Ultra vires doctrine

Ultra vires doctrine (능력외 이론) deals with whether acts that are ultra vires are valid or not.

Ultra vires is a Latin phrase meaning "beyond power". If an act requires legal authority and it is done without such authority, it is ultra vires.

Key words
ultra vires, purpose and goal, articles of incorporation, bylaws

U.S. Corporate law
In the United States, ultra vires describes acts attempted by a corporation that are beyond the scope of powers granted by the corporation's objects clause, articles of incorporation or in a clause in its Bylaws, in the laws authorizing a corporation's formation, or similar founding documents. Acts attempted by a corporation that are beyond the scope of its charter are void or voidable.

Several modern developments relating to corporate formation have limited the probability that ultra vires acts will occur. Except in the case of non-profit corporations (including municipal corporations), this legal doctrine is obsolescent; within recent years, almost all business corporations are chartered to allow them to transact any lawful business. The Model Business Corporation Act of the United States states that: "The validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act." The doctrine still has some life among non-profit corporations or state-created corporate bodies established for a specific public purpose, like universities or charities.
 * 1) An ultra vires transaction cannot be ratified by shareholders, even if they wish it to be ratified.
 * 2) The doctrine of estoppel usually precluded reliance on the defense of ultra vires where the transaction was fully performed by one party
 * 3) A fortiori, a transaction which was fully performed by both parties could not be attacked.
 * 4) If the contract was fully executory, the defense of ultra vires might be raised by either party.
 * 5) If the contract was partially performed, and the performance was held to be insufficient to bring the doctrine of estoppel into play, a suit for quasi contract for recovery of benefits conferred was available.
 * 6) If an agent of the corporation committed a tort within the scope of his or her employment, the corporation could not defend on the ground the act was ultra vires.

According to American laws, the concept of ultra vires can still arise in the following kinds of activities in some states:
 * 1) Charitable or political contributions
 * 2) Guaranty of indebtedness of another
 * 3) Loans to officers or directors
 * 4) Pensions, bonuses, stock option plans, job severance payments, and other fringe benefits
 * 5) The power to acquire shares of other corporations
 * 6) The power to enter into a partnership

Korean case law
Supreme Court has sustained a position that the purpose of bylaws or articles of incorporation of Korean companies should not limit their conducting of business in the name of the ultra vires doctrine.

The followings are leading cases which dealt with the meaning of corporate activities within the scope of the prescribed purpose in terms of the legal capacity of a company, and the appropriate criteria regarding such decision.

Supreme Court Decision 86DaKa1349 delivered on September 8, 1987
The Supreme Court decided whether the endorsement of a promissory note was within the scope of the purpose of a financial company engaged in short-term financing.

회사의 권리능력은 회사의 설립근거가 된 법률과 회사의 정관상의 목적에 의하여 제한되나 그 목적범위내의 행위라 함은 정관에 명시된 목적 자체에 국한되는 것이 아니고 그 목적을 수행하는데 있어 직접 또는 간접으로 필요한 행위는 모두 포함되며 목적수행에 필요한지 여부도 행위의 객관적 성질에 따라 추상적으로 판단할 것이지 행위자의 주관적, 구체적 의사에 따라 판단할 것은 아니다.

단기금융업을 영위하는 회사로서 회사의 목적인 어음의 발행, 할인, 매매, 인수, 보증, 어음매매의 중개를 함에 있어서 어음의 배서는 행위의 객관적 성질상 위 목적수행에 직접, 간접으로 필요한 행위라고 하여야 할 것이다.

Supreme Court Decision 86DaKa1522 delivered on October 13, 1987
The Supreme Court decided whether the activity of a representative director of a company solely for the benefit of his or a third party's interest amounted to misappropriation of his power, and if it was still effective or not.

회사도 법인인 이상 그 권리능력이 정관으로 정한 목적에 의하여 제한됨은 당연하나 정관에 명시된 목적 자체에는 포함되지 않는 행위라 할지라도 목적수행에 필요한 행위는 회사의 목적범위내의 행위라 할 것이고 그 목적수행에 필요한 행위인가의 여부는 문제된 행위가 정관기재의 목적에 현실적으로 필요한 것이었던가 여부를 기준으로 판단할 것이 아니라 그 행위의 객관적 성질에 비추어 추상적으로 판단할 것이다.

주식회사의 대표이사가 그 대표권의 범위내에서 한 행위는 설사 대표이사가 회사의 영리목적과 관계없이 자기 또는 제3자의 이익을 도모할 목적으로 그 권한을 남용한 것이라 할지라도 일응 회사의 행위로서 유효하고 다만 그 행위의 상대방이 그와 같은 정을 알았던 경우에는 그로 인하여 취득한 권리를 회사에 대하여 주장하는 것이 신의칙에 반하므로 회사는 상대방의 악의를 입증하여 그 행위의 효과를 부인할 수 있을 뿐이다.

Conclusion
What's the reason why the Commercial Act demands the purpose of a company to be provided in the bylaws or articles of incorpoation?

It is because:
 * The shareholder-investor should be aware of the scope of business, or the limit of risk-taking;
 * The management including director should be reminded of the appropriate line of business; and
 * The third-party contractors should know what kind of business belongs to the purpose of the company.

Nowadays most companies are ready to expand their business lines subject to the changes of business environment. It is difficult to define the exact scope of business in view of the ever-changing industrial structures. Therefore, it is not reasonable for the purpose of a company stated in the regisered bylaws to limit the scope of the company.

However, if a director of a company dares to commit such act as monetary contribution to politicians or charity organizations, beyond the purpose of the company, his or her act might be challenged by the company or minority shareholders by demanding considerable damages, discharge from the directorship, or injuction of such act.