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C.ULTRA VIRES TRANSACTIONS--those beyond the purposes and powers, express and implied, of the corporation. Under common law, shareholder ratification of an ultra vires transaction nullified the use of an ultra vires defense by the corporation.

1.TORT ACTIONS--ultra vires is NO defense to tort liability.

2.CRIMINAL ACTIONS--claims that a corporate act was beyond the corp’s authorized powers are NO defense to criminal liability.

 3.CONTRACT ACTIONS--at common law, a purely executory ultra vires contracts were NOT enforceable against either party; fully performed contracts could NOT be rescinded by either party; and, under the majority rule, partially performed contracts were generally enforceable by the performing party, since the nonperforming party was estopped to assert an ultra vires defense.

4.STATUTES--most states now have statutes that preclude the use of ultra vires as a defense in a suit between the contracting parties, but permit ultra vires to be raised in certain other contexts:

a)Suits Against Officers or Directors--if performance of an ultra vires contract results in a loss to the corp, it can sue the officers or dirs for damages for exceeding their authority.

b)Suit By State--these limiting statutes do NOT bar the state from suing to enjoin a corp from transacting unauthorized business.

c)Broad Certificate Provisions--when the certificate of incorporation states that the purpose is to engage in any lawful activity for which corp may be organized, ultra vires is unlikely to arise.

V.MANAGEMENT AND CONTROL

A.ALLOCATION OF POWERS BETWEEN DIRECTORS AND SHAREHOLDERS

1.MANAGEMENT OF CORPORATION’S BUSINESS--corporate statutes vest the power to manage in the board of directors, except as provided by valid agreement in a close corp. He board’s power is limited to proper purposes.

2.SHAREHOLDER APPROVAL OF FUNDAMENTAL CHANGES--shs must approve certain fundamental changes in the corp, e.g., amendment of articles, merger, sale of substantially all assets, and dissolution.

3.POWER TO ELECT DIRECTORS--shs have the power to elect dirs and to remove them for cause, absent provisions for removal without cause in the certificate, bylaws, or in statutes. Some statutes also permit the board or the courts to remove a dir for certain specific reasons (e.g., felony conviction).

4.POWER TO RATIFY MANAGEMENT TRANSACTIONS--shs have the power to ratify certain management transactions and insulate the transactions against a claim that managers lacked authority, or shift the burden on the issue of self-interest.

5.POWER TO ADOPT PRECATORY RESOLUTIONS--shs may also adopt advisory but nonbinding (precatory) resolutions on proper subjects of their concern.

6.BYLAWS--shs usually have the power to adopt and amend bylaws, although some statutes give the board of dirs the concurrent power to do this.

 7.CLOSE CORPORATION--this is a corp owned by a small number of shs who may actively manage; it has no general market for its stock, and it has some limitations regarding transferability of stock.

8.STATUTORY CLOSE CORPORATION STATUS--the basic requirements to qualify for special treatment under the statutes are that, in its cert of incorp’n, a statutory close corp must identify itself as such, and must include certain limitations as to the number of shs, transferability of shares, or both.

a)Functioning As a Close Corporation--there may be sh agreements relating to any phase of the corp affairs.

B.DIRECTORS

1.APPOINTMENT OF DIRECTORS--initial dirs are either designated in the articles of incorporation or elected at a meeting of incorporators. Subsequent elections are by shs at their annual meetings. The number of dirs is usually set by the articles or bylaws.

a)Qualifications--absent a contrary provision in the articles or bylaws, dirs need not be shs of the corp or residents of the state of incorporation.

b)Vacancies--statutes vary, but under Model Act, a vacancy may be filled by either the shs or dirs.

1)Compare--removal: some statutes require that vacancies created by removal of a dir be filled by the shs unless the articles or bylaws provide otherwise.

2.TENURE OF OFFICE

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