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A Bridle, a Prod and a Big Stick: An Evaluation of Class Actions, Shareholder Proposals and the Ultra Vires Doctrine as Methods for Controlling Corporate Behavior

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Abstract

Written for the recent conference at St. John's University Law School on "People of Color, Women, and the Public Corporation," this paper evaluates recently applied methods of influencing corporate behavior on employment practices and recommends that a dormant legal doctrine be revitalized and added to the "tool box" of activists and concerned shareholders. The methods of influencing corporate behavior that are evaluated include class action lawsuits and shareholder proposals to amend corporate policy. In both contexts, there are procedural hurdles to achieving success. Even when success is achieved, there are limits to the actual changes in organizational behavior that result. A third means for influencing corporate behavior would not involve the same theoretical or structural limitations. The ultra vires doctrine historically allowed a shareholder to sue to prevent a company from engaging in an activity outside of the specific parameters of its corporate charter. While the doctrine was almost done away with during the 1900s inasmuch as companies are now free to alter their field of business as they wish, a narrow slice of this doctrine remains. Namely, corporate charters typically are required to limit a corporation to "lawful activities," and forty-nine states have statutes empowering the state to enjoin or dissolve the corporation for illegal acts. Therefore, shareholders still have the power to sue a company to prevent the violation of laws. In the context of a company such as Wal-Mart, for example, a well-documented pattern of widespread illegal gender discrimination could therefore be grounds for a shareholder bringing an ultra vires lawsuit. Unlike a shareholder proposal, the available remedies could include a court order to cease the activity and to adopt a detailed monitoring, training and compliance plan. Unlike a class action, the high hurdles of certifying the plaintiffs as class representatives would not exist. Nor would there be the same mix of practical concerns that contribute to class action attorneys emphasizing monetary rewards over long-term, disciplined equitable relief that is geared to actually altering company practices in the future. The only limitation on using the ultra vires doctrine is that there must be evidence that a company is in violation of an actual law in a jurisdiction where it operates. In those contexts, ultra vires can effectively enable a form of shareholder enforcement suit to ensure compliance with the federal laws of the United States or the statutes of foreign nations or individual states' laws.
L
AW
BOSTON
COLLEGE
BOSTON COLLEGE LAW SCHOOL
LEGAL STUDIES RESEARCH PAPER SERIES
RESEARCH PAPER 76
June 13, 2005
A Bridle, a Prod and a Big Stick:
An Evaluation of Class Actions, Shareholder Proposals and
the
Ultra Vires
Doctrine as Methods for Controlling Corporate
Behavior
Adam J. Sulkowski
Assistant Professor, Charlton College of Business
University of Massachusetts, Dartmouth
Kent Greenfield
Professor, Boston College Law School
This paper can be downloaded without charge from the
Social Science Research Network:
http://ssrn.com/abstract=775125
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929
A BRIDLE, A PROD, AND A BIG STICK: AN
EVALUATION OF CLASS ACTIONS,
SHAREHOLDER PROPOSALS, AND THE
ULTRA VIRES DOCTRINE AS METHODS
FOR CONTROLLING CORPORATE
BEHAVIOR
ADAM J. SULKOWSKI & KENT GREENFIELD††
“Great corporations exist only because they are created and
safeguarded by our institutions; and it is therefore our right and
our duty to see that they work in harmony with these
institutions.”1
TABLE OF CONTENTS
INTRODUCTION ..............................................................................930
I. CLASS ACTION LAWSUITS: A BRIDLE .......................................931
A. Reasons for Pursuing a Class Action Lawsuit .............931
B. Obstacles to Winning a Class Action Lawsuit .............932
C. Limitations of Class Action Lawsuits to Alter
Corporate Behavior ......................................................935
II. SHAREHOLDER PROPOSALS: A PROD ......................................937
A. Recent Trends and Reasons for Pursuing
Shareholder Proposals .................................................937
1. Case Study: Cracker Barrel...................................939
B. Obstacles to Passing a Shareholder Proposal ..............942
C. Limitations of Shareholder Proposals..........................943
Assistant Professor of Business Law, Charlton College of Business, University
of Massachusetts, Dartmouth; J.D., Boston College; M.B.A., Boston College.
†† Professor of Law, Boston College Law School; J.D., University of Chicago.
1President Theodore Roosevelt, State of the Union Address (Dec. 3, 1901),
reprinted in Theodore R. Lotchin, Note, No Good Deed Goes Unpunished?
Establishing a Self-Evaluative Privilege for Corporate Internal Investigations, 46
WM. & MARY L. REV. 1137, 1137 (2004), available at
http://www.presidency.ucsb.edu/ws/index.php?pid=29542; see also President
Theodore Roosevelt, State of the Union Address (Dec. 7, 1903), available at
http://www.presidency.ucsb.edu/ws/index.php?pid=29544.
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930 ST. JOHN’S LAW REVIEW [Vol. 79:929
III. ULTRA VIRES: A BIG STICK ...................................................945
A. Evidence That Ultra Vires Lives...................................945
B. Reasons for Pursuing an Ultra Vires Lawsuit .............949
C. Obstacles to Winning an Ultra Vires Suit ....................950
D. Limitations of Using Ultra Vires.................................. 951
CONCLUSION..................................................................................952
INTRODUCTION
This Article evaluates recently applied methods of
influencing corporate behavior and recommends that a dormant
legal doctrine be revitalized and added to the “tool box” of
activists and concerned shareholders. This study focuses on
efforts to remedy and prevent employment discrimination and
draws upon data from recent cases.2 The lessons derived from
this analysis, however, may be applied in other contexts,
including efforts to improve the conduct of American corporations
with regard to labor relations, environmental protection, and
human rights in the developing world.
The methods of influencing corporate behavior that will be
evaluated include class action lawsuits and shareholder
proposals to amend corporate policy.3 In both contexts, there are
procedural hurdles to achieving success. Even when success is
achieved, there are limits to the actual changes in organizational
behavior that result.
There is a third means for influencing corporate behavior,
often ignored, that does not involve the same theoretical or
structural limitations. The ultra vires doctrine historically
allowed a shareholder to sue to prevent a company from engaging
in an activity outside of the specific parameters of its corporate
charter. While the doctrine was almost done away with during
the 1900s inasmuch as companies are now free to alter their field
of business as they wish, a narrow slice of this doctrine remains.4
Namely, forty-seven states require corporate charters to limit a
corporation to “lawful activities,” and forty-nine states have
statutes empowering the state to enjoin or dissolve the
corporation for illegal acts.5
Therefore, shareholders still have the power to sue a
2See discussion infra Part I.
3See discussion infra Parts I.C, II.C.
4See discussion infra Part III.A.
5See infra note 93 and accompanying text.
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2005] A BRIDLE, A PROD, AND A BIG STICK 931
company to prevent the violation of laws. In the context of a
company such as Wal-Mart, a well-documented pattern of
widespread illegal gender discrimination could therefore be
grounds for a shareholder to bring an ultra vires lawsuit.6
Unlike a shareholder proposal, the available remedies could
include a court order to cease the activity and to adopt a detailed
monitoring, training, and compliance plan. Unlike a class action,
the high hurdles of certifying the plaintiffs as class
representatives would not exist. Nor would there be the same
mix of practical concerns that contribute to class action attorneys
emphasizing monetary rewards over long-term, disciplined
equitable relief that is actually geared to altering company
practices in the future.7
The only limitation on using the ultra vires doctrine is that
there must be evidence that a company is in violation of an
actual law in a jurisdiction where it operates.8 In those contexts,
ultra vires can effectively enable a form of a shareholder
enforcement suit to ensure compliance with the federal laws of
the United States, the laws of individual states, the statutes of
foreign nations, or even international human rights laws.9
While an ultra vires suit could also be initiated by a state
attorney general, this Article focuses upon the use of the ultra
vires doctrine by shareholder activists. Institutional investors
and shareholder groups have already sacrificed large amounts of
resources over the past decade in their efforts to improve
corporate conduct.10 These groups could use the ultra vires
doctrine to achieve more tangible results with a smaller
expenditure of resources.
I. CLASS ACTION LAWSUITS: A BRIDLE
A. Reasons for Pursuing a Class Action Lawsuit
Pursuing an employment discrimination lawsuit as a class
action—that is, using a single suit to provide redress for an
entire group of harmed people instead of each person suing
individually—is desirable for several reasons. One practical
6See discussion infra Part III.C.
7See discussion infra Part III.B.
8See discussion infra Part III.D.
9See discussion infra Parts III.B, III.D.
