In most states, the duty of obedience is recognized as one of the three fiduciary duties a director owes to the corporation. One component of the duty of obedience is that a director is prohibited from committing an ultra vires act. Ultra vires, translated from the Latin, means “beyond powers.” An ultra vires act is beyond the scope of the powers bestowed on the corporation (and the director) by the corporate charter or bylaws. Thus, a director commits an ultra vires act when he acts without or beyond the authority vested in him by the corporation.
In many jurisdictions, directors may be held personally liable for their own ultra vires acts and ultra vires acts committed by the corporation if they voted in favor of such action, participated in the action, or allowed the action to occur due to neglect of their fiduciary responsibilities. Some states such as Texas take the view that an ultra vires act may be voidable regardless of whether the act involved negligence. However, the director may not be held personally liable for the ultra vires act unless (1) the act was illegal (violated a statute, was prohibited by law, or was against public policy) and (2) the director had actual knowledge or actually participated in the illegal ultra vires act. In Texas, at least, a director who willfully ignores signs of wrongdoing does not commit an ultra vires act.
Delaware’s general corporation statute provides that corporate acts and corporate conveyances or transfers of real or personal property are not rendered invalid by ultra vires acts. However, stockholders are specifically authorized to file suit against the corporation to enjoin the corporation from accomplishing the ultra vires act. Contracts that contemplate ultra vires acts may be set aside, and equitable remedies are available to parties to the contract if they sustain any loss or damage. Additionally, corporations (either directly, in a derivative action, or through a legal representative) are authorized to file suit to recover loss or damage sustained as a result of an incumbent or former officer’s ultra vires act. The Delaware Attorney General also has the authority to enjoin a corporation from transacting unauthorized business.
When a director breaches the duty of obedience, courts typically have broad discretion to fashion an equitable remedy. A constructive trust may be placed on any profits reaped by a director who engages in an ultra vires act, and director may be required to return or disgorge any profits obtained. In some jurisdictions, it is unnecessary to show that the corporation suffered a loss or was damaged by the ultra vires act. If the director profited from the unauthorized act or transaction, the corporation may recover the director’s profit. Most jurisdictions do not award damages for anticipated profits.
Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.