ultra vires rule

Ultra Vires Rule

The legal term for a corporation or an officer or director of a corporation performing an act without legal authority is “ultra vires.” Corporate activities outside of the corporation's stated or permissible purposes or beyond the corporation's powers are acting ultra vires. Before modern corporations statutes, corporations were required to state their specific purposes and declare their corporate powers in their charters. When corporations ventured outside the specific purposes and grants of powers in their charters, their actions were deemed ultra vires and void. The ultra vires rule was used very effectively in many cases where shareholders sought to challenge corporate activity with which they disagreed. Also, prior to modern statutes providing a right to dissent and an appraisal remedy, shareholders routinely challenged mergers and consolidations as ultra vires. Corporations themselves also utilized the ultra vires rule to get out of contractual commitments or to unwind unfavorable transactions by claiming that the transaction had exceeded the corporation’s powers and was void.

Modern Ultra Vires Rule

Under modern corporate law, the role of the ultra vires rule is greatly diminished. The Texas Business Organizations Code section 2.003 permits Texas corporations to engage in any business or activity that is not “expressly unlawful or prohibited by a law of this state or cannot be engaged in by that entity under state law,” along with a limited number of specific businesses that are prohibited. Texas certificates of formation almost universally state that the corporation is organized for the purpose of “all lawful” business activities and provide the broader possible grant of corporate power. Therefore, almost nothing that a corporation does violates the ultra vires rule, in the sense that it is outside of its powers and purposes as stated in its certificate. The ultra vires rule comes into play with respect to corporate actions only when the conduct or transaction actually violates a limitation imposed by law or specific restrictions in the certificate. 

The ultra vires rule also governs the actions of officers and directors. Corporate management power is limited by the authority, express or implied, that is delegated to them by the corporation. Officer and directors exceeding their authority violate the ultra vires rule.

The defense of ultra vires essentially does not exist in Texas law any more. Section 20.002(a) of the BOC provides that “lack of capacity of a corporation may not be the basis of any claim or defense at law or in equity.” Section 20.002(b) provides that an act of the corporation or a transfer of property by or to a corporation is not invalid because the act or transfer exceeded the stated purposes or powers of the corporation or was inconsistent with any limitation stated in the certificate of formation on the authority of officers or directors to exercise a statutory power of the corporation. However, the Bar Committee’s 1955 comment to Texas Business Corporations Act article 2.04, the predecessor of BOC § 20.002, explains that, "[t]he effect of this article is to limit materially, not abolish, the doctrine of ultra vires, and to preserve the corporate causes of action, subject to article 2.41, against directors and officers who exceed the authority given them."

Despite the broad language eliminating the ultra vires rule in subsections (a) and (b) of BOC § 20.002, subsection (c) makes clear that the ultra vires rule still has applicability in certain limited situations. Corporations generally may not use the ultra vires rule to escape unfavorable contracts, but Texas courts distinguish illegal acts (malum in se, malum prohibitum) from those that are merely without authority (ultra vires). If an ultra vires contract is enjoined, then the trial court is directed to award damages.

Shareholder Remedies for Violation of the Ultra Vires Rule

In this section, we explore the ultra vires rule as it continues to apply to corporations and to corporate officers and directors. Ultra vires is still a viable legal doctrine and continues to constrain wrongful acts of corporations and their officers and directors. In some circumstances, the application of the ultra vires rule may provide greater legal protection to the rights an interests of minority shareholders. We also explore the judicial remedies available under the ultra vires rule.