Ultra vires

Published July 8, 2021, 7:00 AM

by Atty. Jun De Zuñiga

Ultra vires, as used in corporate law, is not synonymous with an act being null and void. It is a Latin phrase (“beyond the powers”) describing an act which requires legal authority but which is done without it (Wikipedia). The Revised Corporation Code (Sec. 44) describes it as an act performed by a corporation “other than those conferred by this Code or by its articles of incorporation and except as necessary or incidental to the exercise of the powers conferred.” 

 There are two types of ultra vires acts: the first are those which are contrary to law and are, therefore, void; and the second are those which are performed outside the scope of the powers granted under the articles of incorporation (Herbosa&Recalde, the Revised Corporation Code, p.201). An ultra vires act is not necessarily null and void except when it is done for an illegal or unlawful purpose, such as when the corporation authorizes the smuggling of contraband goods.

Dean NiloDivina (The Revised Corporation Code, p. 323) makes further distinctions between the two. The ultra vires act (beyond the powers) should be distinguished from the other ultra vires act (for an illegal purpose). The first is merely voidable which may be enforced by performance, ratification or estoppel; while the second is void and cannot be validated. The first being merely voidable, it can be enforced or validated if there are equitable grounds for taking such action.

An ultra vires act can be performed not only by the board of directors but also by an officer thereof. When such officer enters into a contract without having authority from the board, even when the contract falls within the corporation’s powers,  the unauthorized act of this corporate officer is deemed to be ultra vires (ibid., p. 323). Where, however, the board  approved payments  under an unauthorized contract, the board is deemed to have ratified the same (Ombudsman vs. De Guzman, G. R. No. 197886, Oct. 4. 2017).

     According to Dean Divina (ibid., p. 326) the following are the consequences of ultra vires acts:

  1. If the contract is executed on both sides, the courts will not interfere to deprive either party of what has been acquired;
  2. If the contract is executory on both sides, it will not be enforced at the suit of either party;
  3. If executed on one side and executory on the other, some courts will enforce in favor of the party who has executed the same against the other party who already received the benefits; and
  4. Contracts, whether executory or executed, whose ultra vires purpose is not made known to the other party, are enforceable against the corporation.

     What is the remedy then of the stockholder against an ultra vires act? If the act is yet to be done,  the remedy is one of injunction to enjoin its performance. If the act has already been performed, a stockholder may file a derivative suit on behalf of the corporation to set aside the ultra vires act (Divina, ibid., p. 327). If the action has been implemented, the members of the board shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or other persons (Herbosa&Recalde, ibid., p. 202). This will lead me to the discussion of derivative suits by stockholders in a subsequent article.

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The above comments are the personal views of the writer. His email address is [email protected]

 
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