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The Ultra Vires Doctrine

Claims under the ultra vires doctrine. Unauthorized acts of the corporation and its officers.

ultra vires doctrine

Claims Under the Ultra Vires Doctrine

Prohibited Corporate Actions Under the Ultra Vires Doctrine

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.” Corporate powers and purposes are generally not subject to expressed limitations in the certificate; however, other provisions of the certificate may impose such limitations. For example, if the certificate provides the stockholders with pre-emptive rights, then the issuance of new shares in violation of the pre-emptive rights stated in the certificate could be enjoined under the ultra vires doctrine. If the certificate does not provide for shareholder action by non-unanimous written consent, then corporate action taken on the basis of a written consent of less than all shareholders is ultra vires. Most certificates provide for indemnification rights to the maximum extent allowed by the Code, incorporating the Code provisions governing indemnification into the certificate; some even make mandatory indemnification rights that are voluntary in the Code. When shareholders get into litigation, the majority shareholder generally uses his power over the corporation to cause the corporation to pay his legal expenses. The Code does permit advancement of expenses, but only after the corporation’s receipt of a written affirmation of the recipient’s good faith belief that he meets the standard for indemnification and a written undertaking to repay the corporation if he is found not to meet those standards. That step is often neglected. Any payment of legal expenses prior to compliance with the Code is barred by the ultra vires doctrine.

Moreover, corporate action must be taken for the benefit of the corporation and comply with state law, including “basic principles of fiduciary law.” The corporation may be able to take acts for “any lawful purpose,” but those acts must be taken for a corporate purpose. Corporate actions “must be pursued for corporate benefit. If pursued for personal benefit, they are ultra vires.” Where a majority shareholder, officer, or director uses his power over the corporation to cause the corporation to enter into transactions or otherwise operate, not for the purpose of benefitting the corporation, but solely for for personal benefit, the those corporate acts are a violation of the ultra vires doctrine. While misappropriation and other self-dealing transactions by the controlling majority may be the basis of a derivative claim for damages, such transactions may be ratified by a majority of disinterested directors or shareholders, and the definition of “disinterested” under the Code is quite broad and can include allies, friends, and stooges. However, ultra vires acts that do not benefit the corporation, such as those constituting waste or gift, may only be ratified by a unanimous shareholder vote. Furthermore, the business judgment rule does not insulate ultra vires acts.

The ultra vires doctrine is much more limited than the fiduciary duties governing officers and directors. A director breaches his fiduciary duties to the corporation when he fails to devote his honest business judgment solely for the benefit of the corporate, whereas he causes the corporation to violate the ultra vires doctrine only when the corporation receives no benefit whatsoever.

Prohibited Officer and Director Actions Under the Ultra Vires Doctrine

A second area in which the ultra vires doctrine comes to play is when the officers, directors, or other corporate agents take the corporate action without or exceeding their authority as agents. These acts are not truly “ultra vires” in the sense that they may be ratified after the fact, nevertheless they are void unless and until ratification occurs and may be the subject of a claim under the ultra vires doctrine. Such ultra vires acts of officers and directors very frequently occur in shareholder oppression litigation in the course of excluding the minority shareholder from participation, particularly if the minority shareholder is a director. Often the board will be in deadlock, or the controlling shareholder does not wish to meet with the minority, and the controlling shareholder proceeds to act outside the board process. Action by written consent by the majority shareholder is not valid, unless the certificate of formation—not the bylaws—specifically provides for nonunanimous written consent. Often shareholder or board-level decisions will be made without notice to the minority shareholder. “The general rule is that a board of directors may exercise its power only as a body at a meeting duly assembled.” Board members have no authority to act individually or without a properly noticed meeting. Board-level actions taken
 without proper notice to all board members are void. Often the controlling shareholder will attempt to exercise control over the corporation as its president, bypassing board and shareholder votes. However, a president’s authority only extends to matters in the ordinary course of business. The president has no authority to fire an officer appointed by the board. Similarly, the president has no authority to cause the corporation to hire counsel to fight with the minority shareholder.

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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