There's an interesting lawsuit out there for about a month in which a group of professors are using the American Studies Association over its position supporting a boycott of Israel:
The lawsuit charges that ASA’s blatant politicization of an academic association violates District of Columbia (D.C.) law governing nonprofit organizations.
“Until a handful of zealots appropriated our learned society, the ASA was the leading organization for the study of American culture,” stated Professor Simon Bronner, one of the plaintiffs. “Yet in 2013, a handful of anti-Israel Boycott, Divestment and Sanctions (BDS) activists aggressively steered the ASA to an organization of social change pushing a narrow political agenda.”
According to the plaintiffs, the boycott adopted by ASA in December 2013 was a concerted effort by a small number of BDS activists, including founding members of the U.S. Campaign for the Academic and Cultural Boycott of Israel (USACBI), who used their leadership positions in ASA to make anti-Israel activism the central focus of the Association. ASA’s stated mission has nothing to do with boycotting a foreign nation and thus the suit alleges its adoption violates the law that governs nonprofit corporations.
At the time the boycott was initiated, ASA’s constitution stated that “[t]he object of the association [is] the promotion of the study of American culture through the encouragement of research, teaching, publication…about American culture in all its diversity and complexity.” The suit charges that a boycott of another country is outside the scope of ASA’s charter and is the antithesis of promoting knowledge. ASA’s constitution goes on to say that ASA’s goal is “the strengthening of relations among persons and institutions in this country and abroad devoted to such studies.” According to the complaint, the boycott does the exact opposite since it separates an entire country and its academics.
In addition, as a tax-exempt nonprofit, ASA reports annually to the IRS. In its IRS documents, the Association continues to describe its mission as “the nation’s oldest and largest association devoted to the interdisciplinary study of American culture and history,” with its “exempt purpose - advancing the Study of American Culture.” Plaintiffs allege that the academic boycott of Israel is clearly outside of this stated mission and purpose.
This is really interesting and gives us an opportunity to explore some basic old school corporate law. (The following is taken from my book Corporate Law
During the 19th century, state corporation codes typically required that the articles of incorporation set forth the purposes for which the corporation was organized. At that time, this requirement had considerable substantive importance because of the ultra vires doctrine. Most states have sharply emasculated this doctrine in recent years, however, so that ultra vires now is largely a dead letter.
The ultra vires doctrine grew out of suspicion by some early 19th Century legislatures and courts that corporations were a source of potential mischief and evil. As a result, governments closely regulated corporations. As this suspicion faded in the middle of the 19th Century, states started adopting general enabling corporate laws. Under these statutes, all one had to do to form a corporation was to jump correctly through the statutory hoops described above. Traces of the traditional suspicion of corporations lingered for some time thereafter, however, taking the form of restrictions on the purposes for which corporations could be organized and the powers corporations were authorized to exercise. In addition, these statutes required that the articles of incorporation specify which of the permissible purposes the corporation was organized to achieve and which of the statutory powers it would exercise.
If a corporation exceeded the powers and purposes set forth in the statutes or the firm’s articles, it was said to be acting “ultra vires.” Suppose that neither the corporate statute nor the firm’s articles gave it the power to make loans. If the firm lent money, no matter how small an amount, that action was ultra vires. An ultra vires act was illegal and, accordingly, null and void.
The ultra vires doctrine was frequently asserted as a defense in contract suits involving corporations. On the one hand, if the other party breached the contract, the corporation could not enforce an ultra vires contract against it. On the other hand, if the corporation breached the contract, it could assert the ultra vires doctrine as a defense against a breach of contract suit brought by the other party. The ultra vires doctrine also could be asserted affirmatively in a shareholder suit against officers and directors who caused the firm to commit an ultra vires act. The responsible officers and directors could be held personally liable for any losses resulting from the action.
In the leading case of Jacksonville, M., P. Railway & Navigation Co. v. Hooper,[27] for example, the plaintiffs leased a resort hotel to the defendant railroad corporation. The hotel was located near the railroad’s seaside terminal. The lease required the railroad corporation to insure the hotel, but the corporation failed to do so. The hotel burnt down during the lease term. When plaintiffs sued the railroad for breach of the lease, the railroad defended on grounds that the lease was ultra vires. The railroad’s powers included the right to “erect and maintain all convenient buildings . . . for the accommodation and use of [its] passengers.” The railroad argued that operating a resort hotel was not within the scope of this grant of power. The court held that the corporate powers clause was sufficiently broad to encompass operation of a resort hotel located near one of its terminals. As a result, the action was not ultra vires, and the corporation was liable for breaching the lease.
