1. What Is the Corporate Fiduciary Duty of Loyalty?
The corporate fiduciary duty of loyalty is a fundamental principle of Austrian corporate law. While it has been shaped primarily through case law, it is also reflected in statutory provisions, including Section 1186 of the Austrian Civil Code (Allgemeines Bürgerliches Gesetzbuch – ABGB) and Section 112(1) of the Austrian Commercial Code (Unternehmensgesetzbuch – UGB). The duty of loyalty requires shareholders, when exercising their membership rights, to give due consideration to the legitimate interests of both the company and their fellow shareholders. It is rooted in the principles of good faith and fair dealing and reflects the understanding that a company is not merely a contractual relationship, but a legal association founded on mutual trust and cooperation.
A distinction is generally drawn between two principal categories of the fiduciary duty of loyalty:
- Vertical fiduciary duty of loyalty: The shareholder’s duty towards the company.
- Horizontal fiduciary duty of loyalty: The duty owed by shareholders to one another.
Both manifestations of the corporate fiduciary duty of loyalty must be followed to an equal extent.
2. The Intensity of the Fiduciary Duty: From Family-Owned Businesses to Publicly Held Corporations?
The intensity of the corporate fiduciary duty of loyalty is not the same in every type of company. It depends in particular on the specific structure of the company and the relationship between its shareholders or partners. In closely held, relationship-based companies—such as family-owned businesses, partnerships, or GmbHs with a limited number of shareholders—the fiduciary duties of loyalty are generally more extensive.
Particularly in family-owned GmbHs or family partnerships, the requirements of loyalty are high. In such companies, the fiduciary duty may even give rise to duties to provide information and disclose relevant circumstances that go beyond the statutory minimum. The aim is to ensure that no shareholder is unduly disadvantaged by informational advantages held by the majority or by intermediary corporate structures.
In widely held companies, particularly listed stock corporations, the personal relationship between shareholders is far less significant. Given the predominantly capital-providing role of shareholders, the fiduciary duty of loyalty is therefore generally more limited in scope.
3. The Non-Compete Obligation as a Specific Manifestation of the Fiduciary Duty of Loyalty
One of the most important manifestations of the corporate fiduciary duty of loyalty is the non-compete obligation. For partnerships (OG and KG), this obligation is expressly regulated by Section 112(2) of the Austrian Commercial Code (Unternehmensgesetzbuch – UGB). However, according to the prevailing view, shareholders of a GmbH may likewise not, without the consent of the other shareholders, conduct business in the company’s line of business for their own account or participate as a shareholder in another company engaged in the same or a similar business. This applies in particular to majority shareholders who are actively involved in the management of the business, as well as to companies within the same corporate group.
The purpose of the non-compete obligation is, in particular, to prevent conflicts of interest from arising in the first place and to ensure that a shareholder does not use insider knowledge acquired through the company—such as trade secrets, business secrets, or other internal information—for their own benefit or to the detriment of the company. It is a preventive safeguard that applies as soon as the company’s interests are put at risk and does not require actual damage to have occurred (i.e. a risk-based standard). Importantly:
- Scope of application: Pursuant to Section 112 UGB, the prohibition generally applies to the shareholders of an OG and the general partners (Komplementäre) of a KG. For managing directors of a GmbH, a statutory non-compete obligation is set out in Section 24 GmbHG. However, by virtue of the general fiduciary duty of loyalty, GmbH shareholders are likewise prohibited from engaging in competitive conduct, such as “diverting” or otherwise appropriating business opportunities for the benefit of their own company.
- Not-mandatory rules: The statutory non-compete obligations under Sections 112 UGB and 24 GmbHG are not mandatory. The shareholders may agree otherwise in the articles of association or grant their consent to competitive activities on a case-by-case basis
- Post-contractual non-compete obligation: The statutory non-compete obligation ends when the shareholder leaves the company. Any post-contractual non-compete obligation extending beyond this point must be expressly agreed upon by contract and is subject to limitations as to its duration and scope, particularly in light of potential concerns regarding immorality or public policy. A period of no more than two years is generally considered customary.
4. Legal Consequences of a Breach of the Fiduciary Duty of Loyalty: Consequences and Risks
The corporate fiduciary duty of loyalty is not merely a moral principle but a legally binding obligation. Breaches therefore have legal consequences. Statutory law and case law provide a comprehensive range of remedies to address breaches of the duty of loyalty appropriately. The remedy available in a particular case depends on the nature and severity of the breach, as well as the specific circumstances of the case:
- Claim for Injunctive Relief and Duty to Cooperate: Where there is a risk of an imminent or continuing breach of the corporate fiduciary duty of loyalty, the company and the affected co-shareholders do not have to stand by and tolerate such conduct. They may seek injunctive relief to prevent or put an end to conduct that breaches the duty of loyalty or is detrimental to the company. Where a breach is imminent, a preventive action for injunctive relief may also be available, subject to the circumstances of the individual case. Conversely, the fiduciary duty of loyalty may also require a shareholder to take positive action. If, for example, a shareholder wrongfully withholds their consent to a measure that is necessary for the company or in its interests, the company or the co-shareholders may, subject to the applicable requirements, bring an action for specific performance, in particular seeking the granting of the required consent. The fiduciary duty of loyalty therefore operates not only as a safeguard against harmful conduct but may also give rise to a claim requiring a shareholder to actively cooperate in accordance with their duty of loyalty.
- Challenge of Resolutions Adopted in Breach of the Fiduciary Duty of Loyalty: A common form of breach of the fiduciary duty of loyalty is the abusive exercise of voting rights at a shareholders’ or partners’ meeting. According to case law, a resolution adopted on the basis of a vote cast in breach of the duty of loyalty is not automatically void, but may be challenged. The affected shareholders may bring an action seeking a declaration that the resolution is invalid. Reviewing shareholder resolutions for compliance with the fiduciary duty of loyalty is therefore a key area of application of this legal principle.
