Ultra Vires Lives! A Stakeholder Analysis of Corporate Illegality (with Notes on How Corporate Law Could Reinforce International Law Norms)
Posted: 3 Jun 2001
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. Ex ante, all of the stakeholder groups would worry about being 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 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. 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 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, even if those activities are profitable.
Second, because the ultra vires doctrine imports into corporate law a concern about general law compliance, the "lawfulness" that matters is not merely the laws of the incorporating jurisdiction. 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.
Keywords: corporate law, corporate governance, corporate crime, ultra vires, human rights
JEL Classification: K22, K42, L20, M14
Suggested Citation: Suggested Citation