10 See discussion infra Part II.A.
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932 ST. JOHN’S LAW REVIEW [Vol. 79:929
reason is that lawyers who invest extensive resources on a
contingency basis often need a larger incentive to accept a case
than the incentive that a settlement or ruling on one individual
plaintiff’s case would be. Second, certification of a case as a class
action drastically increases the chances that an employer will
settle because it raises the stakes in terms of potential bad
publicity and financial loss if the case goes to trial. Third, in
addition to monetary awards and punitive damages, an equitable
remedy may be possible; for example, the plaintiffs could ask for
a court-ordered regimen of monitoring and non-discrimination
compliance training to affect future hiring, compensation, and
promotion decisions. In that sense, if equitable remedies are
sought by plaintiffs and awarded by a court or consented to in a
settlement agreement, a class action can be a bridle with which
to lead a corporation in a certain direction. As described infra,
however, the use of equitable remedies in class action lawsuits
has been in decline for over a decade.11
B. Obstacles to Winning a Class Action Lawsuit
The first potential impediment to getting a class action
certified is the employment agreement between a company and
its employees. A clause requiring arbitration of disputes with all
employees will make a lawsuit against the employer nearly
impossible.12 In that event, each dispute will be handled
individually by an arbitrator.13 Under such circumstances, as
11 See discussion infra Part I.C.
12 See Class Consciousness-Raising, FULTON COUNTY DAILY REP., Sept. 20,
2004, at B1 (providing an edited transcript of a panel discussion led by Charles A.
Shanor of Emory University Law School and including “R. Lawrence Ashe Jr. of
Ashe, Rafuse & Hill; Harlan S. Miller III of Miller Billips & Ates; Joshua F. Thorpe
of Bondurant, Mixson & Elmore; and C. Geoffrey Weirich of Paul, Hastings,
Janofsky & Walker”). Judicial review of arbitration awards is extremely narrow and
very difficult to obtain. See Cameron L. Sabin, Note, The Adjudicatory Boat Without
a Keel: Private Arbitration and the Need for Public Oversight of Arbitrators, 87 IOWA
L. REV. 1337, 1347–49 (2002) (describing the limitations on judicial action in
arbitration awards under federal and state law); see also Michael H. LeRoy & Peter
Feuille, The Revolving Door of Justice: Arbitration Agreements That Expand Court
Review of an Award, 19 OHIO ST. J. ON DISP. RESOL. 861, 871–73 (2004) (detailing
the narrow criteria for judicial review of arbitration decisions under federal law).
13 Class arbitrations are possible but only if several requirements are met.
First, the employment agreement must not preclude a class arbitration, and even if
it does, as of 2005, the current policy of the American Arbitration Association
(“AAA”) is first to seek court guidance before allowing a class arbitration to proceed.
A class arbitration may still not offer all the benefits that a plaintiff may desire from
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compared to a class action suit, the deterrent impact of a massive
financial award, the public-relations leverage that a plaintiff
class enjoys during the course of a high-stakes lawsuit, and the
possible equitable relief of court-ordered change in corporate
policy will not be available.
The Supreme Court in 197714 and 198215 decided that, even
though race- and gender-discrimination lawsuits under Title VII
of the Civil Rights Act are inherently class based, these cases
must still meet the class certification requirements of Rule 23 of
the Federal Rules of Civil Procedure. That is, plaintiffs’
attorneys must establish that the lawsuit will adequately
represent the interests of all the parties that it claims to
represent.16 The guidelines for ensuring the adequacy of
representation are surprisingly imprecise,17 but the Supreme
Court, in Amchem Products, Inc. v. Windsor,18 recently stressed
the need for rigorous analysis on the part of certifying courts to
determine whether the class and representative plaintiffs
experienced the same harm and share the same interests.19 In
this same case, the Supreme Court stressed the need to evaluate
the competency of the attorneys involved in the lawsuit and
whether any attorney is compromised by a conflict, interrelation,
or alignment of interests.20
The ease of class certification thus frequently turns on the
a lawsuit. For the most currently available information on the policies of the AAA,
see AM. ARBITRATION ASSN, AAA CLASS ARBITRATION POLICY (2005), available at
http://www.adr.org/ClassArbitrationPolicy.
14 See E. Tex. Motor Freight Sys., Inc. v. Rodriguez, 431 U.S. 395, 403, 405–06
(1977) (“We are not unaware that suits alleging racial or ethnic discrimination are
often by their very nature class suits . . . . But careful attention to the requirements
of Fed. Rule Civ Proc. 23 remains nonetheless indispensable.”).
15 See Gen. Tel. Co. of the Sw. v. Falcon, 457 U.S. 147, 156–57 (1982) (holding
that litigants pursuing a class action under Title VII must meet the Rule 23(a)
requirements).
16 See FED. R. CIV. P. 23(a)(4).
17 For a thorough review of the jurisprudence governing adequacy of
representation, including the lack of substantive guidelines in the Class Action
Fairness Act of 2003, H.R. 1115, 108th Cong. (2003), see generally Debra Lyn
Bassett, When Reform Is Not Enough: Assuring More Than Merely “Adequate”
Representation in Class Actions, 38 GA. L. REV. 927 (2004).
18 521 U.S. 591 (1997).
19 See id. at 625–27 (stating the need for careful evaluation of Rule 23’s
requirements in certifying a class that represents the interests of all potential
members).
20 See id. at 626 n.20 (discussing the importance of evaluating the adequacy-of-
representation requirement along with the other requirements of Rule 23).
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934 ST. JOHN’S LAW REVIEW [Vol. 79:929
nature of evidence and the contours of the underlying claim, and
even at the federal appellate level courts disagree as to the
threshold level of evidence necessary to allow a class action case
to go forward.21 Certification is easiest if there is a company rule,
a widespread practice, a test with a disparate impact, or a stated
decision at the top of a management hierarchy that fosters
discrimination.22 A more difficult situation for establishing a
class action is when the company claims to have delegated
personnel decisions to the subjective discretion of managers at
the local level. In these cases, an expert witness is needed to
aggregate information to demonstrate convincingly that
discrimination is likely occurring.23 While this is a difficult
hurdle to overcome, it is not impossible as demonstrated by
Dukes v. Wal-Mart Stores, Inc.,24 in which a class of up to 1.6
million female Wal-Mart workers was certified.25 This may
qualify as the largest class action gender-discrimination suit in
U.S. history.26 This kind of aggregation of proof from the local
level is possible when a company’s hourly employees are, for
example, 65% female but store managers at the same company
are 14% female.27
Despite the occasional success, recent class action
developments in the Federal Rules of Civil Procedure have
tended to favor corporate defendants.28 For example, Rule 23(f)
21 Compare Allison v. Citgo Petroleum Corp., 151 F.3d 402, 410–11, 414–16 (5th
Cir. 1998) (finding certification of a class under Rule 23(b)(2) impermissible if class
members seek compensatory or punitive damages as the predominant—as opposed
to incidental—form of relief), with Robinson v. Metro-N. Commuter R.R. Co., 267
F.3d 147, 162–64 (2d Cir. 2001) (rejecting Allison’s incidental damages standard and
adopting an “ad hoc approach” to class certification treatment under Rule 23(b)(2)
which allows the district court discretion to certify a class even if compensatory or
punitive damages are the predominant relief sought).
22 See Class Consciousness-Raising, supra note 12, at B1.
23 See id.
24 222 F.R.D. 137, 145, 150, 160 (N.D. Cal. 2004).
25 See Constance L. Hays, The Wal-Mart Culture Pulls In 2 Directions, INTL
HERALD TRIB., July 1, 2004, at 1R.
26 Compliance, Diversity Focus at Wal-Mart Annual, WOMENS WEAR DAILY,
June 7, 2004.
27 See Dukes v. Wal-Mart Stores, Inc., 222 F.R.D. 137, 146, 161 (N.D. Cal. 2004);
see also Class Consciousness-Raising, supra note 12, at B1 (stating that more than
fifty percent of lower-level store employees were females but only a small percentage
of store managers and assistant managers were female).
28 See Anthony Rollo & Gabriel A. Crowson, Mapping the New Class Action
Frontier—A Primer on the Class Action Fairness Act and Amended Federal Rule 23,
59 CONSUMER FIN. L.Q. REP. 11, 13 (2005) (quoting President Bush as stating that
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was added in 2003 to allow for the immediate appeal of a class
action certification to a circuit court.29 Plaintiff’s counsel in the
context of class actions must also consider which venue will be
most favorable to them. Certain courts, such as the United
States Court of Appeals for the Eleventh Circuit, are generally
not as favorable to plaintiffs in large lawsuits as is the Ninth
Circuit.30
If both sides of a class action discrimination lawsuit want to
settle the case early in the process, there is one last impediment.
