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Company Law

Notes Neither within the main purpose nor the special powers expressly given by the statute but
incidental to or consequential upon the main purpose and a thing reasonably done for
effectuating the main purpose.
The doctrine of ultra vires played an important role in the development of corporate powers.
Though largely obsolete in modern private corporation law, the doctrine remains in full force
for government entities. An ultra vires act is one beyond the purposes or powers of a corporation.
The earliest legal view was that such acts were void. Under this approach a corporation was
formed only for limited purposes and could do only what it was authorized to do in its corporate
charter.

This early view proved unworkable and unfair. It permitted a corporation to accept the benefits
of a contract and then refuse to perform its obligations on the ground that the contract was ultra
vires. The doctrine also impaired the security of title to property in fully executed transactions in
which a corporation participated. Therefore, the courts adopted the view that such acts were
voidable rather than void and that the facts should dictate whether a corporate act should have
effect.
Over time a body of principles developed that prevented the application of the ultra vires doctrine.
These principles included the ability of shareholders to ratify an ultra vires transaction; the
application of the doctrine of estoppel, which prevented the defense of ultra vires when the
transaction was fully performed by one party; and the prohibition against asserting ultra vires
when both parties had fully performed the contract. The law also held that if an agent of a
corporation committed a tort within the scope of the agent’s employment, the corporation could
not defend on the ground that the act was ultra vires.

Despite these principles the ultra vires doctrine was applied inconsistently and erratically.
Accordingly, modern corporation law has sought to remove the possibility that ultra vires acts
may occur. Most importantly, multiple purposes clauses and general clauses that permit
corporations to engage in any lawful business are now included in the articles of incorporation.
In addition, purposes clauses can now be easily amended if the corporation seeks to do business
in new areas. For example, under traditional ultra vires doctrine, a corporation that had as its
purpose the manufacturing of shoes could not, under its charter, manufacture motorcycles.
Under modern corporate law, the purposes clause would either be so general as to allow the
corporation to go into the motorcycle business, or the corporation would amend its purposes
clause to reflect the new venture.
State laws in almost every jurisdiction have also sharply reduced the importance of the ultra
vires doctrine. For example, section 3.04(a) of the Revised Model Business Corporation Act,
drafted in 1984, states that “the validity of corporate action may not be challenged on the ground
that the corporation lacks or lacked power to act.” There are three exceptions to this prohibition:
it may be asserted by the corporation or its shareholders against the present or former officers
or directors of the corporation for exceeding their authority, by the attorney general of the state
in a proceeding to dissolve the corporation or to enjoin it from the transaction of unauthorized
business, or by shareholders against the corporation to enjoin the commission of an ultra vires
act or the ultra vires transfer of real or personal property.

Government entities created by a state are public corporations governed by municipal charters
and other statutorily imposed grants of power. These grants of authority are analogous to a
private corporation’s articles of incorporation. Historically, the ultra vires concept has been
used to construe the powers of a government entity narrowly. Failure to observe the statutory
limits has been characterized as ultra vires.
In the case of a private business entity, the act of an employee who is not authorized to act on the
entity’s behalf may, nevertheless, bind the entity contractually if such an employee would

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