CORPORATIONS - ULTRA VIREZ Flashcards
What is an Ultra Vires act?
A tansaction outside a corporation’s powers. The scop of a corporation’s powers is determined both by the corporation’s articles of incorporation (specifically the corporate “purpose” clause) and the state’s corporate statute.
SIGNIFICANCE: Not much today; however, traditionally ultra vires acts were considered void. This came up most frequently in the case of contracts, which were unenforceable by or against the corporation if they were outside the corporation’s powers (e.g.e not in relation to the corporation’s stated purpose). Even for acts that were theoretically ultra vires. exceptions were typically made if either party had already performed under the ultra vires contract. HA Sec.184 p. 478-9.
What is an “ultra vires” act?
Example: Lexicon Luthor Inc’s artiles limit its corporate purpose to publishing. It enter the insurance business. Insurance is beyond Lexicon’s powers, so the insurance busness is “ultra vires,” such taht , under the traditional rule, anyone contracting with Lexicon’s insurance business couldn’t enforc such contracts against Lexicon and Lexicon couldn’t enforce them either (unless either party had already performed, in which case an exception would likely be made).
MODERN VIEW: Broad corporate purpose clauses and states” specific abolishment of ultra vires as to lawsuits involving any third party who’s done business with the corporation have made ultra vires largely irrelevant. There are three limited areas where it still applies: shareholder suits enjoining ultra vires acts, corporate suits against directors or officers responsible for ultra vires acts, corporate suits against directors or officers responsible for ultra vires acts, and state claims brought to enjoin such acts. RMBCA Sec. 3.04(a),(b). The traditional use of ultra vires, to disavow a contract, is no longer available.
COMMON, MODERN ULTRA VIRES SITUATIONS: Charitable or political contributions (OK if reasonable), fringe benefits (e.g., retirement and stock opton plans; generally OK if reasonable and no self-dealing involved), and loans to officers and directors (watch for self-dealing issues).
What are the 3 main reasons why “ultra vires” is not a very hot topic nowadays?
There are three reasons:
1. Most state have abolished ultra vires in contract cases involving third parties who’ve done business with the corporation. Since this was traditionally the main application of ultra vires, this change sucked a lot of the guts out of ultra vires. Furthermore, modern courts imply a broad range of powers to corporations, the scope being any act reasonably necessary to accomplish their express purposes (e.g., to enter partnerships, make charitable contributions, and guranty other’s debts).
2. Most corporations today have broad corporate power clauses in their articles, allowing them to do anythin lawful. Thus, for msot corporations, an act can’t be ultra vires as outside its corporate power clause, and, even if an act is outide the corporate purpose, a court is likely to consider it within the corpoation’s implied powers.
- Even for acts that slim through the cracks and are technically ultra vires. there are strict limitations on usage. For one thing, it’s not available at all in tort and criminal cases. In contract actions, it can only be raised by:
a. a shareholder of the corporation, seeking to enjoin performance of the ultra vires contract. The injuction will only be granted if doing so would be equitable. If an injunction is granted, an injured party may reover any damages due to noncompletion of the contract other than lost profits.
b. the state, seeking to enjoin the corporation from undertaking unauthorized business or seeking to dissolve the corporation.
c. the corporation (or a shareholder in a derivative suit) can sue the officers, directors, or employees responsible for the ultra vires act for any damages to the corporation stemming from an already perfomred ultra vires contract.
NOTE: The principal areas in which ultra vires issues arise today are charitable or political contributions (OK if reasonable), fringe benefits (e.ge., retirement ans stock option plans; generally OK if reasonable and not self-dealing involved) , and loans to officers and directors (watch for self-deling issues)
What are the remedies for an ultra vires act?
Although they vary from state to state, they’re typically limited. RMBCA Sec. 3.04, which is representative of ultra vires statutes, holds that the following remedies are possible:
1. Injuction. May be sought by:
a. a shareholder seeking to prevent the corporation from carrying out an ultra vires act. The injunction will only be issued if it is equitable. If the injunction is granted, an injured party may recover damages due to noncompleton of the contract other than lost profits.
b. the state seeking to enjoin the corporation from undertaking unauthorized business.
