Abstract
In this chapter, we study the ultra vires doctrine in corporate law from a Latin American perspective. Historically European Law has had a remarkable influence on the foundation and development of corporate law in Latin America. It is so noteworthy that, for instance, a couple of modern Colombian textbooks have seriously studied European corporate law (Cf. Juan Galindo. Derecho europeo de sociedades, Bogotá, 2002; and, Francisco Reyes. Derecho societario en Estados Unidos y la Unión Europea, Bogotá, 2013), and even the legal texts allow evidencing this situation. In the case of the corporate purpose and the objects clause, there are many similarities between them when comparing legal provisions, some derogated, and some others still in effect (Régimen de las Sociedades Anónimas en los Países de la ALALC (1971), pp. 153–158. A succinct comparative introduction about the ultra vires doctrine in EU, UK, USA, and Latin America, in Villegas (1997), pp. 240–247). With this in mind, we are going to make a comparative approach concerning the ultra vires doctrine and its validity in Latin America, taking into account that a lot of said about it in Europe likewise applies to Latin America.
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Notes
- 1.
Halperin (1958), pp. 22–24. The determination of the objects clause was only mandatory to joint-stock and limited liability companies; however, Law 19.550 made it extensive for any type of company. It would seem expedient to establish this rule in a general way, to avoid unscrupulous businesspersons from creating new corporations to commit frauds.
- 2.
Cabanellas (1993), p. 303.
- 3.
See footnote 2.
- 4.
Alegría (1963), p. 135. According to Sasot Betes (1980), the directors might open a banking account, lease a building, hire and fire employees, draft negotiable instruments, etc. Alegría argues that this is only when a special mandate is conferred. However, corporate management implies the exercise of the objects clause. In that respect, the corporation is represented by the board, and not by the directors as individually considered. See, Martorell (1988), pp. 301–302. In joint-stock companies, there is also the position of manager. This person may be appointed to everyday tasks and in a diverse spectrum of activities; thus, there may be a manager for each department (e.g., legal, sales, investor relations, etc.). Cf. Richard et al. (1980), pp. 300–301.
- 5.
Despite art. 11, num. 3 not expressly states it, the objects clause must also be unique, or, at least, just contain ancillary activities to the main object. This conclusion is reached after a holistic analysis of Law 19.550. Vid. Farina (2011), p. 182.
- 6.
Richard et al. (1980), pp. 44–46. Upon such a basis, there is a difference also between objects clause and commercial activities. The first corresponds to the categories of transactions that any corporation may perform and delimits the field of affairs. The latter are those business transactions, and in general terms, the corporate life in action. See, Garrone (2008), p. 225.
- 7.
Lezcano (2017), p. 266.
- 8.
The Argentine Supreme Court has submitted that the reason behind the legal notion of acts “notoriously foreign” to the objects clause is to protect third parties who might be cheated if the law would allow denying them any kind of hypothetical statutory restrictions on behalf of the company. In re CNac.A.Com. Sala E, 23-03-99. In subsequent adjudications, the Court ruled that contrario sensu, when financial activities are included in the objects clause, such acts or transactions are not notoriously foreign because they are part of the corporate purpose. In re CNac.A.Com. Sala C, 14-07-06.
- 9.
Cabanellas (1993), pp. 305–306.
- 10.
Roitman et al. (2009), pp. 274–275.
- 11.
See footnote 10.
- 12.
Zaldívar et al. (1976), p. 526.
- 13.
See footnote 12.
- 14.
Colombres (1972), pp. 112–113.
- 15.
Colombres (1972), pp. 112–113, Aramouni (1994), pp. 9–11, Villegas (1997), pp. 238–239. The Argentine Supreme Court holds that when the corporation grants a surety in favor of its director, such an act is notoriously foreign and overcomes the objects clause, except whether the company has a financial purpose. In re CNac.A.Com. Sala B, 20-05-99.
- 16.
Also in UNCITRAL, OAS projects, USA, and UK company law, the objects clause could be referred to simply as “any lawful activity”. On the contrary, Argentine SAS did not follow this way, and therefore we can assert that the ultra vires doctrine is still in effect taking into account the manner that art. 36, num. 4, it was composed.
- 17.
In 1850, Brazil enacted into law its Commercial Code. This code was unique because it was the first commercial code adopted by a Latin American country that was not a servile copy of a European code. Although it closely followed the Portuguese Commercial Code of 1833, not a single provision was a replica of the Portuguese one; in fact, many of them were entirely authentic to the Brazilian Code. Vid. Swartz (1975), pp. 347, 353.
- 18.
Octavio et al. (1911), pp. 4–5.
- 19.
Mendonça (1963), pp. 20–21. For analysis about the juristic personality in Brazilian corporate law, and the correlative company’s capacity, at pp. 76–97.
- 20.
- 21.
