Ultra Vires Definition
Ultra vires (Latin for Beyond the powers) is a condition where a company engages in activities that exceed its authority or power as established in organizational documents such as objects clause, articles of incorporation, bylaws, charters, operating agreements, and such like. The doctrine of ultra vires is a constituent of corporate law that governs all contracts entered into by a company. As such, any contract that is beyond the scope of the company’s corporate powers is deemed illegal. Ultra vires is the opposite of intra vires (Latin for Within the powers).
A Little More on What is Ultra Vires
A company’s officers and directors might sometimes lead the organization to engage in activities that are clear violations of their authority or power as outlined in the constituting or vesting instrument. Such a violation constitutes ultra vires and may lead to legal proceedings against the company or its directors.
Attributes of the Doctrine of Ultra Vires
Although the evolution of modern corporate law has rendered the doctrine of ultra vires more or less obsolete, it still enjoys relevance in the case of government entities. The following are some of the attributes of ultra vires.
- The doctrine of ultra vires is applicable to all powers created by a contract or statute, irrespective of whether they are express or implied.
- Ultra vires may not be used by the company or any third party as justification for invalidating a contract.
- Any action of the directors of a company that amounts to ultra vires often has severe repercussions for the shareholders of the company. As such, shareholders often initiate lawsuits against individual directors since the directors of a company are personally liable for its corporate actions.
- It is not possible to turn an ultra vires contract into an intra vires contract by reason of estoppel or ratification. This is because ultra vires contracts are treated as invalid by default.
- Shareholders cannot ratify an ultra vires transaction.
- It is possible for any member of the company to initiate an injunction against the company to prevent it from engaging in any ultra vires activities.
- A company cannot sue or be sued based on an ultra vires transaction. In the event that the company sells products or services on an ultra vires contract, it will not be able to either receive payment or recover any loan involved.
- It is not possible to bind a company through an ultra vires contract.
Advantages of the Doctrine of Ultra Vires
The doctrine of ultra vires presents certain advantages:
- Protection of shareholders: The doctrine of ultra vires assures shareholders that their investments will not be used for any activities other than the ones that were mutually agreed upon.
- Protection of creditors: The doctrine of ultra vires also protects the interests of creditors by ensuring that the company’s capital is not spent on any project or business that is beyond the scope of the objects clause.
Disadvantages of the Doctrine of Ultra Vires
There are a few disadvantages of this doctrine as well:
- The doctrine of ultra vires makes it impossible for a company to alter its activities in a direction that is agreeable to all members.
- It is possible to alter the object clause of the Memorandum via a special resolution, thus defeating the main purpose of the doctrine.
References for Ultra Vires
Academic Research on Ultra Vires
Ultra Vires Lives! A Stakeholder Analysis of Corporate Illegality (With Notes on How Corporate Law Could Reinforce International Law Norms), Greenfield, K. (2001). Virginia Law Review, 1279-1379. The author contends that remnants of the ultra vires doctrine seem to counterbalance illicit activities as transcending the authority of corporations. This component of the doctrine has been predominantly overlooked and unappraised for long. However, such remnants of the doctrine have not yet been completely discarded since it is in the best interest of corporate stakeholders to revoke the illegal acts committed by the corporation and its managers. The subjective view is that the principal stakeholders of the corporation strictly repudiate any activities of the corporation and its managers that are even in the slightest sense ‘illegal’.
Ultra Vires–Ultra Useless: The Myth of State Interest in Ultra Vires Acts of Business Corporations, Schaeftler, M. A. (1983). J. Corp. L., 9, 81. This article provides an elaboration of the procedures that corporations in the United States employ in order to perform ultra vires acts. The author proceeds to explain the role played by such ultra vires acts in protecting the interests of stockholders. He also provides a detailed analysis of the various provisions that have been incorporated in the doctrine of ultra vires.
Company Law Reform and the Ultra Vires Doctrine, Horrwitz, W. (1946). LQ Rev., 62, 66. The author scrutinizes the Ultra Vires Doctrine and contends that this doctrine is not based on an opinionated interpretation of a limited company. He suggests, instead, that the doctrine is founded on specific provisions laid down in the Companies Act of 1862 and a few subsequent statutes. The author also points out that companies incorporated by royal charter are outside the purview of the ultra vires doctrine. Furthermore, the doctrine is only limited to Anglo-American company law.
