Drafting Reserved Matter Schedules for Venture Capital Shareholders
Effective venture capital reserved matter schedules require clear voting thresholds, cascading subsidiary covenants, and fallaway provisions to prevent deadlock.
Ultra Vires Corporate Actions
Meaning
Decisions or contracts made by a company that exceed the legal authority granted by its constitutional documents are considered void or voidable. These ultra vires corporate actions occur when management enters into a transaction that the company was never formed to perform. Modern corporate law has limited the impact of this doctrine to protect third parties who deal with the company in good faith.
Capacity Breach
The memorandum of association usually defines the scope of what a business is permitted to do. When ultra vires corporate actions are identified, they may be challenged by shareholders who did not approve the expansion of the company’s activities. This legal boundary prevents directors from using company funds for purposes unrelated to the core business.
Legal Validity
Courts often examine whether a contract can be enforced if it falls outside the company’s powers. Although many jurisdictions now allow a company to have unrestricted objects, ultra vires corporate actions remain a concern in specific industries like banking or charitable work. If an action is truly beyond capacity, the company may be unable to recover its assets from the transaction.
Officer Liability
Directors who authorize spending on unauthorized projects may be required to repay the company from their personal funds. Prevention of ultra vires corporate actions is a primary duty for the legal department and the company secretary. They must review the articles of association before the board signs off on any major change in the business model or a new investment.