I. Introduction and Definition of Ultra Vires Acts
An ultra vires act, derived from Latin meaning “beyond the powers,” refers to an act performed by a corporation that is beyond the scope of the powers and purposes conferred upon it by its Articles of Incorporation and the law under which it was formed. Under Philippine law, specifically the Revised Corporation Code (RCC) of the Philippines (Republic Act No. 11232), the doctrine of ultra vires has been significantly circumscribed but remains a relevant consideration in corporate transactions, particularly concerning the liability of directors, trustees, or officers.
II. Legal Foundation under the Revised Corporation Code
The primary legal framework is found in Sections 44 and 45 of the RCC. Section 44 provides that no corporation shall possess or exercise any corporate powers except those conferred by the Code, its Articles of Incorporation, and those incidental or necessary to carry out its purposes. Section 45 explicitly states that no act of a corporation and no transfer of property to or by a corporation shall be invalid by reason only of the fact that the corporation was without capacity or power to perform such act or transfer. This marks a critical shift from the old doctrine, rendering ultra vires acts generally valid and enforceable as between the parties.
III. Distinction from Illegal Acts
It is crucial to distinguish ultra vires acts from illegal acts. An ultra vires act is one merely outside the corporation’s express or implied powers but may not be inherently illegal (e.g., a educational institution engaging in large-scale mining). An illegal act is one expressly prohibited by law, regardless of whether it is within the corporation’s stated purposes (e.g., engaging in fraud or a criminal enterprise). Illegal acts are void and may result in criminal and civil liabilities beyond corporate remedies.
IV. Parties Who May Challenge an Ultra Vires Act
Despite the validation rule in Section 45, the RCC allows certain parties to challenge ultra vires acts in a direct proceeding:
V. Consequences and Liability for Ultra Vires Acts
While the act itself may be valid, the directors, trustees, or officers who willfully and knowingly voted for or assented to patently ultra vires acts may be held liable. Under Section 45, they shall be liable jointly and severally for all damages resulting therefrom to the corporation, its stockholders, members, and other persons. This personal liability is the primary legal consequence under the current Code.
VI. Ratification of Ultra Vires Acts
A corporation may ratify an originally ultra vires act. Ratification can occur through the affirmative vote of the board of directors and, if necessary, the shareholders representing at least two-thirds (2/3) of the outstanding capital stock or membership, provided the act is not illegal. Upon ratification, the act is deemed within the corporate powers, curing the initial defect and potentially shielding the responsible officers from liability.
VII. The Role of the Securities and Exchange Commission (SEC)
The SEC retains regulatory authority. If a corporation commits, repeats, or continues to commit ultra vires acts, the SEC may, after due notice and hearing, suspend or revoke its certificate of incorporation under the grounds provided in the RCC. This is an administrative remedy exercised in the public interest.
VIII. Doctrine of Apparent Authority and Estoppel
Third parties dealing with a corporation in good faith are generally protected. Under the doctrine of apparent authority, if a corporation holds out an officer or agent as having the power to perform an act, it may be estopped from denying such authority, even if the act was technically ultra vires. The validation rule of Section 45 strongly supports this protection for innocent third parties.
IX: Practical Remedies.