As of 1997, with the Amchem decision, the Supreme Court
established that almost all of the class certification requirements
of the Federal Rules of Civil Procedure must be met before a
class-wide settlement will be allowed.31
C. Limitations of Class Action Lawsuits to Alter Corporate
Behavior
A recent empirical study found that class actions are actually
ineffective in significantly compensating plaintiffs, in affecting
share price, or in bringing about lasting change.32 First, during
the past decade, even cases with large settlements only created
an average of approximately $10,000 of benefits per class
member, which is below what one would expect in a typical
individual suit.33 For example, discrimination settlements under
the auspices of the Equal Employment Opportunity Commission
in 1995 averaged $35,000, while the mean trial recovery obtained
by private plaintiffs was $100,000.34
Second, the impact of class action lawsuits on share price,
both at the time of filing and at the time of settlement, is lower
than what one might expect. A systematic study of thirty-three
class action awards and twenty-six settlements revealed no
reforms to the Rules “will keep out-of-state businesses, workers, and shareholders
from being dragged before unfriendly, local juries, or forced into unfair settlement”).
29 FED. R. CIV. P. 23(f).
30 See Class Consciousness-Raising, supra note 12, at B1 (comparing the
conservative trend of the Eleventh Circuit with the more liberal and plaintiff-
favorable Ninth Circuit).
31 See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997).
32 See Michael Selmi, The Price of Discrimination: The Nature of Class Action
Employment Discrimination Litigation and Its Effects, 81 TEX. L. REV. 1249, 1250–
51 (2003).
33 See id. at 1250.
34 Michael Selmi, Public vs. Private Enforcement of Civil Rights: The Case of
Housing and Employment, 45 UCLA L. REV. 1401, 1435 (1998).
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statistically relevant impact on share price at either the time of
filing or at the time of settlement.35 Even in cases of large
settlements, such as the $192.5 million settlement involving
Coca-Cola in 2000, the settlement had little effect on share
price.36 The Coca-Cola settlement amounted to roughly 0.15% of
the firm’s market capitalization,37 contributing to a decrease of
about six cents from the sixty dollars share price at the time of
settlement.38
Prior to 1991, lawyers and courts emphasized remedial relief
that altered policy, required hiring preferences for former
victims, and set out goals and timetables.39 In 1991, Title VII
was revised to provide punitive damages,40 and since then,
monetary relief has been the “core of the remedial package.”41
“[T]here is little attempt to remedy past discrimination by other
methods.”42 In three of the most highly visible cases—Texaco’s
$176 million settlement, Coca-Cola’s $192 million settlement,
and Home Depot’s $104 million settlement—not a single consent
decree required a change in employment practices.43
Observers have suggested that the focus of the plaintiffs and
the courts upon rewarding monetary compensation instead of
ensuring change represents a shift toward handling
discrimination as a transaction or a cost of doing business.44 In
cases where a consent decree or court order results in a
prescribed change of policy, the monitoring has been left to
plaintiffs’ attorneys and diversity task forces, neither of which
35 See Selmi, supra note 32, at 1257–68.
36 See id. at 1250 n.7.
37 See id. at 1250.
38 See id. at 1250 n.7. See also Davan Maharaj, Coca-Cola To Settle Racial Bias
Lawsuit; Workplace: Soft Drink Giant Agrees To Pay $192.5 Million Over Allegations
It Treated Blacks Unfairly, L.A. TIMES, Nov. 17, 2000, at A1 (stating that the market
had incorporated the possibility of Coca-Cola’s settlement into its stock price months
before the terms of the settlement were publicly announced).
39 See, e.g., Kirkland v. N.Y. State Dep’t of Corr. Servs., 711 F.2d 1117, 1123–24
(2d Cir. 1983) (providing race-conscious promotional relief); Officers for Justice v.
Civil Serv. Comm’n, 688 F.2d 615, 635–36 (9th Cir. 1982) (validating promotional
goals and timetables); United States v. City of Alexandria, 614 F.2d 1358, 1368 (5th
Cir. 1980) (requiring job performance goals).
40 B. Ford Robertson, Commissioner v. Schleier: The Excludability of ADEA
Awards Under Section 104(a)(2) of the Internal Revenue Code, 31 WAKE FOREST L.
REV. 557, 562 (1996).
41 Selmi, supra note 32, at 1299.
42 Id.
43 See id. at 1249–50.
44 See id. at 1251–52, 1301.
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have a significant enough stake to ensure that change occurs.45
Therefore, although class actions present an opportunity to alter
the behavior of corporations with equitable remedies, because of
structural and financial motives they have ceased to be the
quintessential embodiment of public law litigation. That is,
typical class action lawsuits are no longer about enforcing
absolute rules of society; rather, they resemble transaction costs,
or instances where businesses may pay a fee for breaking rules.46
II. SHAREHOLDER PROPOSALS: A PROD
A. Recent Trends and Reasons for Pursuing Shareholder
Proposals
Conventional wisdom considers shareholders as either the
owners of the firm or the principals in a relationship in which
managers serve as their agents. In fact, the obligation to manage
and establish policy for the firm is held by the board of
directors.47 The mechanisms through which shareholders
influence actual managerial decisions are few indeed. 48 They
vote annually to elect directors (usually from a slate, proposed by
existing members of the board, that includes the same number of
nominees as there are vacancies), must vote to approve changes
in the bylaws or in the charter (usually proposed in the first
instance by the board), and vote on extraordinary matters such
as mergers, major sales of assets, or dissolution (again, proposed
by the board).
One area where shareholders have more ability to originate
action is in the area of shareholders proposals. These are simply
resolutions put forward by shareholders for collective
consideration. They can relate to either issues of corporate
strategy or of political or social issues more generally. An
example of the former type is a proposal to limit the corporation’s
use of poison pills; an example of the latter is a proposal to
explore the company’s history of equality in employment. The
federal government oversees a regulatory regime that seeks to
ensure that proper proposals are included in materials circulated
45 Id. at 1252.
46 Id. at 1251–52.
47 See, e.g., DEL. CODE ANN. tit. 8, § 141 (2005).
48 See DAVID P. TWOMEY ET AL., ANDERSONS BUSINESS LAW & THE REGULATORY
ENVIRONMENT 941 (14th ed. 2001).
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to shareholders in preparation for annual meetings. Even
though only few proposals receive a majority vote from
shareholders, many shareholder activists nevertheless use them
to raise issues in the public eye, with other shareholders, or with
firm managers. This section discusses the influence of proposals
in affecting corporate behavior, especially with regard to
employment discrimination.
There is presently a growing trend of shareholder activism
on a variety of issues, particularly environmental causes and
corporate governance. Shareholders also campaign to alter
business practices in countries linked to international terrorism,
to improve working conditions in foreign factories, and to curb
the marketing of tobacco to youngsters abroad.49 Shareholder
resolutions to curb employment discrimination provide a vivid
example of the growing trend of shareholder activism. According
to Meg Voorhes, Director of the Investor Responsibility Research
Center’s Social Issues Service, in 1999, only one proposal for
changing an employment nondiscrimination policy related to
sexual orientation went before shareholders and it received 8
percent of the vote.”50 2000 and 2001 saw little change, as only
one proposal was brought each year.51 As the campaign around
Cracker Barrel gained traction in 2002, however, five proposals
reached shareholders and they garnered an average of twenty-
two percent of the vote.52
Institutional investors that care to influence corporate
behavior through shareholder proposals can have particular
impact, because they own sufficient shares to demand attention
from corporations’ decisionmakers. According to one executive of
a socially-responsible investment firm, “The advantage of having
an institutional holder file these resolutions is that companies
always return their phone calls. If they want a dialogue, they get
it.”53
Beginning in the late 1990s, shareholder activists—
especially institutional investors—began to see the possibility
that corporations could incur liabilities as a result of litigation
49 Id.
50 Michael S. Markowitz, Gay Rights; Shareholders’ Power Is the New Weapon in
Fight for Workplace Equality, NEWSDAY, Jan. 4, 2004 at F10.
51 Id.
52 Id.
53 Id. (quoting Shelley Alpern, Assistant Vice President at Trillium Asset
Management).
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and public relations damage due to widespread employment
discrimination.54 Various activist groups, motivated by either
religious convictions or progressive ideals, also began to mobilize
to alter what they saw as socially undesirable behavior. These
groups were joined by leaders of large public pension funds.
