Post on 16-Jul-2020
transcript
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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.