Ultra Vires Lives! A Stakeholder Analysis of Corporate Illegality (with Notes on How Corporate Law Could Reinforce International Law Norms)
Boston College Law School
December 1, 2000
Boston College Law School Research Paper No. 2001-02
This paper argues that a remaining vestige of the ultra vires doctrine sets off illegal activities as "beyond the power" of corporations. Though largely unnoticed and unexamined until now, this part of the doctrine has been retained because none of the important corporate stakeholders has an interest in authorizing the corporation and its managers to commit illegal acts. From an ex ante perspective, the principal stakeholders in the corporate contract would want the corporation and its management to forego illegalities as a way to increase the value of the firm. Any of the stakeholders would be a potential victim of the corporation's lawbreaking and would want to receive assurances that they would not be harmed by such conduct. Even for the shareholders, the difficulties inherent in distinguishing in the corporate contract between profitable and unprofitable unlawful acts would either be insurmountable or quite costly to resolve. On the whole, the risks of corporate or managerial illegalities would be too great, and the potential rewards too tenuous, to expect anything other than a corporate contract that would prohibit such acts. As evidence that this stakeholder analysis reflects positive law, the paper points to state incorporation statutes and individual companies' articles of incorporation, which almost invariably charter corporations only for "lawful" purposes.
The continuing (though limited) existence of the ultra vires doctrine has important implications. First, because unlawful acts are ultra vires, such activities become subject to the enforcement powers of corporate law, in addition to the enforcement powers of whatever governmental or private entity is charged with enforcing the underlying, substantive legal requirement. Corporate law thus provides shareholders the right to sue to enjoin corporations' continuing unlawful activities.
Because the ultra vires doctrine is alive in a form that makes general law compliance an enforceable obligation within corporate law its continuing life also has implications for the duty of corporations and their managers to maximize profits. If corporations must obey the law, then such obedience must come at times when it is not profitable to do so. This notion is in contrast to the views of those scholars who have written that corporations should, with only some small exceptions, seek to maximize profits even when it requires the firm to break the law.
Finally, that the obligation to obey the law is at the heart of the corporate contract means that corporate law cannot be thought of as concerned only with the internal governance of the firm. The remaining vestige of the ultra vires doctrine imports into corporate law a concern about general law compliance, and the "lawfulness" that matters is not merely the laws of the incorporating jurisdiction. In this view, a corporation is required under its charter to act lawfully wherever it does business, whether in Delaware, California, or in a foreign jurisdiction. State corporate law would thus have something to say about a shoe company's compliance with minimum wage laws in Vietnam or an oil company's use of slave labor in Burma.
Number of Pages in PDF File: 103
Keywords: corporate law, corporate governance, corporate crime, ultra vires, human rights
JEL Classification: K22, K42, L20, M14working papers series
Date posted: February 4, 2001
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.406 seconds