Arcane Corporate Law Cited in Lawsuit

An academic association is being sued by a number of their members over a boycott of Israel. That association recently began a boycott of the country and its products over relations between that country and its neighbors. But not all of the association’s members are happy with the boycott.

For those who do not support what their organization is doing, they wanted to take some action to have it stopped. After all, the organization is, essentially, made up of the people who are members, and when some of those members oppose an official’s action it is because it is being done in their name.

In a typical case involving an association, organization, or corporation, the members do not have much redress to oppose official action. Once a board of directors, chief executive officer, or other person empowered to act on behalf of the organization acts, there is not much that can be done. A member could sell his shares, vote in opposition of an action at a shareholder meeting, or do some other action, but without a majority share of the company or executive position, there is not much to do.

In the present case, however, the disaffected members came up with a creative argument to stop the organization from acting on a boycott. They sued the association on the grounds that the boycott was an ultra vires action, and therefore not lawful or able to be taken by the association. The legal doctrine of ultra vires is a bit arcane, and rarely used today, but still has some effect in particular situations.

Purpose and History of Ultra Vires

To understand the doctrine of ultra vires it is important to understand the historical context of corporations. Historically, and particularly in England, corporations were granted charters by the king or government for a specific purpose. The granted charter would enable a corporation to do something, such as operate a mill, run a rail company, or some other thing that served the public in a sort of semi-official way.

Once a corporation became successful or powerful, sometimes the officers running it would venture out of the company’s stated mission to perform other acts in the name of the corporation. But this was not allowed by law, as it was ultra vires or out of the chartered purpose of the company. Using this doctrine, minor members of a corporation could stop official action of a company by saying the company does not have the legal authority to act in this way.

That is what has happened in this case. Because the association is an academic one, chartered to advance the understanding of American culture and ways, enacting boycott on Israel is arguably outside that scope of purpose. Today’s corporations do not run into these problems, generally, because most corporations are incorporated for all legal purposes. But this case is an important lesson on why it is critical for a corporation to have all its papers, requirements, and obligations in order to avoid litigations like these.

Your Corporate Advisor

At The Royse Law Firm, our group of dedicated professionals can help your corporation with every aspect of its business. We can work with your company in a proactive manner to help avoid situations like these, and bring your executive officers peace of mind. Contact us, and let us begin working with you today.

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Roger Royse
rroyse@rroyselaw.com

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
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