Ultra vires

Ultra vires is a Latin term meaning “beyond the powers.” In a legal context, it refers to actions taken by a corporation or its officers that exceed the scope of the authority granted by the company’s charter, articles of incorporation, or the law.
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Updated on May 30, 2024
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3 key takeaways

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  • Ultra vires actions are those taken by a corporation or its officers that exceed their legal authority.
  • Such actions are considered invalid and can be challenged in court.
  • Ultra vires doctrine is intended to protect shareholders and ensure corporate actions adhere to legal and charter-defined limits.

What is ultra vires?

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Ultra vires describes actions taken by a corporation or its executives that are beyond the scope of the powers and authority granted to them by the corporation’s charter or the applicable laws. These actions are not legally binding and can be declared void. The ultra vires doctrine aims to prevent corporations from engaging in activities or transactions that are not within their defined objectives and to protect shareholders and creditors.

Examples of ultra vires actions

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Ultra vires actions can take various forms, including:

  • Contractual obligations: Entering into contracts or agreements that are outside the corporation’s business purposes as defined in its charter. For example, if a corporation chartered to manufacture electronics enters into a contract to purchase real estate for unrelated purposes, this may be considered ultra vires.
  • Corporate resolutions: Passing resolutions or making decisions that exceed the authority granted to the board of directors or officers. For instance, if the board of directors approves a merger that is not authorized by the company’s articles of incorporation, it would be ultra vires.
  • Financial transactions: Engaging in financial transactions, such as borrowing money or issuing shares, without proper authorization or beyond the limits set by the corporation’s governing documents.
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Ultra vires actions have several legal implications:

  • Invalidity: Actions taken ultra vires are typically considered invalid and unenforceable. Contracts entered into ultra vires may be void, and parties involved may not be legally bound by them.
  • Liability: Corporate officers or directors who engage in ultra vires actions may be held personally liable for damages resulting from their unauthorized actions. Shareholders and creditors may seek legal recourse against those responsible.
  • Remedies: Courts can intervene to stop ultra vires actions through injunctions or other legal remedies. Shareholders can file derivative lawsuits to challenge and prevent ultra vires acts.

Modern relevance of ultra vires doctrine

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While the ultra vires doctrine was historically significant, its practical relevance has diminished in modern corporate law due to several factors:

  • Broad charters: Many corporations now have broadly defined purposes in their charters, allowing them to engage in a wide range of activities, thus reducing the likelihood of ultra vires actions.
  • Statutory changes: Modern corporate statutes often include provisions that limit the application of the ultra vires doctrine, allowing corporations more flexibility in their operations.
  • Ratification: Corporations can often ratify ultra vires actions after the fact, making them valid if the shareholders or board of directors approve them.

Examples of court cases involving ultra vires

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There have been notable court cases where the ultra vires doctrine was applied:

  • Ashbury Railway Carriage and Iron Co Ltd v Riche (1875): This is a classic case where the House of Lords held that a contract entered into by the company was ultra vires and therefore void because it was beyond the company’s objects as defined in its memorandum of association.
  • Community Counseling Service, Inc. v. Reilly (1951): In this case, the court ruled that actions taken by a company officer that exceeded their authority were ultra vires and unenforceable.

Understanding ultra vires is crucial for ensuring that corporate actions remain within the legal boundaries established by a company’s charter and relevant laws. For further exploration, topics such as corporate governance, directors’ duties, and the evolution of corporate law provide deeper insights into the principles and implications of ultra vires actions in the business world.


Sources & references

Arti

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Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...