- Damages. Can be sought by the corporation itself (or a shareholder in a derivative suit) from the officers, directors, or employees responsible for the ultra vires act. Damages can reflect any damage to the corporation stemming from an already performed ultra vires contract.
- Dissolution. The attonrey general of the state can seek dissolution of the corporation on grounds of an ultra vires act.
NOTE: Neither the corporation itself nor a third party can disavow a contract on ultra vires gounds.
Gilligan’s Island Tours, Inc., runs one-day cruises. Its purpose, as stated in its articles of incorporation, is limited to running such cruises. Realizing that a desert island to which it sails would make a great resort, the chairman of the board of Gilligan’s Island Tours, Skipper, signs a land sale contact on the corporation’s behalf to purchase the island. Ginger, a major shareholder of Gilligan’s Island Tours, challenges the proposed purchase on ultra vires grounds. Is the purchase ultra vires, according to modern courts?
No, even though the articles of incorporation limit the corporation’s purpose to running cruises.
Ultra vires acts are those beyond the scope of the cororation’s powers and purposes. Modern courts imply corporate powers across a broad range. As a general rule, corporations have the implied power to engage in any act reasonably necessary to accomplish their express purposes. In the facts here,opening a resonrt would be considered incidental to the corporation’s purposeof running cruises and within the scop of Gilligan’s Island’s implied powers. As a result, it wouldn’t be considered ultra vires. Jacksonville v. Hooper (1896).
RELATED ISSUE: Say, instead, that the purchase was ultra vires, and ginger sought to enjoin it on that basis. The rule is that a shareholder may enjoin an ultra vires act by the cororation if 1) all parties to the contract are parties to the proceeding, and 2) the injunction would be equitable. If, for instance, Ginger herself helped negotiat the purchase price, it wouldn’t be equitble to gran an injunctin in her favor.
Scrooge mcDuck is the majority shareholder of the Heuy Dewy Louie Real Estate Development Corp. The company makes a $19,000,000 profit one year. McDuck donates $500,000 of it to a nonprofit charity he controls, the McDuck Foundaton for the Preservation of Wetlands. A state statute authorizes corporations to make reasonable charitable gifts by corporations. If a minority shareholder challenges the donaton as ultra vires, what result?
The gift is valid, as long a it’s in the corporation’s interest (and not purely for McDuck’s own personal benefit). Ultra vires acts are those outside the corporation’s pwers and purposes. The scope of a corporation’s powers is determined by its articles and state statutes. Here, the state authoirzes reasonagle corporate charitble gifts (this is a typical statute. RMBCA Sec. 3.02(13). With a $19,000,000 profit, $500,000 is reasonable. Note that it’s relevant that McDuck controls the charity in question, but it doesn’t change the result. (if the charity were, say, a sham, or McDuck was making the gift for personal instead of corporate interests, the issue would be self-dealing, not ultra vires.)
NOTE: The facts here are based lossely on Theodora Holding Corp. v Henderson (DE 1969). Also of relevance in that case was a federal tax statute permitting a corporation to deduct up to 10% of its taxable income as charitable donations in a year.
RELATED ISSUE:Say, instead, that the contribution was a political contribution to the campaign of Michael Duckakis for President. Direct political contributions by corporations are illegal.
RELATED ISSUE; Say that the Companys articles expressly fordabe charitable gifts. Such a gift would be ultra vires. RMBCA Sec. 3.02(13).
TheMontague Corporation makes chocolate. The Cpulet Corporation makes peanut butter. The two corporations decide to joint venture a line of cnadies combining chocolate and peanut butter. One of Montague’s shreholders, Romeo, challenges the partnership, stating that the fiduciary duties the companies wil owe to each other partners may conflict with Montague diredtors” duties to their shareholders. is the partnership ultra vires?
No, in most states. Under RMBCA Sec. 3.02(9) (and most state statutes), a corporation has the authority to take part in partnerships, joint ventures, trust, and similar enterprises. As a result, the partnership is not ultra vires.
RELATED ISSUE: Say, instead, that Montague Corp. wanted to buy shares of Capulet Corp. Similarly, this would not be ultra vires (although it wold have been in decades gone by, since it was though that owning shares in another corporaton would be a way a corporation might try to skirt limitations on its purpose clause). RMBCA Sec. 3.02(6).