Together, these unified interests began using shareholder
proposals to attempt to modify discriminatory corporate
employment practices. For example, Equality Project—a group
of shareholder activist groups that includes Pride Foundation,
Walden Asset Management, Trillium Asset Management, and
ISIS Asset Management—succeeded in changing Wal-Mart’s
equal employment opportunity policy to include sexual
orientation and gender identity.55
The example of Equality Project’s successful campaign to
amend Wal-Mart’s employment opportunity policy, however,
highlights not only the power of shareholder campaigns, but also
the limitations of shareholder proposals. Shareholder proposals
were one aspect of a multi-pronged strategy, and it took a
significant amount of time to bring about change. Negotiations
between Equality Project and Wal-Mart’s management lasted for
two years, from September 2001 until June 2003, before a policy
amendment was agreed upon.56 Therefore, the role of
shareholder proposals, as illustrated by the efforts of Equality
Project, is often to mount pressure, generate media attention,
and build momentum behind a policy change.
The case of Cracker Barrel provides another vivid example
of: (1) the eagerness of shareholders to invest years of time and
extensive financial resources to change corporate behavior; (2)
the potential of shareholder activism; and (3) the limitations of
current methods.
1. Case Study: Cracker Barrel
The battle to alter Cracker Barrel’s formal, written
54 See Maureen Minehan, Shareholders May Help Determine Employment
Issues, HR MAGAZINE, Feb. 1998, at 160.
55 See Lance Turner, Wal-Mart Changes Policy To Protect Gays, ARKANSAS BUS.,
July 7, 2003, at 10. Wal-Mart had approximately 1.3 million employees at the time
of the announcement and said that the changes were effective immediately. Id.
56 Id. At the time of the announcement, Wal-Mart, the number one retailer in
the world with $246.53 billion in annual sales, became the forty-ninth company in
the top fifty of the Fortune 500 to bar discrimination based on sexual orientation;
ExxonMobil was still refusing to alter its policy. Id.
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940 ST. JOHN’S LAW REVIEW [Vol. 79:929
discrimination policy involved a high-profile boycott and
negotiations between activists and management coupled with
shareholder proposals.57 For over a decade—from 1991 to 2002—
these shareholder proposals and the concerted external campaign
failed to alter the company’s policy or practices.58 During this
time, Cracker Barrel’s parent company, publicly traded CRBL
Group, Inc., enjoyed great financial success59 even as it became
“the poster boy for corporate antigay bigotry.”60
In 1991, Cracker Barrel issued a memo stating that people
who did not demonstrate “normal heterosexual values” could not
work for the company.61 At least eleven Cracker Barrel
employees lost their jobs in the 1990s because of their sexual
orientation, though the number may be as high as twenty.62 One
of the dismissed employees, Cheryl Summerville, a backup cook
at the Douglasville, Georgia Cracker Barrel Old Country Store,
did not previously hide her orientation and her immediate
supervisor did not want to dismiss her.63 Yet her district
manager fired her, writing on her separation papers the reason
for termination: “Employee is gay.”64
Because Georgia is one of the many states where Cracker
Barrel operates that does not have a law preventing
discrimination based on sexual orientation, the company’s policy
and Cheryl Summerville’s firing were not illegal. In her words, “I
called the ACLU and they said there was nothing I could do at
57 Jeremy Quittner, Cracker Barrel Buckles: The Family Restaurant’s Change of
Heart Provides a Prime Example for Activists Committed To Reforming Other
Antigay Corporations, THE ADVOCATE, Feb. 4, 2003, at 24.
58 Id.
59 In 2002, CBRL had approximately “50,000 employees in 41 states, [was]
publicly traded on the NASDAQ and rank[ed] 704th in the Fortune 1000. For the
fiscal year ending August 2, 2002, it had $92 million in net income, nearly a 90%
increase over the $49 million in net income reported a year earlier. At the end of the
calendar year its stock was trading at around $30 a share.” Id.
60 Id. This characterization of Cracker Barrel is attributed to Shelley Alpern,
Assistant Vice President of Boston-based Trillium Asset Management Corporation,
which specializes in socially responsible investing: “It is important the poster boy for
corporate antigay bigotry has finally acknowledged that lesbians and gays are part
of their own workforce and part of their customer base as well. . . . The importance of
this cannot be underestimated in terms of the company’s ability to create a
comfortable working environment for lesbian and gay employees.” Id. (quoting
Shelley Alpern, Assistant Vice President at Trillium Asset Management).
61 Id.
62 Id.
63 Id.
64 Id.
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all.”65
For the next ten years, the New York City Employees’
Retirement System (NYCERS), one of five pension funds for New
York City workers that together control 391,000 shares of stock
in CBRL, Cracker Barrel’s parent company, sponsored
shareholder proposals that would push Cracker Barrel to
overhaul its employment policy through a proxy vote.66 The
shareholder proposal was coupled with a nationwide, decade-long
boycott by gays and lesbians.67 Outside the coordinated
campaign of external pressure, several discrimination lawsuits
were also filed, at least two of which attempted class-wide
redress.68
Finally, prior to the November 26, 2002 shareholders’
meeting, shareholders controlling fifty-eight percent of CBRL’s
49.8 million outstanding shares voted by proxy to approve the
proposal.69 While no vote was taken at the shareholders’
meeting, immediately afterward the board voted unanimously to
add sexual orientation to its written nondiscrimination policy.70
The decade-long campaign of shareholder action, letter writing,
negotiations, and attempted economic damage is therefore
illustrative of both the promise and problems of bringing about
change through shareholder proposals alone.
It bears repeating that the specific goal of recent shareholder
proposals was to change official corporate policies. Another
limitation of this strategy, even if policies are changed, is that
policy alterations may not have a direct impact on day-to-day
functions. The campaigns to mobilize shareholders to vote on a
65 Id. (quoting Cheryl Summerville, a former Cracker Barrel employee).
66 Id. “NYCERS owns 189,000 shares.” Id.
67 In 2002, the Human Rights Campaign (“HRC”), a Washington, D.C.-based
gay advocacy organization gave CBRL zero points out of a possible one hundred in
its annual rating of company attitudes toward gay men and lesbians. HRC’s
WorkNet scale assigns points based on several factors, such as whether a company
provides domestic-partner benefits or has a written corporate policy that bans
discrimination on the grounds of sexual orientation and gender identity. According
to HRC’s Education Director, Kim Mills, “[t]hey [Cracker Barrel] had no
nondiscrimination policy, no gay and lesbian employees’ organization, no
appropriate and respectful marketing to the gay and lesbian community.” Mills
explained that “working actively against the shareholder resolutions [in past years]
got them that zero.” Id.
68 The NAACP attempted at least one class action lawsuit. Class action
certification was denied in 2002. Id.
69 Id.
70 Id.
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proposed policy change, however, helped raise the issue of
discrimination to management’s attention. Also, once a policy is
changed, it is possible that employees can later sue when a
company policy is violated to their detriment. In summation, the
nudging effect that shareholders can have upon a company’s
management is reflected in the title of this section: shareholder
proposals are a prod with which to push a corporation in a
certain direction.
B. Obstacles to Passing a Shareholder Proposal
Though shareholder proposals may prod corporations into
action as they did in the Cracker Barrel case, there are a number
of obstacles that shareholder activists face when they use
shareholder proposals to create change. First, the proper subject
matter for shareholder proposals is limited by federal law. The
SEC prevented shareholder proposals from affecting employment
policies in the 1990s, saying that employment policies were part
of the normal course of business of a company and therefore in
the domain of the board and management.71 That changed in
1998 when the SEC reversed its “Cracker Barrel decision” and
changed its rules to allow voting on shareholder proposals
affecting employment policies.72 There are still issues, however,
that are off limits to shareholder proposals—domestic partner
benefits being one of them—since these issues are still considered
to fall within the ambit of the ordinary course of business.73
Second, there are requirements pertaining to the votes
required to adopt a proposal. For a shareholder meeting to be
valid, a minimum number, or quorum, of shareholders, or
authorized proxies, must be present. Further, a shareholder
resolution may need more than a simple majority of cast votes to
pass. For example, the corporate charter may require a
supermajority of votes at the meeting or set some other minimum
threshold of total shareholder participation for a resolution to
pass. Non-voting shareholders who are present at the meeting or
abstentions may either be counted as votes for or against the
measure depending on the company charter and bylaws.
