allowed me to draw conclusions as to how US law handles my specific legal issue. Finally, these conclusions in connection with the comprehensive doctrinal basis of the “duty to act lawfully” in US law indeed helped to support a doctrinally coherent resolution of this issue in German law.

All in all, I am extremely thankful to the Joachim Herz US Exchange Program at Bucerius Law School for Young Legal Scholars which funded and made my research visit to UCLA possible. Last but not least, there is probably no need to mention the uniquely relaxed and at the same time hard-working Southern California lifestyle, which made the stay at UCLA extraordinarily pleasant and was a welcome change to the winter in Hamburg.


Johannes M. Rowold