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

By Sulkowski, Adam J.; Greenfield, Kent | St. John's Law Review, Fall 2005 | Go to article overview

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


Sulkowski, Adam J., Greenfield, Kent, St. John's Law Review


"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

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 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: ABRIDLE

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 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 plaintiffs case would be. …

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