MBE Rules · Business Associations
Ultra Vires
Cal. Corp. Code § 208
The rule
The doctrine of ultra vires — that a corporation cannot act beyond its stated powers — has been largely abolished as a defense to third-party contracts. Ultra vires claims survive as (1) shareholder suits to enjoin unauthorized acts, (2) corporation-officer/director actions, and (3) state proceedings to dissolve a corporation for repeated unauthorized acts.
In plain English
The ultra vires doctrine means that a corporation cannot engage in activities that are beyond the scope of its stated powers as outlined in its charter. While this doctrine is mostly not a defense against third-party contracts, it can still be used in specific situations such as shareholder lawsuits or actions against corporate officers and directors.
Worked example
A corporation is formed to manufacture toys, but it decides to invest in real estate, which is not included in its charter. A shareholder sues to stop this investment, claiming it is ultra vires. The court agrees and enjoins the corporation from proceeding with the real estate investment.
Memory hook
Ultra vires: Know your limits or face the consequences!
The trap
Exams may present scenarios where students mistakenly believe ultra vires can be used as a defense against third-party contracts, leading to incorrect conclusions. It's important to remember that this doctrine primarily applies in specific internal or state contexts.
How examiners test it
Questions often involve fact patterns where a corporation acts outside its stated powers, prompting candidates to identify the implications of ultra vires actions and the limited contexts in which the doctrine is applicable.
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