Vid. Vieira (2007), footnote 26.
- 22.
Pontes de Miranda (2012), pp. 416–417.
- 23.
Vieira (2007), pp. 32–33.
- 24.
Vieira (2007), pp. 40–42.
- 25.
See footnote 24.
- 26.
See Gonçalves (2017), pp. 257–259, for a brief analysis of this new general regulation of civil and commercial law. The director liability in joint-stock companies was regulated in Law 6404 of 1976, art. 158. According to such provision: “An officer shall not be personally liable for the commitments he undertakes on behalf of the corporation and by virtue of action taken in the ordinary course of business; he shall, however, be liable for any loss caused when he acts: (i) within the scope of his authority, with fault or fraud; (ii) contrary to the provisions of the law or of the by-laws. (…)”.
- 27.
Oliveira (2012), 118.
- 28.
Ministerio de Justicia (1958), t. 2, pp. 87, 91.
- 29.
Bernal et al. (1991), pp. 68–69.
- 30.
Pinzón (1989), pp. 201–203.
- 31.
Narváez (2008), pp. 24–26. This author illustrates an ultra vires case when a corporation does not contemplate in its by-laws the possibility to associate with another company, and, nevertheless, does it. This act is an absolute nullity and can be challenged in court by either corporators or any third party. However, Narváez enlists five hypotheses in which a company could associate with other companies. Op. cit., p. 139.
- 32.
Reyes (2006), p. 148.
- 33.
AP Smith Manufacturing Co. v. Barlow, 13 N.J. 145, 98 A. 2d 581 (N.J. 1953). The Colombian mercantile regime contemplates as a cardinal principle the animus lucrandi in every business transaction; however, according to C.Co. art. 446, num. 3, lit. (c) is admissible to donate money and goods to both natural and juristic persons.
- 34.
Reyes (2006), pp. 149–150. However, this author stresses that in the light of Colombian Law 222 of 1995, art. 22, even if there was a middle-to-end relationship between the loan and the main corporate object, the directors could still be liable whether damage is caused to the company resulting from such loan, taking into account the duties of caution and loyalty.
- 35.
Narváez (2008), pp. 136–137. According to this author, the diversification of business without a direct relationship to the main object, even if they are related or complementary, is not in accordance with the principle of specialty.
- 36.
C.Co. art. 196, the second paragraph provides: “In the absence of stipulations, it shall be understood that the persons who represent the company may celebrate or execute all the acts and contracts included within the corporate purpose or those directly related to the existence and operation of the company”.
- 37.
- 38.
This hypothesis applies to general partnership (C.Co. art. 316) and the SAS (Law 1258 of 2008, art. 32). It is expedient to notice that a corporation, however, having been created, is not dissolved, in contemplation of law, without a legislative or judicial act—or act in pursuance of legislative authority—extinguishing its franchises. So long as they exist, the corporation exists. Consequently, while the sale of the entire property of a corporation may render it unable to fulfill the purposes of its organization, it does not dissolve it. “A corporation may exist without property”. See, Noyes, 226. In this regard, the courts have stated: “The sale of all the property may have the effect of terminating the business for which the corporation was organized, but it does not dissolve it. Such a sale no more dissolves the corporation than would the giving of a mortgage that might ultimately result in all the property being taken from the corporation”. In re, Price v. Holcomb, 89 Iowa, 137 (1893), (56 N. W. Rep. 407).
- 39.
Gaviria (1984), p. 111.
- 40.
See footnote 39.
- 41.
Bernal (1980), pp. 65–66.
- 42.
Colombian Supreme Court of Justice has ruled in a judgment of July 27, 1978, that an ultra vires act is wholly void because of the lack of capacity. Subsequently, in a judgment of April 27, 1989, the theory of nullity was upheld but in this case not in connection with the lack of capacity but rather because of an unlawful object even when the firm’s objects clause was lawful. However, in the opinion of Pinzón (1989), pp. 252–253, that nullity arising from an ultra vires act is avoidable, and, in consequence, could be ratified, reforming the by-laws to include such an act or transaction in the objects clause, in this way, it will be no more ultra vires, but a business into the scope of company’s capacity. Op. cit., 203. On the contrary, other scholars consider that such ultra vires acts or transactions are wholly void because of the C.Co. art. 899, which lays out that when an act or contract goes against a mandatory rule, it shall be wholly void, except when the law provides another thing. See, Bernal, Desviaciones, op. cit., p. 70. In turn, Professor Reyes does not take sides but looks critically at the convenience of the ultra vires doctrine because it could become a source of juristic instability to the extent that the company’s acts and contracts will be exposed uncertainly, and could be challenged in court at any time.
- 43.
Reyes (2015), p. 396.
- 44.
http://www.oas.org/en/sla/dil/newsletter_Model_Law_Simplified_Corporation_Report_Jul-2017.html [last accessed: 12/Sept/2021].
