Vail Daily column: The ultra vires doctrine
A duck is a duck and, presumably, should quack like one. That, in broad sweep, is the ultra vires doctrine. A duck should not, say, bugle like an elk.First, a little Latin vivisection. In that ancient tongue, “ultra” means “beyond” or “outside of.” “Vires” is the Latin for “powers.” Put them both together and you’ve got something which means “beyond the powers.” You say, “So what?”Well, hang with me just a sec.Ultra vires applies to the powers of a corporation.At law, a corporation is a separate legal “person” with a separate identity and, accordingly, with separate duties and responsibilities. “Separate from what?” you may rightfully be asking. Separate from the people who comprise it or are involved with it. Separate from the shareholders, the officers, directors and employees. A corporation is its own legal being.Again, you might reasonably inquire, from whence do a corporation’s duties and responsibilities arise?”Good question.The answer may be found in the corporate laws of the state within which the entity is registered as well as in its articles and bylaws. The “articles,” more properly the “articles of incorporation,” are the basic instrument filed with the appropriate agency. In Colorado, the articles are filed with the secretary of state. Articles are filed when the corporation is first formed and establish the corporation as a separate legal being. Corporate existence begins with the filing of the articles.The bylaws are the corporate constitution. They lay out the rules or internal laws adopted by the corporation and by which the entity will be governed. Bylaws may be thought of as the “government” of the corporation.OK, then, back to where we started: a corporation is a separate legal person. It is separate from the persons who run, own or are otherwise involved with it. It is born, or comes into existence, with the filing of its articles. It is governed by both state law and by the bylaws which form its rules and regulations. It must, it holds to reason, operate in accordance with those rules.When the rules are breached, what such “stepping out of bounds” may be is ultra vires. The duck, instead of quacking like a duck, is bugling like an elk. Or, more appropriately, the corporation is not acting in a manner true to its corporate colors.An ultra vires act is one beyond the scope of the powers of the corporation. The term has broad application and includes not only acts prohibited by the corporation’s charter, but acts which are in excess of powers granted and not prohibited. The ultra vires doctrine generally applies either when a corporation has no power whatsoever to act (but does so anyway), or when it does have the power (but exercises it irregularly).An act is ultra vires when a corporation is without authority to perform the act under any circumstances of for any purposes. By the doctrine of ultra vires, a contract made by a corporation beyond the scope of its corporate powers is unlawful and invalid.Let’s take an extreme (but strangely, not too uncommon example).First, even a small corporation is a corporation and, except for scale, the same rules apply to Mom & Pop Inc. as to Microsoft or Coca-Cola. Mom & Pop Inc. filed articles with the secretary of state, has created and is bound by bylaws, and is subject to the corporate laws of whatever is the state of its incorporation.Let’s say the bylaws of Mom & Pop say that the individual shareholders, Mom and Pop, must both agree before the corporation makes any major acquisitions. Let’s say, further, that the bylaws define a “major acquisition” as any expenditure of corporate money in excess of $5,000. OK, so far all is hunky dory.One day, Pop decides what the corporation needs is a ghastly expensive sports car for him to drive. Mom and Pop, predictably, cannot agree. What’s certain is that they don’t agree; Pops says “yes” and Mom votes her emphatic “no.” According to the bylaws Pop is stuck, at least insofar as wanting to buy the ghastly expensive sports car with the corporation’s funds.But, doing what the aging male will often do, he buys it anyway. He takes out a zillion corporate dollars, buys the ghastly expensive sports car and returns to Mom & Pop Inc.’s corporate headquarters with a cat-that-ate-the-canary grin.There is only one problem (other than the fact that Pop is likely sleeping in the doghouse for the next who knows how long); he has violated the corporation’s bylaws. And in so doing, his act is ultra vires. He has done what is verboten. He has acted, earning his corporate act and employing corporate money, in a way that he may not.That some acts may be ultra vires emplaces checks and balances on corporate conduct. The corporate may do only what the corporation can do. And that, in fairness to the corporate shareholders, is precisely how things rightfully should be.Rohn K. Robbins is an attorney licensed before the bars of Colorado and California who practices in the Vail Valley. His practice areas include business and commercial transactions, real estate and development, homeowners’ associations, family law and divorce and civil litigation. He may be heard on Wednesdays at 7 p.m. on KZYR radio (97.7 FM) and seen on ECOTV 18 as host of “Community Focus.” Robbins may be reached at 970-926-4461 or at his email address, firstname.lastname@example.org.