| Fryar Law Firm, P.C. -- 1001 Texas Ave. -- 14th Floor -- Houston, Texas 77002-3194 Tel. 888-481-9995 281-715-6396 Fax 281-715-6397 Skype: fryarlawfirm ©2011 -- Copyright Fryar Law Firm, P.C. -- All Rights Reserved -- Disclaimer/Terms of Use |
| Protecting the Rights of Business Owners |
| Subscribe to Shareholder Oppression Blog |
| The Ultra Vires Doctrine |
| Resources >>Closely Held Corporations>>Ultra Vires |
The legal term for a corporation or an officer or director of a corporation performing an act without legal authority is “ultra vires.” Prior to
modern corporations statutes, this doctrine was widely used to void contracts by corporations. Corporations used to have to specify their
corporate powers and purposes in detail in their Articles of Incorporation. If the corporation then entered into a transaction that wasn’t
specified, it was ultra vires and the transaction could be set aside. Under modern corporate structures, this is no longer the case. First,
most articles of incorporation state that the corporation was incorporated for “all lawful purposes” and give the corporation all legal power
necessary to accomplish those purposes. Second, most state corporations statutes now specify that ultra vires may not be used as a
ground to set a transaction aside. For example, the Delaware statute provides: “No act of a corporation and no conveyance or transfer of
real or personal property to or by a corporation shall be invalid by reason of the fact that the corporation was without capacity or power to
do such act or to make or receive such conveyance or transfer.” (Del. Code. 8:124).
Nevertheless, a shareholder may seek an injunction from a court to stop the corporation from committing an ultra vires act if the act or
transaction has not yet been fully performed, all parties to the transaction are part of the lawsuit, and the court decides that it would be
inequitable not to act. Also a corporation or shareholders in a derivative suit on behalf of the corporation may sue officers and directors for
damages resulting from an ultra vires act or transaction.
modern corporations statutes, this doctrine was widely used to void contracts by corporations. Corporations used to have to specify their
corporate powers and purposes in detail in their Articles of Incorporation. If the corporation then entered into a transaction that wasn’t
specified, it was ultra vires and the transaction could be set aside. Under modern corporate structures, this is no longer the case. First,
most articles of incorporation state that the corporation was incorporated for “all lawful purposes” and give the corporation all legal power
necessary to accomplish those purposes. Second, most state corporations statutes now specify that ultra vires may not be used as a
ground to set a transaction aside. For example, the Delaware statute provides: “No act of a corporation and no conveyance or transfer of
real or personal property to or by a corporation shall be invalid by reason of the fact that the corporation was without capacity or power to
do such act or to make or receive such conveyance or transfer.” (Del. Code. 8:124).
Nevertheless, a shareholder may seek an injunction from a court to stop the corporation from committing an ultra vires act if the act or
transaction has not yet been fully performed, all parties to the transaction are part of the lawsuit, and the court decides that it would be
inequitable not to act. Also a corporation or shareholders in a derivative suit on behalf of the corporation may sue officers and directors for
damages resulting from an ultra vires act or transaction.
Author:
Eric Fryar
Eric Fryar
 | |  | |  | |  | |  |
| Last Updated: 2/20/2011 |