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Presented by John Kauffman

May 18, 2016 • Anchorage

CORPORATE COUNSEL SECTION MEETING:

REQUIREMENT TO QUALIFY AS A FOREIGN

ENTITY

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REQUIREMENT TO QUALIFY AS A FOREIGN ENTITY

• Main take aways:

– [Not] Sweet Home Alabama

– Every state is different (often facts and circumstances test)

– When in doubt, qualify

• This is different from:

– Whether or not an entity is subject to taxation in a state (based on

whether there is “nexus”)

– Whether subject to service of process/jurisdiction (civil procedure)

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REQUIREMENT TO QUALIFY AS A FOREIGN ENTITY

Every state has a statute (most either Model Business Corporation Act or

Revised MBCA). Note: Guam looks to U.S. court decisions (especially CA)

on what requires qualification. Canadian provinces also require

registration by foreign corporations doing business in the province.

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REQUIREMENT TO QUALIFY AS A FOREIGN ENTITY

• Penalties for Failure to Qualify (if required)

– May be denied access to state courts (as plaintiff; you can defend even if

not qualified)

• Note: not required to qualify just to bring suit

• It is an affirmative defense

• Can usually just qualify before bringing suit or even qualify during suit

if required.

– But - Alabama: if not qualified when entering into a contract,

cannot later cure by qualifying.

– Failure to qualify does not impair the validity of corporate acts or contracts

– Fines for failure to qualify: some states (incl. WA, DE, CA) don’t limit the

fines to the entity, but include those acting on its behalf (officers, directors,

agents). May require some knowledge/knowing violation.

– Fines on the entity vary (AK - up to $10,000/year; CA is $20/day); DE is on a

per-transaction basis.

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REQUIREMENT TO QUALIFY AS A FOREIGN ENTITY

• What does not constitute doing business: Every state has a list of

things that specifically do not (on their own) constitute doing

business.

– Maintaining or defending a lawsuit

– Holding director or shareholder (owner) meetings

– Maintaining bank accounts

– Having an office (without more)

– Sales through independent contractors

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REQUIREMENT TO QUALIFY AS A FOREIGN ENTITY

• What does not constitute doing business: Every state has a list of

things that specifically do not (on their own) constitute doing business

(cont.)

– Soliciting orders which require acceptance outside of the state

– Creating debt

– Collecting debts or rights in collateral

– Transacting business in interstate commerce:

• Note: just because you have numerous contracts with the

federal government does not require qualification in DC

– Isolated transaction completed short period of time.

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REQUIREMENT TO QUALIFY AS A FOREIGN ENTITY

• Holding interests in domestic businesses

– Franchises/distributorships may require (depends on level of

control)

– Holding company may have to qualify (for example in Washington) -

most likely where it is only formed to hold stock of the domestic

entity

– Alabama: must qualify if you are purchasing stock of Ala corp. or

can’t enforce purchase agreement (other states don’t agree)

– Foreign parent not required to qualify solely because it owns

domestic entity.

– Partners (in general partnership) and joint venturers may all be

required to qualify where entity is doing business unless they can

fit in the isolated exemption.

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REQUIREMENT TO QUALIFY AS A FOREIGN ENTITY

• Construction and Contracting:

– Projects in a state are generally held to be doing business (even if

only one project). This is true even if the contract is with the

federal government (unless the work is in a federal area, then it

depends on whether the state has ceded its authority to require

such qualification)

– Subcontracting: prime needs to qualify even if all work is

subcontracted

– Simply submitting a bid (prior to award) usually does not

constitute doing business, except in Alabama.

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REQUIREMENT TO QUALIFY AS A FOREIGN ENTITY

• Securing or collecting debts (or foreclosing on in-state collateral)

usually does not require qualification.

• Pro sports teams do need to qualify in states where they regularly

play.

• Many states have exceptions for the production of motion pictures -

that they do not constitute doing business (incentive programs).

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REQUIREMENT TO QUALIFY AS A FOREIGN ENTITY

• Leases

– Personal Property: don’t need to qualify to be the lessor of

personal property.

– Real Property: ownership or leasing of real property usually does

not require qualification unless that is your business.

– Usually do need to qualify if purchasing an oil and gas lease.

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REQUIREMENT TO QUALIFY AS A FOREIGN ENTITY

• Manufacturing will usually require qualification.

• Purchasing goods in a state may require qualification unless isolated

or purely interstate.

• Providing services will usually require qualification.

• Installation of machinery: qualification required unless you were the

(out of state) seller and the installation was very technical.

• Transport: qualification not required in only interstate, but required if

also engaged in intrastate transportation.

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REQUIREMENT TO QUALIFY AS A FOREIGN ENTITY

• Sending raw materials into a state for processing and return may

constitute doing business.

• Property Ownership: simply owning real or personal property does not

require qualification

• Sale of Stock: usually don’t have to qualify to sell your sock in a state

except in Alabama.

• Business over the internet: unclear. Not exempt just because it is over

the internet.