There is one scenario in which shareholder action may be
71 See Minehan, supra note 54, at 160.
72 Id.
73 See Markowitz, supra note 50, at F10.
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taken without a meeting. A number of states have adopted the
Revised Model Business Corporation Act (“RMBCA”) provision
that “[a]ction required or permitted by this Act to be taken at a
shareholders’ meeting may be taken without a meeting if the
action is taken by all the shareholders entitled to vote on the
action.”74 To pass, however, the resolution in this case would
require delivery to the corporation of a written consent describing
the action to be taken and signed by all the shareholders entitled
to vote on the action.75
C. Limitations of Shareholder Proposals
It has been asserted that majority shareholder resolutions
can be ignored by directors since directors have the discretion—
some would say the obligation—to exercise independently their
best business judgment in carrying out their fiduciary duty.76
According to this line of reasoning, “[w]hile majority shareholder
support for precatory proposals is an important consideration for
directors, it should not be the only one that they take into
account when making decisions as fiduciaries, which they are
required to make in the best interest of the company and all
shareholders as a whole.”77
Even shareholder activists acknowledge that shareholder
proposals would not get anywhere if not for a coordinated public
relations effort. Grant Lukenbill, Vice Chairman of the Equality
Project, says resolutions are most effective as part of a
“‘multifaceted approach.’ In truth, by the time a resolution comes
up, the company has probably already been lobbied by gay and
lesbian groups, by employee resource groups and has watched its
competitors change their policies.”78
74 REVISED MODEL BUS. CORP. ACT § 7.04(a) (2002).
75 Id.
76 See Andrew R. Brownstein & Igor Kirman, Can a Board Say No When
Shareholders Say Yes? Responding to Majority Vote Resolutions, 60 BUS. LAW. 23, 24
(2004); see also Quittner, supra note 57 (noting that a proxy vote by shareholders is
not legally binding and a company’s board is not required to follow such a vote).
77 Brownstein & Kirman, supra note 76, at 24. In general, courts refrain from
enjoining the action of directors unless there is proof of acting: (1) on an uninformed
basis; (2) in bad faith; or (3) not in the best interest of the corporation. This principle
is known as the “business judgment rule.” TWOMEY ET AL., supra note 48, at 945. In
keeping with this rule, courts do not interfere with a board’s discretion unless illegal
conduct or fraud harms the rights of creditors, shareholders, or the corporation. See
id. at 942.
78 Markowitz, supra note 50, at F10 (quoting Grant Lukenbill, vice chairman of
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944 ST. JOHN’S LAW REVIEW [Vol. 79:929
Resolutions have been withdrawn without a vote when a
company agrees to make a change. For example, CSX stated that
it started to revise its code of ethics even before the New York
City Comptroller filed a resolution.79 When a resolution in favor
of equal employment opportunity for gays and lesbians was filed
at J.C. Penny, the board decided to back it in the company’s
proxy statement; the measure drew ninety-three percent
support.80 Other companies institute changes while insisting
they are merely clarifying policies that were already in place.81
Even Cracker Barrel, which at one point issued a memorandum
stating that only heterosexual men and women were to be
retained as employees, declared that its inclusion of sexual
orientation in their antidiscrimination policy was simply a
clarification of its existing policy.82
A separate issue from the passage of formal policy changes is
whether the reality in the workplace has changed. This is one
reason that the Human Rights Campaign maintains an annual
report card on workplace conditions.83 The fact that shareholder
activists have prodded aerospace giant Lockheed Martin to take
steps that dramatically improved its score is evidence that these
efforts are potentially producing results beyond mere policy
changes.84 Also, while a change in formal policy may have no
direct impact on ongoing and future day-to-day decisions, it does
give potential future plaintiffs grounds for a lawsuit.
To summarize, shareholder proposals have in fact succeeded
in changing corporate behavior in various ways over the past
decade, even though they only rarely receive more than a small
percentage of the actual vote. They are most effective when they
the Equality Project, which promotes gay and lesbian shareholder initiatives).
79 See id.
80 Id.
81 Id.
82 See Quittner, supra note 57 (noting that Cracker Barrel claimed it had
“‘always had a strong written policy that prohibits discrimination of any kind in the
workplace’” even though it had previously issued a memo stating people who did not
demonstrate “normal heterosexual values” could not work for the company) (quoting
Julie Davis, spokeswoman for Cracker Barrel).
83 HUMAN RIGHTS CAMPAIGN FOUND., CORPORATE EQUALITY INDEX ON GAY,
LESBIAN, BISEXUAL AND TRANSGENDER SOCIAL RESPONSIBILITY 2 (2004), available
at http://www.business-humanrights.org/Categories/Miscellaneous/Ratingsindexes/
HRCCorporateEqualityIndexUSA (follow Corporate Equality Index 2004 hyperlink)
(stating that the intent of the Index is to be a “road map to equal treatment for
GLBT Americans in the workplace and marketplace”).
84 See Markowitz, supra note 50, at F10.
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are coupled with other forms of pressure. When successful, they
can potentially contribute to a change not only in formal policy
but in the daily practice of firms.
III. ULTRA VIRES: A BIG STICK
A. Evidence That Ultra Vires Lives85
The incorporation statutes of forty-nine states allow these
states to dissolve a corporation or enjoin it from engaging in ultra
vires activities—that is, activities outside of the corporation’s
authority.86 Even critics of the ultra vires doctrine acknowledge
that these provisions of states’ incorporation laws are based “on
the notion that the state had an interest in deterring [ultra vires]
activity by virtue of its responsibility to protect the public
welfare.”87
While the requirement of listing specific corporate purposes
and powers was removed from state incorporation laws, the
requirement that the corporation’s purposes and activities be
“lawful” or “legal” was never removed.88 The Model Business
Corporation Act states that the articles of incorporation shall set
forth “[t]he purpose or purposes for which the corporation is
organized which may be stated to be, or to include, the
transaction of any or all lawful business for which corporations
may be incorporated under this Act.”89 The Revised Model
Business Corporation Act establishes that “[e]very corporation
incorporated under this Act has the purpose of engaging in any
lawful business.”90
The first section of the Delaware statute establishes that “[a]
corporation may be incorporated or organized under this chapter
to conduct or promote any lawful business or purposes.”91 The
New York incorporation statute allows that “[a] corporation may
85 For a more comprehensive review of the history of the ultra vires doctrine, see
Kent Greenfield, Ultra vires Lives! A Stakeholder Analysis of Corporate Illegality, 87
VA. L. REV. 1279, 1302–23 (2001).
86 See Michael A. Schaeftler, Ultra vires—Ultra Useless: The Myth of State
Interest in Ultra vires Acts of Business Corporations, 9 J. CORP. L. 81, 85 n.9 (1983).
The one exception is North Dakota. See N.D. CENT. CODE § 10-19.1-08 (2001).
87 Schaeftler, supra note 86, at 85.
88 JAMES D. COX ET AL., CORPORATIONS § 3.6, at 3.15 (1st ed. 1995).
89 MODEL BUS. CORP. ACT § 54(c) (1969).
90 REVISED MODEL BUS. CORP. ACT § 3.01(a) (1999).
91 DEL. CODE ANN. tit. 8, § 101(b) (2001).
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946 ST. JOHN’S LAW REVIEW [Vol. 79:929
be formed under this chapter for any lawful business purpose.”92
Forty-six states and the District of Columbia have some kind of
language in their incorporation statutes limiting corporations to
lawful purposes and activities.93
It is important to clarify that illegal activities constituted
one variety of ultra vires activity during the doctrine’s glory days
in the 1800s and early 1900s and since then have never been
rationalized as permissible as a matter of corporate law, even
when profitable. Fletcher’s Cyclopedia of the Law of Private
Corporations explains the traditional notion this way: “[A]n
illegal act or contract, defined as one expressly prohibited by the
charter or a general statute, or which is immoral or against
public policy, is ultra vires and also something more.”94 “If an act
or contract is illegal, . . . it is doubtless ultra vires in the broad
92 N.Y. BUS. CORP. LAW § 201 (McKinney 2003).
93 See ALA. CODE § 10-2B-3.01 (LexisNexis 1999); ALASKA STAT. § 10.06.005
(2004); ARIZ. REV. STAT. ANN. § 10-301 (2004); ARK. CODE ANN. § 4-26-103 (2001);
CAL. CORP. CODE § 206 (Deering 2003); COLO. REV. STAT. § 7-103-101 (2004); CONN.