The ultra vires doctrine frequently had inefficient (not to mention harsh and unfair) results. If one of the parties to an ultra vires contract later regretted its bargain, it could breach the agreement with impunity, even if the transaction had been completed. The doctrine was even less attractive in tort cases, where it was sometimes invoked as a defense against tort suits brought by those injured by corporate agents committing an ultra vires act.
To avoid such outcomes, courts began eviscerating the doctrine. Some courts limited the doctrine’s impact by broadly construing the corporation’s purpose and powers clause to encompass the transaction in question.[28] Other courts enforced completed transactions by invoking such equitable doctrines as estoppel, quasi-contract, and waiver.
Moving the story forward towards the present, recall that state corporation laws gradually became more liberal, making the incorporation process much simpler. At about the same time, states began abandoning any effort to regulate the substantive conduct of corporations through the incorporation process. Several statutory reforms had a direct impact on the importance of the ultra vires doctrine, reducing it to its present non-issue status.
First, states have abandoned the effort to limit corporate powers and purposes. MBCA § 3.01(a) provides that every corporation shall have the purpose of engaging in any lawful business,[29] unless the articles set forth a more limited purpose. Section 3.02 says that every corporation shall have “the same powers as an individual to do all things necessary or convenient to carry out its business and affairs,” including a list of specified powers. Section 2.02(b)(2) makes optional the inclusion of a purpose clause in the articles. Taken together, these provisions make it essentially impossible for an act to be ultra vires: if the corporation can pursue any lawful purpose and use any lawful power in so doing, no action can be said to be ultra vires, because no corporate act can involve an impermissible power or purpose.[30]
Second, states have enacted statutory limits on standing to challenge ultra vires acts. It is difficult to imagine a situation in which a transaction planner would choose to put limits on a corporation’s purposes or powers in the articles of incorporation. But even if the articles include some such limitation, MBCA § 3.04(a) provides that the validity of a corporation’s act may not be challenged on the ground that it lacks the power to so act. In one fell swoop, this provision de facto eliminates the ultra vires doctrine. Because the validity of the act cannot be challenged, neither the corporation nor the other party to the transaction can raise the ultra vires doctrine as a defense to a breach of contract or tort claim.
MBCA § 3.04(b) contains three limited exceptions under which the ultra vires doctrine has some lingering validity: (1) a shareholder may bring suit to enjoin an ultra vires act; (2) the corporation may bring suit against an officer or director who commits an ultra vires act; and (3) the state may bring an involuntary dissolution suit against the corporation for abusing its authority. An interesting example of these provisions at work is provided by Inter-Continental Corp. v. Moody.[31] The corporation guaranteed a note given by its president to a lender. When the lender brought suit against the corporation to enforce the guarantee, the corporation raised the ultra vires defense. In addition, a shareholder intervened to enjoin performance of the guarantee on ultra vires grounds. The court held that Texas’ ultra vires statute, comparable to MBCA § 3.04, barred the corporation from raising the ultra vires defense even if the other party knew the transaction exceeded the corporation’s powers or purposes. The court further held that the statute permits a shareholder to intervene to enjoin the contract, however, even if the corporation solicited him to do so. Only if the shareholder was acting as the corporation’s agent would the shareholder be denied standing. Interestingly, the shareholder would not become the corporation’s agent even where the corporation notified the shareholder of the suit and suggested the shareholder intervene. If the corporation paid the shareholder’s attorney’s fees, however, an agency could be found. Perhaps surprisingly, uncompensated collusion between the defendant corporation and one of its shareholders thus seems possible.
As I understand it, the suit against the ASA is basically making a modern version of the ultra vires claim:
“This appears to be a clear example of a small group misappropriating assets raised for an agreed upon purpose and illegally using the organization to advance a completely separate and personal agenda,” stated University of California Berkeley Law School Professor Steven Davidoff Solomon, a renowned corporate law expert who served as an expert adviser to the litigation group representing the plaintiffs.
Northwestern Pritzker Law School Professor Eugene Kontorovich, a recognized expert in constitutional and international law who also served as an expert adviser to the litigation group added, “To be clear, this is not about silencing or stopping criticism of Israel, or in any way discouraging it. It is about non-profit corporations abiding by their own rules.”
Would such a suit be barred if this were a non-profit corporation? The Model Nonprofit Corporation Act (MNCA) (which I assume ASA is) has "provisions very closely mirroring the Model Business Corporation Act, including its ultra vires provision, which is essentially identical to its model." 7A Fletcher Cyc. Corp. § 3439.30.
