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1. Revocation of Qualification by State subsequent qualification, even during a lawsuit. Nevertheless, various penal- 209 ties may still be imposed on the corporation. G. Effects of Changes to Domestic Corporation just as a domestic corporation must inform the secretary of state of a change of corporate name or merger, so also must a corporation qualified to transact business in a foreign state inform that state of such changes. Generally, when a corporation amends its articles of incorporation in its state of incorporation it must also file a certified copy of the amended articles ( or amend its certificate of authority to transact business) in any state in which it transacts business as a foreign corporation (see Figure 13-2). Merely changing a registered agent or registered office is less complicated, and a more simplified form is used. H. Withdrawal of Foreign Qualification When a corporation ceases doing business in a state in which it previously qualified, it should file an application for withdrawal. This will ensure that the corporation is Withdrawal no longer subject to service of process, taxes, or annual reporting requirements in Process of canceling the state. authority to do business in a The application for withdrawal form is usually provided by the secretary of foreign state state. (See Figure 13-2 for a sample form for application for withdrawal.) The corporation must provide an address so that the secretary of state can forward any process for any action later filed against the corporation. After examining the application, the secretary of state will issue a certificate of withdrawal. The corporation is then no longer authorized to transact business in the state. I. Revocation of Qualification by State In some instances, a state in which a foreign corporation has qualified to transact business may revoke that authority. Typically, revocation is triggered by some Revocation unlawful act of the corporation or its failure to comply with the state's laws. Action by a state withdrawing a foreign Common reasons for revocation are failure to file annual reports, failure to pay corporation's authority to taxes, and failure to have a registered agent. do business in that state Most states provide a delinquency notice to the corporation before revoking its authority to transact business in the state. The corporation is given a period within which to cure its default. If it does not do so, the secretary of state will revoke the corporation's authority to conduct business in the state. In many states, a corporation may apply to be reinstated, especially if the corporation's authority to usact business was revoked for an administrative reason such as failing to file reports or pay taxes. Reinstatement is discussed further in Chapter Fourteen.Chapter 13. Qualification of Foreign Corporations 206 Identities of Directors and Officers. The names and usual business addresses of the corporation's current directors and officers must be provided so that potential investors are able to investigate the back- grounds of the managers of the corporation. Other states may impose additional requirements, such as requiring a descrip tion of the business the foreign corporation proposes doing in the state or a de- scription of its stock. Certificate of good The application must usually be accompanied by a certificate of good standing standing (sometimes called a certificate of existence) issued by the secretary of Document issued by state of state of the state of incorporation. This is obtained from the state of incor- incorporation verifying corporation is in compliance poration upon request and payment of a fee. The secretary of state of the with state requirements state of incorporation will check various state records to ensure the corpo- (also called certificate of ration is in good standing, meaning that it has paid its taxes and has complied cuistence) with any reporting or other requirements. The certificate is presented to the foreign state as a method of assuring that state that the foreign corporation will comply with the foreign state's laws as well. (See Figure 13-1 for a sample application for certificate of authority to transact business in Delaware.) Upon its filing with the secretary of state, the application will be reviewed to ensure it complies with the statutory requirements. The secretary of state will then issue a certificate of authority. The foreign corporation may then transact business in the state. E. Effects of Qualifying There are four primary effects on foreign corporations that have qualified to do business in another state. 1. The foreign corporation will be subject to any restrictions imposed on domestic corporations. For example, a corporation formed in New Jersey and that operates a gambling casino there may be precluded from operating a casino in Ohio if Ohio does not permit its own domestic corporations to operate for gambling purposes. The internal affairs of the qualifying corporation (such as amending its bylaws, giving notice of meetings, and other similar matters) are governed by its state of incor- poration. MBCA $ 15.05(b) specifically provides that a qualified foreign corporation has the same but no greater privileges as a domestic corpo- ration in the state and is subject to the same duties and restrictions as a domestic corporation formed in the state. 2. The foreign corporation will be subject to service of process in the new state. Service of process on the registered agent in the foreign state is as effective as service of process on the corporation's agent in its own state of incorporation. 