GEN. STAT. ANN. § 33-645 (WEST 1997); D.C. CODE ANN. § 29-301.04 (LexisNexis
2001); FLA. STAT. ANN. § 607.0301 (West 2001); GA. CODE ANN. § 14-2-301 (2003);
HAW. REV. STAT. ANN. § 414-41 (LexisNexis 2004); IDAHO CODE ANN. § 30-1-301
(1999); 805 ILL. COMP. STAT. ANN. 5/3.05 (West 2004); IND. CODE ANN. § 23-1-22-1
(West 2005); IOWA CODE ANN. § 491.1 (West 1999); KAN. STAT. ANN. § 17-6001 (1995);
KY. REV. STAT. ANN. § 271B.3-010 (LexisNexis 2003); LA. REV. STAT. ANN. § 12:22
(1994); ME. REV. STAT. ANN. TIT. 13-B, § 201 (2005); MD. CODE ANN., CORPS. &
ASSNS § 2-101 (LexisNexis 1999); MASS. ANN. LAWS CH. 156, § 6 (LexisNexis 1996);
MICH. COMP. LAWS SERV. § 450.1251 (LexisNexis 2001); MISS. CODE ANN. § 79-4-3.01
(2001); MO. ANN. STAT. § 351.386 (West 2001); MONT. CODE ANN. § 35-1-114 (2003);
NEB. REV. STAT. § 21-2024 (1997); NEV. REV. STAT. ANN. § 78.030 (LexisNexis 2004);
N.H. REV. STAT. ANN. § 293-A:3.01 (LexisNexis 1999); N.J. STAT. ANN. § 14A:2-1
(West 2003); N.M. STAT. § 53-11-3 (2003); N.C. GEN. STAT. § 55-3-01 (2003); OHIO
REV. CODE ANN. § 1701.03 (LexisNexis 2004); OKLA. STAT. ANN. TIT. 18, § 1005 (West
1999); OR. REV. STAT. § 60.074 (2003); 15 PA. CONS. STAT. ANN. § 1301 (West 1995);
R.I. GEN. LAWS § 7-1.1-3 (1999); S.C. CODE ANN. § 33-3-101 (1990); S.D. CODIFIED
LAWS § 47-2-3 (2000); TENN. CODE ANN. § 48-13-101 (2002); TEX. BUS. ORGS. CODE
ANN. § 2.001 (Vernon 2001); UTAH CODE ANN. § 16-10A-301 (2001); VA. CODE ANN. §
13.1-626 (1999); WASH. REV. CODE ANN. § 23B.03.010 (West 1994); WIS. STAT. ANN. §
180.0301 (West 2002); WYO. STAT. ANN. § 17-16-301 (2005). The only three states
that do not have such language are Minnesota, North Dakota, and Vermont. See
MINN. STAT. ANN. § 302A.101 (West 2004) (“A corporation may be incorporated
under this chapter for any business purpose or purposes . . . .”); N.D. CENT. CODE §
10-19.1-08 (2001) (“A corporation may be incorporated under this chapter for any
business purpose or purposes . . . .”). Vermont does not have such statutory
language. It has specific purposes listed, but the general purposes section—Title 11,
§41—was repealed in 1971. VT. STAT. ANN. TIT. 11, § 41 (repealed 1971).
94 7A WILLIAM MEADE FLETCHER ET AL., FLETCHER CYCLOPEDIA OF THE LAW OF
PRIVATE CORPORATIONS § 3400, at 10 (perm. ed., rev. vol. 1997) (footnote omitted).
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sense as being ‘without power.’”95
Courts have held that illegal acts are indeed ultra vires. For
example, in Roth v. Robertson,96 the New York Supreme Court
held the corporate directors of an amusement park personally
liable for “hush money” paid in exchange for assurances that a
law prohibiting the operation of their business on Sundays would
not be enforced. The payments were “something more than an
ultra vires transaction, it was one bad in morals, and so evidently
so that the plea that the payment was made for the supposed
interest of the corporation cannot be deemed any excuse in
law.”97 The court recognized the difference between acts that are
simply ultra vires but not unlawful and acts that are both. In the
context of illegal ultra vires acts, the court stated that corporate
directors would be required to refund damages to the corporation
arising from such an act, even if the shareholder plaintiff had
acquiesced in the act.98 Since then, no one has seriously argued
that companies should be authorized in their charter to commit
illegal acts. In fact, even proposed limitations to the ultra vires
doctrine proposed during the doctrine’s decline still explicitly
prohibited acts “repugnant to law.”99
Perhaps the best evidence of the continued relevance of ultra
vires are companies’ own articles of incorporation. Even a
contractarian, who believes in a paradigm whereby companies
are nothing more than a “nexus of contracts,” will see that, in
drafting their charters, companies have accepted a binding
commitment to engage in only legal activities. For example,
Unocal’s articles of incorporation state that the “purpose of the
corporation is to engage in any lawful act or activity for which a
95 Id. at 12. In the context of contracts, the status of illegal contracts is clearly
settled: “Contracts that are illegal are certainly ultra vires.” Eckhart v. Heier, 162
N.W. 150, 151 (S.D. 1917).
96 64 Misc. 343, 345, 118 N.Y.S. 351, 353 (Sup. Ct. Erie County 1909).
97 Id. at 343, 118 N.Y.S. at 353.
98 See id. at 345–46, 118 N.Y.S. at 353.
99 Robert S. Stevens, A Proposal as to the Codification and Restatement of the
Ultra Vires Doctrine, 36 YALE L.J. 297, 321 (1927). The relevant section reads as
follows:
I. A corporation which has been formed under this Act, or a corporation of a
class which might be formed under this Act, shall have the capacity to act
possessed by an unincorporated association of natural persons.
II. The authority of such a corporation to act shall be limited to the
performance of those acts which are necessary or proper for the
accomplishment of its purposes and which are not repugnant to law.
Id.
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corporation may be organized” under California law.100 Nike, Inc.
states in its charter that its purpose is “to engage in any lawful
activity for which corporations may be organized” under Oregon
law.101 Ford Motor Company’s articles of incorporation list a
variety of business purposes that the company may engage in,
including the manufacture and sale of automobiles. The articles
also state that the company is empowered “[t]o do everything
necessary, suitable or proper for the accomplishment of any
purpose . . . hereinbefore set forth,” and additionally “to do every
other act or thing incidental or appurtenant to or growing out of
or connected with the aforesaid business or purposes, objects or
powers, . . . provided the same be not inconsistent with the laws
under which the corporation is organized.”102 General Electric’s
charter states that the corporation’s purposes include “any
activity which may promote the interests of the corporation, or
enhance the value of its property, to the fullest extent permitted
by law, and in furtherance of the foregoing purposes to exercise
all powers now or hereafter granted or permitted by law.”103
Philip Morris is incorporated “to transact any lawful business.”104
100 Union Oil Co. of Cal., Restated Articles of Incorporation, art. II (June 29,
1994).
101 Nike, Inc., Restated Articles of Incorporation, art. III (Sept. 23, 2005).
102 Ford Motor Co., Restated Certificate of Incorporation, art. III, § 13 (Aug. 2,
2000).
103 Gen. Electric Co., Certificate of Incorporation, § 2D (Apr. 27, 2000).
104 Philip Morris Cos. Inc., Restated Articles of Incorporation, art. II (Mar. 18,
1997). In addition, Sears, Roebuck & Company’s charter states that the purposes of
the corporation are, inter alia, “[t]o engage in any activity which may promote the
interests of the Corporation, or enhance the value of its property, to the fullest
extent permitted by law.” Sears, Roebuck & Co., Restated Certificate of
Incorporation, art. II, § 2.2 (May 13, 1996). Moreover, Boeing’s charter states that
“[t]he nature of the business, or objects or purposes to be transacted, promoted, or
carried on, are those necessary to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.” The Boeing Co., Restated Certificate of Incorporation, art. III (Aug. 14,
1997). IBM’s certificate of incorporation explains that the purpose of the corporation
“is to engage in any lawful act or activity for which corporations may be organized”
under New York law. Int’l Bus. Mach. Corp., Certificate of Incorporation, art. II
(Apr. 28, 1999). Raytheon Company states in its charter that “[t]he purpose of the
Corporation shall be to engage in any lawful act or activity for which corporations
may be organized and incorporated under the General Corporation Law of the State
of Delaware.” Raytheon Co., Restated Certificate of Incorporation, art. III (May 5,
2005). Columbia Hunter Capital Corporation is organized “to engage in any lawful
act or activity for which corporations may be organized” under Delaware law.
Columbia Hunter Capital Corp., Certificate of Incorporation, art. III (Oct. 19, 2000).
Sprint Corporation “is organized for profit, and the purpose for which it is formed is
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B. Reasons for Pursuing an Ultra Vires Lawsuit
There are several advantages to choosing an ultra vires suit
to influence corporate behavior. First, there is no ambiguous
standard or difficult threshold to hurdle, such as certifying a
class action lawsuit or rallying a minimum number of
shareholders to support a shareholder proposal. A single
shareholder owning a few shares of a company may sue to enjoin
an activity.105
Second, there are fewer unforeseeable contingencies and
fewer evidentiary burdens than in a class action litigation; since
there is a lower risk of failure and lower costs associated with the
initial stages of the suit, a relatively smaller financial
commitment is required. Therefore, the main questions for the
plaintiff shareholder’s attorney are whether there is sufficient
evidence to prove that the company is engaging in illegal activity
and what equitable remedies should be requested from the court.
