The ultra vires principle under Ecuador corporate law

Edificio alto de cristal y foto de Milton Carrera, asociado de CorralRosales, firma de abogados de Ecuador

The Latin phrase ultra vires (abuse of power) is applied in corporate law when a company exceeds the activities determined in its corporate purpose. The ultra vires principle implies that the company lacks the capacity to perform acts or contracts that are outside the scope of the corporate purpose.

 The doctrine states that the determination of the ultra vires condition of an act or contract is given by an element alien to them: the purpose of the company. Consequently, ultra vires acts or contracts do not have defects in their conformation nor were executed by administrators without sufficient capacity to bind the company.

Likewise, the doctrine establishes that the ultra vires principle has a double purpose: (i) it is a protection mechanism for creditors who, based on a principle of determination of the corporate purpose, have full knowledge of the scope of the activities of the company with which they contracted; and (ii) an instrument for the protection of shareholders who invest in a company in which the scope of action for the development of its business is determined.

 Article 3 of the Law on Companies, applicable to stock corporations and limited liability companies, states in its pertinent part that:

 “The corporate purpose of a company may, in general, include one or several lawful economic activities, except for those that the Constitution or the law prohibits or reserves for other types of entities. The corporate purpose must be clearly established in its articles of association or incorporation document

Morever, it provides that:

The acts or contracts executed or entered into in violation of this article shall not bind the company, but the administrators who have executed or entered into them, or the partners or shareholders who have authorized them, shall be personally and jointly and severally liable before third parties in good faith, for the respective damages and losses.”

 Therefore, it is established that these acts or contracts do not bind the corporation, but the administrators who performed them, and even the shareholders who authorized them, must respond for the damages caused. The latter because the purpose of the doctrine is the protection of the third party in good faith that contracts with a company assuming that it does so within its corporate purpose.

However, some trends in modern corporate law deviate from the ultra vires principle by limiting the operational capacity of the company when what is sought is to allow companies to perform all lawful acts or acts permitted by law.  In this sense, the unnumbered article of the Law on Companies, titled “contents of the incorporation document”, paragraph 6, when referring to the simplified stock corporation, establishes that, among other requirements, it must include:

a clear and complete statement of the activities foreseen in its corporate purpose, unless it is expressed that the company may perform any lawful commercial or civil activity”. 

In this way, the simplified stock corporation may opt for an undetermined corporate purpose, which means a radical change to the traditional corporate approach.

In conclusion, the ultra vires principle is currently applicable to stock corporations and limited liability companies, but not to simplified stock corporations, which have opted for an indeterminate object.  We do not find a valid argument why this flexibility recognized to the SAS has not been extended to stock corporations and limited liability companies.

Milton Carrera
Partner at CorralRosales