- Damages: If a shareholder culpably breaches their fiduciary duty of loyalty and thereby causes damage to the company or to fellow shareholders, they may be liable for damages. A particular manifestation of this principle applies where the non-compete obligation is breached in a partnership. Under Section 113 UGB, the company may not only claim damages but may alternatively require the shareholder who acted in breach of their fiduciary duty to assign to the company any transactions entered into for their own account or to surrender the remuneration or profits derived from such transactions. In the case of GmbHs, this remedy is expressly provided for by statute only in relation to managing directors (Section 24 GmbHG).
- Ultima Ratio – Personal and Structural Consequences: In cases of particularly serious or repeated breaches of the fiduciary duty of loyalty that fundamentally destroy the relationship of trust between the shareholders, the law provides for far-reaching structural measures. These measures constitute an ultima ratio and generally require a court decision. Depending on the circumstances, they may result in the exclusion of the shareholder concerned or even in the dissolution of the company.
5. Practical Example 1: A Shareholders’ Resolution Adopted in Breach of the Fiduciary Duty of Loyalty
A classic area of conflict concerns the exercise of voting rights at a general meeting or shareholders’ meeting. As a general rule, a shareholder is free to pursue their own interests. However, this freedom is subject to limits where the interests of the company or minority shareholders are seriously and unjustifiably impaired.
Case: A limited liability company (GmbH) has had a successful financial year. The majority shareholder, who urgently needs liquidity for a private project, pushes through a full distribution of the company’s retained earnings against the wishes of the minority shareholder. The company, however, urgently needs the funds to finance an investment and avert an impending crisis.
Legal Assessment: Such voting conduct may constitute a breach of the fiduciary duty of loyalty. The courts assess on a case-by-case basis whether the company’s interest in retaining the profits (profit retention) “substantially outweighs” the shareholder’s interest in receiving a distribution. If the continued existence of the company is at risk, the fiduciary duty of loyalty requires the shareholder to refrain from the distribution. The resolution would therefore be subject to challenge.
6. Practical Example 2: Appropriating a Business Opportunity for Oneself?
Another sensitive issue is competition by a shareholder. While managing directors are generally subject to a statutory non-compete obligation under Section 24 GmbHG, there is no equivalent express statutory provision applicable to shareholders who are not managing directors. The fiduciary duty of loyalty nevertheless partially fills this gap.
Case: A minority shareholder of an IT consulting GmbH learns of a lucrative major contract in the course of his activities for the company. Instead of pursuing the opportunity on behalf of the GmbH, he secretly sets up his own IT company and takes the customer away from the company by undercutting its bid based on the GmbH’s internal pricing information, which he knows from his involvement with the company.
Legal Assessment: Even where no statutory or contractual non-compete obligation applies, such conduct constitutes a clear breach of the fiduciary duty of loyalty. Using insider knowledge and appropriating the company’s “established business opportunities” for personal gain is impermissible. The shareholder has wrongfully exploited information obtained through their position within the company for their own benefit, thereby causing harm to the company. Such conduct may also have criminal law implications, including, in particular, under Section 122 of the Austrian Criminal Code (Strafgesetzbuch – StGB) for the violation of trade or business secrets and Section 153 StGB for breach of trust (Untreue).
7. Practical Example 3: The Removal of an Unpopular Managing Director
The appointment and removal of managing directors are among the key rights of the shareholders of a GmbH. Pursuant to Section 16(1) GmbHG, a managing director may generally be removed at any time and without stating reasons (the principle of “free removability”). However, the fiduciary duty of loyalty places limits on this right as well.
Case: In a two-shareholder GmbH, personal disagreements arise between the two shareholder-managing directors. The majority shareholder removes the minority shareholder as managing director, not because the latter has breached any of his duties, but solely for personal reasons and in order to gain sole control of the company.
Legal Assessment: Such a removal may constitute an abuse of rights and a breach of the fiduciary duty of loyalty. If the withdrawal of confidence is based on “manifestly improper reasons”, takes place at an inopportune time, or is motivated by an intention to cause harm, the relevant shareholders’ resolution may be challenged. The principle of free removability does not give shareholders carte blanche to act arbitrarily. The courts assess on a case-by-case basis whether the decision was driven by improper motives and thereby breached the fiduciary duty owed to the co-shareholder.
8. Conclusion
The corporate fiduciary duty of loyalty is a flexible and effective legal instrument. It does not require shareholders to subordinate their own interests entirely to those of the company, but rather requires a fair and loyal balancing of the interests at stake in each individual case. In this way, it protects minority shareholders against arbitrary decisions by the majority, safeguards the proper functioning of the company, and preserves the relationship of trust that is indispensable to any company. Precisely because its scope is not rigidly defined but depends on the circumstances of each individual case and the company’s specific structure and shareholder relationships (its “actual structure”), the fiduciary duty of loyalty is also one of the most common sources of corporate disputes.
For shareholders and managing directors, an understanding of this often “invisible guardrail” is therefore essential. Careful and forward-looking drafting of the articles of association and shareholders’ agreements can prevent many disputes before they arise. Where a dispute cannot be avoided, a thorough analysis of the fiduciary duty of loyalty and any potential breach of that duty is often crucial to successfully asserting or defending claims.
Are you facing a dispute with your fellow shareholders or seeking to ensure that your corporate agreements are structured in a legally sound manner?
LEUKOS Attorneys at Law in Vienna can assist you in protecting your rights and finding tailored solutions for your business—whether in drafting shareholders’ agreements or representing you in disputes concerning the validity of shareholder resolutions.
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