Third, the remedies allowed for in all states except North
Dakota are either equitable relief (including injunctions) or the
dissolution of the company.106 In other words, in its most
extreme theoretical application, a violation of the ultra vires
doctrine would empower courts to impose a “death sentence” on
corporations that, for example, were engaging in ongoing and
severe violations of law. On a more moderate level of application,
a court could be asked to enjoin the illegal conduct107 or to
exercise its powers in equity and order the company to achieve
certain benchmarks or engage in certain remedial or
preventative programs to prevent further illegalities. As the
ALI’s Principles of Corporate Governance state in section 2.01:
“[T]he corporation, in the conduct of its business . . . [i]s obliged,
to the same extent as a natural person, to act within the
to engage in any lawful act or activity for which corporations may be organized”
under Kansas law. Sprint Corp., Articles of Incorporation, art. II (Apr. 28, 2000).
Nabisco states that its purpose “is to engage in any lawful act or activity for which
corporations may be organized” under Delaware law. Nabisco Group Holdings Corp.,
Restated Certificate of Incorporation, art. III (June 16, 1999).
105 Dodge v. Woolsey, 59 U.S. (18 How.) 331, 343 (1855); see infra note 107.
106 See Greenfield, supra note 85, at 1359.
107 See, e.g., Hoole v. Great W. Ry., 3 L.R.-Ch. 262, 266-67 (Ch. App. 1867)
(holding that an individual shareholder can bring suit to enjoin an ultra vires act);
Beman v. Rufford, 61 Eng. Rep. 212, 218 (V.C. 1851) (holding that non-assenting
shareholders can sue even when the majority of shareholders ratified the act).
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950 ST. JOHN’S LAW REVIEW [Vol. 79:929
boundaries set by law.”108 The comment to that section clarifies
that “[t]he appropriate vehicle to remedy an alleged violation of
the principles stated in § 2.01 would be an action for injunctive or
other equitable relief by a shareholder.”109 As the United States
Supreme Court has ruled, “beyond the limits of the act of
incorporation, the will of the majority cannot make an act valid;
and the powers of a court of equity may be put in motion at the
instance of a single shareholder.”110 The power to order a
company to change a pattern of behavior is one advantage that
an ultra vires suit offers in comparison to a shareholder proposal
to change policy.
Unlike a typical shareholders’ derivative suit, no showing
would have to be made that a demand was made to directors to
act or that such a request would be obviously fruitless.111 Unlike
a shareholder suit seeking to hold directors accountable for
breaching a duty of care, no showing of a financial loss to the
company would be required.112 Unlike a derivative case
attempting to recover damages from directors, the proof that
some monitoring system was in place would not absolve the
directors from liability.113
C. Obstacles To Winning an Ultra Vires Suit
The two obstacles to success in an ultra vires lawsuit would
be producing evidence that a company is presently engaging in
unlawful conduct and then convincing the judge to use the court’s
powers in equity to enforce the relevant law by requiring action
or the cessation of action by the company. Significantly, the
profitability or lack of profitability of an illegal act is irrelevant
and therefore does not represent an obstacle of any kind.
In the context of employment discrimination, class action
108 PRINCIPLES OF CORPORATE GOVERNANCE: ANALYSIS AND
RECOMMENDATIONS § 2.01(b)(1) (1992).
109 Id. § 2.01 cmt. j.
110 Dodge, 59 U.S. (18 How.) at 343.
111 See generally Marx v. Akers, 88 N.Y.2d 189, 666 N.E.2d 1034, 644 N.Y.S.2d
121 (1996) (detailing the universal demand approach and the demand/futility
approach).
112 See Miller v. AT&T, 507 F.2d 759, 763 (3d Cir. 1974) (denying a motion to
dismiss on the ground of plaintiffs’ sufficient allegation of actual corporate loss).
113 See In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 971 (Del. Ch.
1996) (noting that the burden of proof for plaintiffs seeking to hold directors liable is
quite high when evidence of a reporting system exists).
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lawsuits have demonstrated that it is possible to meet the
threshold requirement of aggregated evidence of discrimination,
even when human resources management is decentralized.114
Statistics about under-representative composition of upper
corporate management are well known and suggest that similar
patterns of discrimination could be proven at many corporations.
For example, a 2002 survey found that 82% of the director
positions on Fortune 1000 companies were held by white men,
11% by white women, 3% by African Americans, 2% by Asian
Americans, and 2% by Hispanics.
In general, both labor law violations and illegal
discrimination are under-reported to government watchdogs. For
example, the U.S. Department of Labor, charged with
enforcement of child labor, wage, and hour provisions of federal
labor law, cited only 104 cases of child labor violations in fiscal
year 1998, even though an estimated one million child labor
violations occur in U.S. agriculture every year.115 While the lack
of perfect information on employment law violations is an
obstacle to bringing an ultra vires suit, facts such as these may
be seen instead as indicative of an opportunity. Groups of
shareholders and institutional investors116 are increasingly eager
to wield their power to influence corporate behavior. The
activism of shareholders coupled with a powerful, unused
doctrinal tool in the face of unchecked legal violations should
logically result in multiple opportunities and contexts in which to
prove that the ultra vires doctrine can truly impact corporate
behavior to the benefit of all stakeholders. Even shareholders
not concerned with the ethics of a pressured company would
arguably benefit in the long run when their company ceases or
avoids conduct that could lead to fines or tort claims in the
future.
D. Limitations of Using Ultra Vires
The key limitation to the ultra vires doctrine is that it will
114 See Dukes v. Wal-Mart Stores Inc., 222 F.R.D. 137, 145, 150, 160 (N.D. Cal.
2004).
115 HUMAN RIGHTS WATCH, WORLD REPORT 2001: UNITED STATES: HUMAN
RIGHTS DEVELOPMENTS (2001), available at http://www.hrw.org/wr2k1/usa/#labor.
Compounding the problem, “penalties were typically too weak to discourage
employers from using illegal child labor.” Id.
116 See discussion supra Part II.A.
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952 ST. JOHN’S LAW REVIEW [Vol. 79:929
work only when a corporation is violating a law in a jurisdiction
where it is engaged in a business activity. Once that is
established, however, an ultra vires suit can be brought in the
state where the company is incorporated to enforce, in effect, the
law of the jurisdiction where the lawbreaking is occurring.117 For
example, Nevada has a state law banning employment
discrimination in both the public and private sectors. Therefore,
a single shareholder with proof of discriminatory treatment of
homosexuals by Wal-Mart in Nevada could sue in a Delaware
court (where Wal-Mart is chartered) and ask for equitable relief
of the situation. The key limitation of the other evaluated
methods—namely, the difficulty or impossibility of bringing
about actual change in corporate conduct—should be less of a
problem in the context of an ultra vires lawsuit because equitable
relief is, by the nature of the claim, the focus of the remedy.118
CONCLUSION
Studying attempts to alter corporate behavior in the context
of employment discrimination over the past decade yields several
key insights that activists and shareholders can learn from and
can apply to other contexts.
First, class actions are increasingly difficult to have certified
by a court due to the Supreme Court’s 1997 decision that
adequacy of representation must be rigorously scrutinized.
Furthermore, while class actions have historically held the
promise of equitable relief—that is, the possibility to win a court
order that a company take concrete steps to achieve specific
future goals—that outcome is no longer frequently pursued nor
achieved. There is also evidence that even on an individual level,
plaintiffs may recover more monetary compensation with an
individual action. Finally, even very large settlements do not
impact the bottom line sufficiently to affect share prices at either
the time of the lawsuit’s filing or at the time of settlement.
Therefore, class actions during the past decade of
antidiscrimination activism appear to be limited in both their
theoretical ability to deter undesirable behavior and in their
practical ability to lead a company in a certain direction.
117 Cf. Greenfield, supra note 85, at 1372 (stressing that the ultra vires doctrine
renders an illegal corporate act unlawful in any jurisdiction, not simply where the
company is incorporated).
118 See supra Part I.C.
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Second, shareholder proposals are an increasingly frequent
means for shareholder activists to prod corporate policy in a
certain direction. While it is still not easy to mobilize a campaign
on such a large scale, at least SEC regulations now allow
proposals that affect areas that were previously in the exclusive
purview of directors. The problem with shareholder proposals is
that while they may succeed in changing formal policy, a
shareholder proposal is inherently incapable of mandating
specific enforceable goals or activities.