As we have seen the MBCA allows "a shareholder [to] bring suit to enjoin an ultra vires act." A non-profit's member would similarly have standing to do under the MNCA. See, e.g., Sawko v. Dominion Plaza One Condo. Ass'n No. 1-A, 578 N.E.2d 621, 624 (Ill. App. Ct. 1991) (holding that a member of a nonprofit condominium association has standing to challenge an association's action as ultra vires).
Turning to the specific issue in the ASA suit, one authority explains that "nonprofit directors and officers have been found also to owe a duty to the purposes set forth in the corporate charter or by the terms of the initial trust indenture funding the organization. ... It is because of this mission-orientation that the antiquated ultra vires doctrine, practically defunct for purposes of business corporate law, is alive and well in the nonprofit context."
It is true that many cases involving ultra vires acts by nonprofits seem to involve improper expenditures of funds, but I see nothing in the law that limits the doctrine to cases involving expenditures. In addition, the complaint alleges some expenditure of funds "to advocate, conduct a vote on, and declare enacted, the Boycott Resolution"; para. 83. Although that expenditure seems ancillary to the thrust of the complaint, it helps advance their ultra vires claim by showing that the organization wasted its assets.
If the plaintiffs are correct in their argument about the organizations purposes--and it certainly seems a plausible argument--they therefore should have a good claim. As Eugene Kontorovich explained in a WaPo article:
... most scholarly associations’ constitutions dedicate them solely to advancing knowledge and research in their field. Such purposes not only fail to authorize boycotts but also exclude them:
A boycott by definition restricts study and research: The explanatory material attached to the AAA resolution, for example, says it would restrict the organization from sharing scholarly journals with Israeli universities.
Saying that organizations cannot act beyond the purposes specified in their charters is no mere legal nitpicking. The charter is an explicit contract with members, declaring that their money will be dedicated to agreed-upon goals and that their group will not turn into a motorcycle club or a political party.
Although some major academic organizations have thousands of members, they are generally run by a small staff and a board that effectively controls the agenda. The purposes named in their charters are meant to protect the overwhelming mass of members who cannot get involved in the minutiae of the organization’s affairs, to ensure that the organization cannot be hijacked for a fundamentally foreign purpose, and to protect minority members. The charter is the minimal assurance that while an organization may act unwisely, it will be at least in the category of fieldwork, education and research, not beekeeping or boycotts.
Whether a particular boycott resolution is ultra vires depends on both the group’s constitution and the wording of the resolution itself. Some BDS resolutions are simply non-operative denunciations of Israel; they probably do not constitute a corporate act. On the other hand, decisions like the one being considered by the American Anthropological Association (or the one passed last year by the American Studies Association), which would exclude Israeli entities, have real bite, and thus fall outside of the group’s “Statement of Purpose.”
A WSJ op-ed co-authored by Kontorovich and Steven Davidoff Solomon further explains that:
Saying that organizations cannot act beyond the purposes specified in their charters is no mere legal nitpicking. The charter is an explicit contract with members, declaring that their money will be dedicated to agreed-upon goals and that their group will not turn into a motorcycle club or a political party.
Although some major academic organizations have thousands of members, they are generally run by a small staff and a board that effectively controls the agenda. The purposes named in their charters are meant to protect the overwhelming mass of members who cannot get involved in the minutiae of the organization’s affairs, to ensure that the organization cannot be hijacked for a fundamentally foreign purpose, and to protect minority members. The charter is the minimal assurance that while an organization may act unwisely, it will be at least in the category of fieldwork, education and research, not beekeeping or boycotts.
Makes sense to me.
For a contrary view, however, see this post by Steve Lubet. For a ton of background information, see this post by Walter Jacobson. For a letter from two of the plaintiffs explaining why they filed suit, see this post.
[28] See, e.g., Jacksonville M., P. Ry. & Nav. Co. v. Hooper, 160 U.S. 514 (1896).
[29] The MBCA position that a corporation may engage in any lawful activity and exercise any lawful power implicitly suggests that a corporation exceeds its lawful powers, and thus commits an ultra vires act, by engaging in illegal conduct. Although courts sometimes refer to illegal corporate acts as ultra vires, corporate law scholars disfavor this usage. As with natural persons, corporations have the power to break the law, but not the right to do so.
[30]DGCL § 102(a)(3) retains a requirement that the articles include a purpose clause, but allows the drafter simply to state that the corporation’s purpose is to engage in any lawful business. The substantive effect is the same as the MBCA approach.