- 45.
Reyes (2015), pp. 415–416. Although according to the regulation governing the SAS there is no need to define any specific business purpose in the corporation’s purpose clause, the Mercantile Registry keeps a record of these entities’ main economic activity. The statistical data shows that the SAS model is mostly used for agricultural economic activities, manufacturing undertakings, construction business, and commercial activities (wholesale and retail). Ibid., p. 407.
- 46.
This “any lawful activity” purpose clause, as a statutory provision, was enacted in the MBCA and today every American jurisdiction permits the incorporation under general laws for any lawful purpose, except for certain regulated businesses. For a detailed background of this legislation, vid. Schaeftler (1983), footnote 33. In Spanish corporate law having the ancient regime of 1989 in force—and even before it—scholars were unanimously doubtless about the unlawfulness of this kind of undetermined clause. Vid. Rodríguez (1991), p. 163.
To avoid such illegality and with the purpose of having a generic objects clause, some corporations adopted one of the following mechanisms: (i) a prolix description encompassing all of the economic activities to be performed by the firm including commercial, industrial, and financial business; or, (ii) a narrower but more profiled listing of economic activities, with subsequent addition of ancillary to the main objects clause activities. This second method is not correct because it creates confusion between economic activities, and legal devices to achieve them. Vid. De La Cámara (1977), p. 321. An analysis and detailed listing of the five most common undetermined objects clause, in Broseta (1971), footnote 23.
In the field of law of agency, before European Communities Act 1972—which protects third parties in certain cases—it was considered that a corporation cannot appoint an agent for any purpose, or to do any act, which is ultra vires in its memorandum of association. The contract entered into by the agent on the corporation’s behalf, would not bind the corporation, and if the purpose of the appointment was specific, any contract with the agent would not be so either. But a corporation may perhaps be liable for an ultra vires tort committed by an agent. Cf. Bowstead (1985), p. 32. A description of lifting the corporate veil in English case law related to agency and the abuse of corporate personality that could trigger ultra vires acts, in Verrucoli (1964), pp. 103–114.
- 47.
Barrera (1984), 186. Later it was enacted the current Commercial Code of 1890.
- 48.
Barrera (1966), p. 41.
- 49.
Rodríguez (1978), p. 116.
- 50.
When enforcing the Mexican Commercial Code of 1889 related to corporations, i.e., before 1934, the articles having been properly registered in the place wherein the company is doing business, the acts committed in the name of the company, but in excess of its object (ultra vires), will not be binding upon the company, as notice of such objects is imparted through registration. But a failure to effect such registration will make the company liable, even if its object has been exceeded. On the other hand, when an officer of the company has, in its name, effected a binding operation beyond such an object, and without the consent of the stockholders, he will be responsible to the company for any losses resulting therefrom. Vid. Fuller (1911), p. 24.
- 51.
Galindo (1986), pp. 980–981. On the other hand, Rodríguez (1978), pp. 127, 137–138, considers that an ultra vires transaction is not an excess of power but negligent contracting. Thus, those ultra vires acts could be challenged by the corporation through the individuals designed by the general meeting as the empowered corporate organ to do so against the current or former directors.
- 52.
Barrera (1967), pp. 156–158. According to this author, the corporation has no liability because the acts—lawful or unlawful—have been performed in excess by their director and beyond the objects clause or against the articles of incorporations or legal provisions that prohibit or limit such acts, except when the corporation has authorized, tolerated or ratified them. Conversely, the corporation becomes a liability by the acts of the directors—lawful or unlawful—performed in the frame of the objects clause. Op. cit., p. 186.
- 53.
Rodríguez (1978), t. 2, pp. 103–104.
- 54.
Frisch (1994), p. 100. In fact, according to this author, such kinds of ultra vires acts cannot be ratified through a retroactive statutory alteration of the by-laws.
- 55.
Mantilla (1989), p. 210. However, this writer in a previous book related to negotiable instruments stressed that on behalf of a company, this cannot warrant the payment of a promissory note or bill of exchange, if such an act is not listed in the objects clause because it becomes ultra vires. See, Mantilla (1977), p. 180.
- 56.
Barrera (1983), pp. 86–87.
- 57.
Cervantes (1980), p. 45.
- 58.
Laroza (1995), p. 87. Peruvian scholars, however, recognize that ultra vires doctrine has a notable influence in common law and civil law systems, even if its validity causes controversy. Therefore, the law’s evolution allows claiming that all those acts executed in excess of powers may be ratified for all of the shareholders. Vid. Diez (1996), 169.
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Jiménez Sánchez, M.A. (2022). The Ultra Vires Doctrine in Latin America. In: The Ultra Vires Doctrine in Corporate Law. SpringerBriefs in Law. Springer, Cham. https://doi.org/10.1007/978-3-030-88838-1_5
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