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State Foreign Qualification; Pitfalls for the Unwary


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The webinar will bring early access to Qualifying to Do Business in Another State: The CSC® 50-State Guide to Qualification, while bringing the handbook to life. Attendees will have the opportunity to ask our presenters about formations as they review qualification guidelines, their impact on your business, and what you can do to protect yourself. We’ll also touch on some common CSC customer qualification questions.

Presented by: LexisNexis®, Corporation Service Company®, and Akerman LLP.

Published in: Law
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State Foreign Qualification; Pitfalls for the Unwary

  1. 1. State Foreign Qualification; Pitfalls for the Unwary May 24, 2017, 2 – 3 PM
  2. 2. What is State Foreign Qualification? • Doing business in a state other than the state of formation. • Defined by state statute (i.e. you must review each particular state statute). • Typically defined in the negative (i.e. what is not deemed doing business in the particular state) – leads to confusion. • Moreover, there are no uniform standards across state lines when you have to qualify. Proprietary and Confidential 2
  3. 3. State Qualification • Often overlooked, but not without the potential for material adverse consequences… • But what are these consequences? Proprietary and Confidential 3
  4. 4. Yikes…I Forgot to Qualify… • Potential for significant monetary penalties and fines depending upon the state Proprietary and Confidential 4
  5. 5. Example: A client should have qualified in 2000, but qualified in 2015. Incurred the following fees: • Texas – $9,815 (compared to $600 in 2000) • Illinois – $21,522.07 (compared to $1,814.27 in 2000) • Florida – $1,920 (compared to $70 in 2000) • Georgia – $825 (compared to $225 in 2000) Proprietary and Confidential 5
  6. 6. Potentially a Call The Carrier Moment… • Besides the monetary fees, potential issues regarding: • Legal opinions issued • Reps and warranties in M&A transactions • Other licensing requirements • Outstanding contracts (including enforceability of certain contracts) • State taxes (including back taxes and penalties) • Financial statement impact • Litigation Proprietary and Confidential 6
  7. 7. Personal Liability? • Some state statutes impose fines on individuals (officers, directors, and agents) acting for non-complying foreign corporations • CA, DE, LA, MD, ND, OH, OK, UT, VA, and WA Proprietary and Confidential 7
  8. 8. Enforceability of Contracts? • If unqualified entity is denied access to state court, may not be able to enforce contracts made in that state. • But, may be enforceable if the contract was entered into outside of that state. • Ultimately, depends on the nexus with the state in question. • Contract language may not be sufficient to counteract nexus with the state in which you are not qualified. Proprietary and Confidential 8
  9. 9. Defending lawsuits? • Generally permitted if not qualified • However, bringing a counterclaim may be barred • VT Statute (11A, Sec. 15.02) • Most states – grey area regarding counterclaims Proprietary and Confidential 9
  10. 10. So Do We Have to Qualify? • Remember the definition is worded in the negative Proprietary and Confidential 10
  11. 11. What Does Not Constitute Doing Business • Bank accounts (maybe) • Meetings of shareholders and directors • Defending litigation (most states cannot maintain an action in state court) • Maintain depositories with respect to its securities • Owning real property • Engaging independent contractors to sell products • Interstate commerce Proprietary and Confidential 11
  12. 12. BUT what is doing business? • Generally… you have to qualify to do business if you: o Have a physical presence o Have employees o Engage in intrastate commerce • Note, doing business for purposes of foreign qualification may be different from doing business for taxation or jurisdictional purposes o Genuine Parts Co. v Cepec (Del. April 18, 2016) Proprietary and Confidential 12
  13. 13. Interstate vs. Intrastate • Interstate – generally do not have to qualify • Intrastate – generally have to qualify Proprietary and Confidential 13
  14. 14. Interstate • Activities generally protected under commerce clause of the U.S. constitution • What is the nexus with the particular state? Proprietary and Confidential 14
  15. 15. Intrastate • Generally, regular, systematic, extensive, and continuous • In other words, at least part of the business is conducted entirely within the particular state (i.e. it is of a local nature) • Exceptions – sell through independent contractors to customers in that state; mail order, or telephone sales; national advertising campaign, maintain website (provided you have no other presence in that state) Proprietary and Confidential 15
  16. 16. Facts and Circumstances Analysis • Easy to reach “wrong” conclusion • What happens if you incorrectly characterize someone as an independent contractor rather than as an employee? Proprietary and Confidential 16
  17. 17. In determining whether you have to qualify, courts may look to state licensing or other state regulatory requirements. • Be proactive to determine requirements • Must also be proactive in determining the consequences of qualifying vs. not qualifying Proprietary and Confidential 17
  18. 18. Unusual Situations • There are five states or jurisdictions where a bank account may require you to qualify to do business: o Alabama o Delaware o D.C. o Ohio o Oklahoma Proprietary and Confidential 18
  19. 19. Certain states require unqualified entities to register in the state before engaging in interstate commerce in that state. • Maryland, New Jersey, Minnesota • Bottom Line: You have to check each state Proprietary and Confidential 19
  20. 20. Qualification v. Jurisdiction • Qualification does not automatically subject a corporation to jurisdiction in every state in which it does business (Genuine Parts Co. v Cepec, No. 528, 2015, 137 A.3d 123 2016 (Del. Supr. April 18, 2016); Magna Powertrain De Mexico S.A. De C.V. v Momentive Performance Materials USA LLC , 192 F. Supp. 3d 834 (ED Michigan 2016) o No longer sue foreign corporations in Delaware for claims that are unrelated to corporation’s activities in Delaware Proprietary and Confidential 20
  21. 21. Questions?