In this chapter, we do address two issues. Firstly, we answer the question: What is the ultra vires doctrine? In doing so, an explanation of the meaning in corporate law is delivered taking as the starting point the capacity as an attribute of the corporate personality. On the other hand, a brief description of this book’s contents is outlined. That way we present the three main thematic axes, which are split up into nine chapters.
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Machen (1908), p. 819. The expression “ultra vires” had already been used by ancient equity scholars in the field of contract law, a long time ago before it was applied to the law of corporations. For instance, “(…) a bona fide transaction with a putative proprietor. Such transaction is void at common law as ultra vires; and were there no remedy in equity, the paying debt to a putative creditor would not be more hazardous, than transactions with a putative proprietor. (…)”. Cf. Kames (1825), p. 350.
Elliott (1911) §200. However, in Central Transportation Co. v. Pullman Palace Car Co., 139 U.S. 24 (1890) the Court emphasized that: “A contract of a corporation which is ultra vires in the proper sense, that is to say, outside the object of its creation as defined in the law of its organization, and therefore beyond the powers conferred upon it by the legislature is not voidable only, but wholly void and of no legal effect (…) A contract ultra vires being unlawful and void, not because it is in itself immoral but because the corporation, by the law of its creation, is incapable of making it (…)”. According to this line of authority, a distinction must be made: the contracts which are merely unauthorized by the corporate charter are ultra vires, and contracts that are illegal because they are contrary to law, are both ultra vires and illegal.
Nevertheless, at an early stage of the ultra vires doctrine, British courts held in Bagshaw v. Eastern Union Ry. (1850) 2. M. & G. 389: “The Legislature may have thought it right to provide that the capital raised for a specific purpose should not be applied for any other purpose. Under such a state of things, the application of capital so appropriated to any other than the specified purpose must be unlawful. No majority of the shareholders, however large, could sanction the misapplication of such a portion of the capital. Indeed, in strictness, even unanimity would not make such an act lawful” (italics added). In accordance with the opinion of the United States Supreme Court Justice Gray, everybody who deals with a corporation is charged with constructive notice of its powers. An ultra vires act is an illegal act. Therefore A, when he participated in the act, was particeps criminis. In re St. Louis Railroad v. Terre Haute Railroad, 145 U.S. 393. See, Warren (1910), p. 507. We are adherents to Professor Warren who claims that this is a ferocious doctrine. Unauthorized corporate action, simply because it is unauthorized, cannot with any propriety be said to be criminal. It is not even illegal if that adjective is used to connote something particularly reprehensible, and not simply to connote something contrary to law. Ibid.
Swaney (1883), p. 2. Martínez (2007), p. 39, et seq.Elliott (1911) §212, footnote 48. In this case, the bank can collect only the amount, which the corporation is thus authorized to contract indebtedness for. In re First Nat. Bank V. Kiefer Milling Co., 95 Ky. 97, 23 S. W. 675, 15 Ky. L. 457; First Nat. Bank v. American Nat. Bank, 173 Mo. 153, 72 S. W. 1059; Monument Nat. Bank v. Globe Works, 101 Mass. 57, 3 Am. 322; Lyon, etc., Co. v. First Nat. Bank, 85 Fed. 120, 29 C. C. A. 45; Connecticut River Say. Bank v. Fiske, 60 N. H. 363; Prospect Worsted Mill, 126 Fed. 1011.
Comparative law scholars such as Pistor (2002), p. 818, claims that directors overstepping the established boundaries were acting ultra vires. Then, transactions ultra vires were null and void and directors could be held personally responsible. The success of the ultra vires doctrine as an instrument to control management has had mixed results.
For example, in Colombia the Law 222 of 1995, art. 22, conceived a broad concept of managers. Accordingly, the representatives, liquidators, factors, members of the board of directors, and in general anyone that according to the articles of incorporation holds the inherent duties to those positions, are considered as directors. In the opinion of the Minister of Justice and the Superintendence of Companies, this is a restrictive enumeration because both the punishable regime and liability involved cannot apply to those individuals not listed in such provision. Therefore, it is not allowed to make an extensive interpretation. Cf. Ministerio de Justicia (1998), p. 143.
Ballantine (1930), pp. 235, 238. Ballantine (1930), pp. 235, 238.Geldart (1927), p. 104, holds that to say that all legal personality (natural or juristic) is equally real because the law gives it an existence, and equally artificial or fictitious because it is only the law which gives it an existence, is really confounding personality with capacity. Despite this author not pointing out the difference between these two legal concepts (personality/capacity) there is a gender to species ratio. The capacity is an attribute of the personality through which a natural individual or juristic person such as a corporation, may enforce the fulfillment of an obligation or exercise a legal right. In turn, there is a clear distinction between “passive” capacity and “active” capacity adjudicated in re Earl of Shrewsbury v. North Staffordshire Ry. Co. (1865). Cf. Schlink (1935), p. 64. More details about this topic in comparative law, see Harris (2006) passim. Research about the nature of legal persons in comparison between common law and civil law, in particular, the four predominant theses in Wolff (1938), pp. 496–505.
Pollock (1911), p. 235 argues: “… the difficulty of ascribing wrongful intention to an artificial person was in truth only a residue of anthropomorphic imagination”. A detailed research in France, Audinet (1950) and, in Italy, Verrucoli (1964).
About the meaning of corporate personality and its different theories, in Clark (1986) §16. It is expedient to consider the following elements as required for the existence of a ‘corporate juristic person’: (a) plurality of individuals; (b) cooperation; (c) organization; (d) exclusive patrimonial capacity; (e) corporate purpose. Vid. De Benito (n/d), p. 42. The technical development of the corporate personality from a Latin American civil law context, in Pinzón (1980), pp. 31–44.
Ferrara (1929), p. 778. Ferrara (1929), p. 778. Young (1912), pp. 86–87.Serick (1958), p. 44. This author also deals with fraudulent conduct employing corporate personality that causes harmful outcomes to the individuals, firms, and third parties, especially, in unfair competition issues linked to contract relationships. Cf. §4, ibid. A comprehensive analysis of this subject matter in the UK and USA from an Italian perspective, in Verrucoli (1964), Chaps. 2–4. For a critical view about the concept of a juristic person in a comparative perspective. See, De Castro (1991) pp. 115–135.
Bank of Chicago v. Trebein Co., 59 Ohio St. 316, 52 N. E. 834 (1898). In this case, courts ignore the entity concept when used as a shield for attempts to swindle creditors. Verrucoli (1964), 46–47, points out that incorporation is a privilege that cannot be abused, and those acts executed in that manner must be outlawed or at least, modified through a special act or a general provision. Therefore, the contractual theory of the firm is a counterpart to the idea of corporate personality as an absolute privilege.