A Proposal as to the Codification and Restatement of the Ultra Vires Doctrine, Stevens, R. S. (1927). The Yale Law Journal, 36(3), 297-335. There are three distinct objectives of this article. They are: 1) To highlight the existence of two organizations that can assist in expounding the complexities that usually accompany ultra vires. They are (i) The National Conference of Commissioners on Uniform State Laws, and (ii) The American Law Institute. 2) To offer an understanding of the functioning of these organisations and the solutions that they are expected to provide. 3) To encourage others to participate in the decision making process so as to arrive at a solution that is both workable as well as amicable.
Proposed Revision of Ultra–Vires Doctrine, Ballantine, H. W. (1927). ABAJ, 13, 323. The author contends that the laws pertaining to the doctrine of ultra vires cannot be indicated in terms of capacity or the lack thereof. Moreover, it would also not be correct to state that a corporation has specific powers only. The paper concludes that the bigger question is what authority has the stockholders granted to the directors of the company to act on their behalf.
Privileges and Powers of a Corporation and the Doctrine of Ultra Vires, Harno, A. J. (1925). The Yale Law Journal, 35(1), 13-28. This paper is, by the author’s own clarification, an academic analysis of the doctrine of ultra vires along with a few suggestions that the author contends, should come in handy in the classroom. The paper also makes it absolutely clear at the very outset that it provides no solution to the problems arising from corporate acts of ultra vires. What the paper does provide is a differentiation between the concepts of power and privilege.
Rise and Fall of the Ultra Vires Doctrine in United States, United Kingdom, and Commonwealth Caribbean Corporate Common Law: A Triumph of Experience Over …, Leacock, S. J. (2006). DePaul Bus. & Comm. LJ, 5, 67. This paper scrutinizes the process of company formation in common law jurisdictions, with due attention to the similarity that exists in this process from a global perspective. However, there exist certain differences with respect to individual jurisdictions, which the author duly mentions. The paper then proceeds to elaborate on the evolution of the doctrine of ultra vires in England and in the United States and articulates its standing in modern corporate law.
A bridle, a prod, and a big stick: an evaluation of class actions, shareholder proposals, and the ultra vires doctrine as methods for controlling corporate behavior, Sulkowski, A. J., & Greenfield, K. (2005). John’s L. Rev., 79, 929. The authors perform a detailed analysis of the procedures currently applied to control corporate behavior on employment practices. These procedures include class action lawsuits and shareholder proposals to amend corporate policy. The paper suggests that both activists as well as stakeholders make use of an otherwise dormant legal doctrine in order to influence such corporate behavior.
Ultra Vires and Companies: The Indian Experience, Sangal, P. S. (1963). International & Comparative Law Quarterly, 12(3), 967-988. This article seeks to investigate the origin and evolution of the doctrine of ultra vires in Indian company law. The author then proceeds to offer suggestions pertaining to the improvements that can be brought about in such a system. The article includes a brief analysis of the pertinent provisions of the Indian Companies Acts of 1850, 1857 and 1866, besides a scrutiny of some representative verdicts passed by various Indian High Courts.
The Ultra Vires Doctrine and the Turquand Rule in Company Law-A Suggested Solution, McLennan, J. S. (1979). S. African LJ, 96, 329. The doctrine of ultra vires has been one of the most contentious topics in the field of company law. Naturally, it is also an extremely popular topic among both academician as well as the judiciary. This paper attempts to scrutinize the different aspects of the doctrine and identify the numerous issues involved. The author offers a solution in the form of a legislative draft.
Executory Ultra Vires Transactions, Warren, E. H. (1911). Harvard Law Review, 24(7), 534-547. Ideally, a corporation can be formed through a sanction of the American legislature either by special charter or pursuant to general law provisions. However, the legislature also clearly defines the authorized scope of corporate action by the company associates. Nevertheless, the general opinion of several judges is that a corporation will not be held liable for any corporate action executed by its associates outside this authorized scope.