As the case of Cracker Barrel illustrates, shareholder
proposals and lawsuits, supplemented by strategies from outside
the realm of corporate law such as boycotts and coordinated
negative publicity, have together managed to change policies at
some large recalcitrant companies. On the other hand, these
struggles have taken a decade of concerted, focused effort to
achieve results, and it remains an open question whether the
formal policy alterations that have been implemented will result
in actual changes in the day-to-day conduct of these corporations.
Therefore, class action lawsuits are like a bridle: conceivably
useful to lead a corporation in a specific direction through the use
of equitable remedies, but they are unwieldy. Shareholder
actions are like a prod for nudging a corporation in a vague
direction, but that nudging will not necessarily result in
predictable, specific steps.
While no one likes to beat a recalcitrant animal, in situations
where a corporation engages in an ongoing, undeterred pattern of
illegal conduct, it is good to know that there is also a stick in the
tool shed. It is important to emphasize once again that ultra
vires suits can be initiated by either states’ attorneys general or
shareholders. This Article has analyzed the ultra vires doctrine
from the perspective of shareholder activists rather than the
perspective of state law enforcement. Unlike a shareholders’
derivative action, no proof of loss of profitability is needed to win
at trial. Just evidence of ongoing illegal acts should be enough to
win a judgment.
As discussed, the dissolution of the company is one available
remedy, albeit an extreme and unlikely outcome. Given the
choice, when confronted with a persistent pattern of illegal
conduct, a court will be more likely to order—and the company
more likely to accept—a remedy in equity. A basic tenet of
equitable relief is that a court can tailor a remedy to a situation,
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954 ST. JOHN’S LAW REVIEW [Vol. 79:929
require that specific steps be taken, provide mechanisms for
measuring outcomes, and enforce ongoing accountability to the
court.
Obviously, many questions about the pursuit of an ultra
vires lawsuit cannot be answered with complete certainty until a
case is filed. Courts have dealt with questions surrounding the
mechanics and implementation of various doctrines for centuries
on a case-by-case basis, however, and a revival of the ultra vires
doctrine will prove to be no exception.
... 21 On a related note, there are also opportunities to remove perverse incentives in obsolete legal structures, as I explained with Mystica Alexander and William Wiggins. 22 On the other hand, some traditions 23 and little used statutes 24 should arguably be reinvigorated and used. ...
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Full-text available
We are all wondering: what's next? This paper poses and answers 10 questions. These are predictions for the COVID-19 era and beyond based on my research.
... The observations above concern classic legal questions and quandaries related to our imaginary friends and sometimes masters: business forms (Geldart, 1911). Given conventional business structures, is it possible to guide these imaginary beasts to behave better, despite the incentives of their nominal leaders to potentially make profits from (legally sanctioned or not) harm to people and the environment (Sulkowski, 2009;Sulkowski & Greenfield, 2006). Is encouraging the practice of gathering, considering, and publishing data on societal and environmental impacts a means to "take the blinders off" these imaginary beings and help decision-makers take into account real risks and opportunities connected to people and ecosystems (Hughey & Sulkowski, 2013) conventional corporate hierarchy and overhead (and inefficiencies, limitations, and costs), it is argued, could be replaced by a nexus of self-executing smart contracts (Sulkowski, forthcoming). ...
Chapter
Corporate governance (CG) denotes the rules of business decision-making and directs the internal mechanism of companies to follow the output of the rules. It includes the customs, policies, laws and institutions as a set of processes that affects the way in which a corporation is directed, administered or controlled. In the aftermath of some corporate scandals and with the rise of civil society campaigns against the negative impact of corporate operations on the environment, corporate governance has started emphasizing issues that go beyond this traditional focus to touch on corporate ethics, accountability, disclosure and reporting. ‘As companies seek to assure regulators and investors that they are fully transparent and accountable, corporations have increasingly pledged their commitment to honest and fair corporate governance principles on a wide spectrum of business practices’ (Gill, 2008, p. 453).
Chapter
There are many ways of examining CSR, although as yet there is no single generally accepted, fully specified concept encompassing its practices. Contemporary scholars of CSR have shown that the voluntary mode of practising CSR is predominant. However, there are opponents of this mode, especially in the weak economies in which the non-legal drivers in society are sparse. In these circumstances, establishing a theoretical basis for implementing CSR through legislation is difficult, but important. It is difficult, since legal regulation could be detrimental to business development if it narrows the scope of innovation in business and becomes a barrier to companies’ usual business practices in the post-regulatory world. It is important, since the public interest groups—who are sceptical of the role of companies’ voluntary responsibility for social development—need a theoretical basis to demonstrate instances of corporate irresponsibility to society in an articulate manner. This chapter presents a detailed discussion of several theories to establish that a normative basis exists for implementing CSR principles through legal regulation.
Article
The moral arguments associated with justice, fairness and communitarianism have rejected the exclusivity of cost–benefit analysis in corporate governance. Particularly, the percepts of new governance (NG) have included distributive aspects in efficiency models focused on maximizing profits. While corporate directors were only assigned to look after the return of investment within the traditional framework of corporate governance (CG), NG has created the scope for them to look beyond the set of contractual liabilities. This article explores how and how far NG notions have contributed to the devolution of CG to create internal strategies focusing on actors, ethics and accountability in corporate self-regulation.
Article
This article analyzes the recent wave of large class action employment discrimination suits to determine their effects on the firms that are sued and the members of the plaintiff class. The first part of the paper includes an event study that measures the effect the lawsuits and their settlements have on stock prices of the companies that are sued, and the second part of the paper involves three case studies (Texaco, Home Depot and Denny's) to explore how the lawsuits actually change corporate practices. The study finds that the lawsuits do not generally affect stock prices, and rarely provide meaningful benefits to the plaintiff class. Although the damages obtained in the cases are substantial, they are generally not sufficient to affect large corporations, which also means that the lawsuits are unlikely to provide a sufficient deterrent against discrimination. An important subsidiary finding of the study is that employment discrimination class actions have lost their public nature and have evolved into private tort claim where there is little public oversight. The last part of the article proposes several reform measures, including increasing damages available in employment discrimination suits, and imposing a public monitoring function on the settlement.
Ultra vires-Ultra Useless: The Myth of State Interest in Ultra vires Acts of Business Corporations, 9
  • See Michael
  • A Schaeftler
See Michael A. Schaeftler, Ultra vires-Ultra Useless: The Myth of State Interest in Ultra vires Acts of Business Corporations, 9 J. CORP. L. 81, 85 n.9 (1983). The one exception is North Dakota. See N.D. CENT. CODE § 10-19.1-08 (2001).
CODE § 10-2B-3.01 (LexisNexis 1999)
  • Ala See
93 See ALA. CODE § 10-2B-3.01 (LexisNexis 1999); ALASKA STAT. § 10.06.005
  • Neb Rev Stat
NEB. REV. STAT. § 21-2024 (1997); NEV. REV. STAT. ANN. § 78.030 (LexisNexis 2004);
  • Haw Rev Stat
  • Ann
HAW. REV. STAT. ANN. § 414-41 (LexisNexis 2004); IDAHO CODE ANN. § 30-1-301
  • Ky Rev Stat
  • Ann
KY. REV. STAT. ANN. § 271B.3-010 (LexisNexis 2003); LA. REV. STAT. ANN. § 12:22
  • Model
  • Bus
MODEL BUS. CORP. ACT § 54(c) (1969).
The only three states that do not have such language are
  • Wyo
  • Stat
  • Ann
WYO. STAT. ANN. § 17-16-301 (2005). The only three states that do not have such language are Minnesota, North Dakota, and Vermont. See MINN. STAT. ANN. § 302A.101 (West 2004) ("A corporation may be incorporated under this chapter for any business purpose or purposes....");
Restated Articles of Incorporation, art
  • Inc Nike
Nike, Inc., Restated Articles of Incorporation, art. III (Sept. 23, 2005).
Moreover, Boeing's charter states that "[t]he nature of the business, or objects or purposes to be transacted, promoted, or carried on, are those necessary to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware
Philip Morris Cos. Inc., Restated Articles of Incorporation, art. II (Mar. 18, 1997). In addition, Sears, Roebuck & Company's charter states that the purposes of the corporation are, inter alia, "[t]o engage in any activity which may promote the interests of the Corporation, or enhance the value of its property, to the fullest extent permitted by law." Sears, Roebuck & Co., Restated Certificate of Incorporation, art. II, § 2.2 (May 13, 1996). Moreover, Boeing's charter states that "[t]he nature of the business, or objects or purposes to be transacted, promoted, or carried on, are those necessary to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware." The Boeing Co., Restated Certificate of Incorporation, art. III (Aug. 14,