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Shareholder's Remedy for Ultra Vires Act

The shareholder's ultra vires cause of action for act of corporate waste, officer/director abuse of power, or any other unauthorized, ultra vires act.

ultra vires remedies

Shareholder Remedies for Ultra Vires Acts

Among the limited number of situations listed by the Texas Supreme Court in Cates v. Sparkman, where an individual shareholder is entitled to bring a claim against the corporation for actions that damage the value of his shares was for corporate acts characterized as “ultra vires.” Shareholder remedies for ultra vires acts are now governed by section 20.002 of the Texas Business Organizations Code, which greatly limits, but does not abolish, this remedy. One Texas court has written, describing the Texas statutory scheme:

An analysis of [TBCA art.] 2.04 [now BOC § 20.002] will demonstrate that it affords protection to all classes really entitled to protection. Any shareholder has his remedy if equitably entitled to relief, through a suit to enjoin performance of the particular act. The corporation or its representatives or a shareholder have their remedy by suing the officers and directors. The third party dealing with the corporation is protected to the extent that he is entitled to compensation for any loss or damage, except profits, where a shareholder is entitled to an injunction.

Proving An Ultra Vires Act Against the Corporation

Under Texas law ultra vires acts are “acts beyond the scope of the powers of a corporation as defined by its charter or the laws of the state of incorporation.” Therefore, the shareholder must prove corporate action that either violates a specific provision stated in the certificate or read into the certificate by the Business Organizations Code or prove corporate action that violates a statutory or other legal restriction imposed on the corporation, such as the limitation on the corporation to commit waste.

Proving Ultra Vires Acts Against Officers and Directors

The scope of ultra vires acts subject to legal sanction is broader for officers and directors than it is for corporation because officers and directors are limited to the authority delegated by the corporation. An ultra vires act that is ultra vires for the corporation is also ultra vires for directors who vote to take it. While there has been authority to the effect that a director is personally liable if he participates, or allows the corporation to engage, in an ultra vires act, Texas courts have held that the mere doing of an ultra vires act is not sufficient basis for imposing liability on the officers or directors of the corporation. Even where an ultra vires act by a director is voidable under Texas law, the director is not personally liable for it unless the action in question is also illegal. An illegal act is one in violation of a specific statute, malum in se, malum prohibitum, or against public policy.

However, where an officer or director commits an ultra vires act in violation of corporate or legal limitations of his own authority, he will be personally liable. An officer or director of a corporation has a duty of obedience that requires avoidance of ultra vires acts. Accordingly, he is obligated to perform his tasks consistent with the limitations placed on his authority by the certificate, the Code, and the applicable state law.

Remedies for an Ultra Vires Act of the Corporation

Section 20.002(c)(1) permits a shareholder to bring a claim for an ultra vires act against the corporation “to enjoin the performance of an act or the transfer of property by or to the corporation.” For the most part, the shareholder must catch the corporation in the act and sue to enjoin the ultra vires act before the transaction is fully consummated. The trial court must decide whether it would be inequitable not to act and may award compensatory damages suffered as a result of the injunction.

Remedies for Ultra Vires Acts by Officers and Directors

Section 20.002(c)(2) permits a claim for an ultra vires act to be brought by the corporation, acting directly or through a receiver or other representative, or by a shareholder in a derivative suit “against an officer or director or former officer or director of the corporation for exceeding that person’s authority.” There is no limitation on the remedy and no provision to compensate in damages suffered as a result of the injunction.
Therefore, in a derivative suit for ultra vires acts by officers or directors, not only could a minority shareholder enjoin on-going conduct, but should be able to unwind even fully performed transactions or recover damages on behalf of the corporation. The special rules for derivative actions in closely-held corporations would apply. Therefore, the minority shareholder might be entitled to an individual recovery of damages and would certainly be entitled to reimbursement of attorneys’ fees if successful.

Houston Business Lawyer Eric Fryar About the author: Houston Business Lawyer Eric Fryar is a published author and recognized expert in the field of shareholder oppression and the rights of small business owners. Eric has devoted his practice almost exclusively to the protection of shareholder rights over the last 25 years. Learn more

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This post represents our opinion regarding the relevant shareholder oppression and minority ownership rights law. However, not everyone agrees with us, and the law is changing quickly in this area. This page may not be up to date. Be sure to consult with qualified counsel before relying on any information of this page. See Terms and Conditions.

 

 

 

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