3. The corporation must pay various fees and taxes to the state that has permitted it to transact business within its borders. These fees and taxes vary from state to state. Some states impose an an an annual license ofChapter 13. Qualification of Foreign Corporations 204 doing business in states other than in its state of incorporation is a foreign Foreign corporation Corporation doing business corporation in those states. in a state other than the The qualification requirement imposed on foreign corporations provides a state in which it was formed way for states to protect their citizens. Requiring qualification ensures that citizens have some basic information about the corporation and are able to sue the cor- poration and serve its registered agent in the state. The decision to conduct business in other states begins with the board of directors. Upon seeing a need for expansion into other states, the board will pass a resolution (or act by written consent) authorizing the officers to take needed action so the corporation may transact business elsewhere. One hopes that the decision to expand into other jurisdictions has been carefully considered, and the corporation's name has been registered in the foreign state so it is available to the corporation for use (see Chapter Eight). Remember also that a corporation can change its state of incorporation by a process called domestication (see Chapter Twelve). C. Transacting Business Transacting business Generally, most state statutes provide that a foreign corporation may not transact Generally, statutory list of business within the state until it obtains a certificate of authority from the secretary activities in which a corporation may engage in a of state. The critical question (and one that has resulted in much litigation ), is what foreign state without being particular activities are considered "transacting business" such that the qualifica required to qualify to do tion is required? What if an Ohio corporation wishes to hold its annual share- business therein holders' meeting in Hawaii? What if an Iowa corporation wishes to open a bank account in Kansas? Must the corporations qualify in the foreign states to engage in these activities? To reduce litigation over these issues, many states have enacted statutes enu- merating certain activities that may be engaged in by a foreign corporation without having to qualify in the state. MBCA $ 15.01(b) provides that the following ac- tivities do not constitute transacting business: 1. Maintaining, defending, or settling any proceeding; 2. Holding meetings of the board of directors or shareholders or carrying on other activities concerning internal corporate affairs; 3. Maintaining bank accounts; 4. Maintaining offices for the transfer, exchange, and registration of the corporation's stocks and bonds; 5. Selling through independent contractors; 6. Soliciting or obtaining orders (whether by mail or through agents or employees) if the orders require acceptance outside the state before they become contracts; 7. Creating or acquiring indebtedness, mortgages, and security interests in real or personal property; 8. Securing or collecting debts or enforcing mortgages and security inter ests in property securing the debts; 9. Owning, without more, real or personal property;208 Chapter 13. Qualification of Foreign Corporations franchise fee for the privilege of doing business in the state. Similarly foreign corporations will be required to pay any other taxes imposed on domestic corporations in the state, such as income taxes (although some states, such as Delaware, impose income taxes only on business actually conducted in the state). 4. The corporation must usually file annual reports with the state. The annual report is generally a fairly simple form that provides basic infor mation about the corporation. (Annual reports are discussed in Cha Eight.) Most states now require that annual reports be filed electronically with the state. PRACTICE TIP For each corporate client, maintain a master list indicating its state of incorporation and then each of the states in which it is qualified to transact business. The list should specify the agent for service of process in each state and each state's requirements and due date for annual reports. Send reminders to clients about 45 to 60 days before each annual report is due. Periodically revisit the list with the client to make sure that the client withdraws its qualification from any state in which it has ceased to do business. F. Effects of Failure to Qualify Although they vary from state to state, sanctions are imposed on corporations that have transacted business in a foreign jurisdiction without first having qualified to do so. MBCA $ 15.02 provides the following penalties for transacting business in a foreign jurisdiction without authority: 1. The foreign corporation may not maintain a proceeding in any court in the foreign state until it obtains a certificate of authority; and 2. Monetary penalties will be imposed for each day the corporation was not properly qualified (not to exceed a stated amount). Some states adopt a harsher approach and may enjoin the foreign corporation from conducting any further business or may impose significant fines, The more permissive approach and that adopted by the MBCA is to refuse to allow an unqualified corporation to maintain or continue legal action. It may, however, commence an action or defend itself in any legal action, and its failure to qualify will not impair the validity of its acts of the contracts it entered into during the period of nonqualification, Most states allow a corporation that has failed to qualify to cure the Ture the defect by212 Chapter 13. Qualification of Foreign Corporations Key Features of Foreign Qualification Corporations that intend to transact business in other states must "qual- ify" or be approved by the foreign jurisdiction prior to commencing business in those states. Not all activities are considered to be "transacting business" such that a corporation must qualify in the foreign state. Some activities are consid ered relatively peripheral or isolated and thus do not require qualification. To qualify, the corporation must complete the foreign state's form and pay a filing fee. The corporation must have an agent for service of process in the foreign state. Qualification will result in the corporation being amenable to service of process in the foreign state and will require the corporation to file annual reports and pay various taxes and fees to the foreign jurisdiction. If a corporation transacts business without qualifying, it is usually for- bidden from maintaining an action in that state's courts and may be subject to monetary fines. When a corporation makes changes in its state of incorporation or to its articles of incorporation, it should conduct research to determine if for- eignjurisdictions in which it operates must be informed of those changes. Once a corporation ceases doing business in the foreign jurisdiction, it should withdraw its qualification. Internet Resources State statutes: www.law.cornell.edu www.justia.com MBCA: http://apps.americanbar.org/dch/committee. cfm?com=CL270000 General information: http://lp.findlaw.com Secretaries of state: www.nass.org (for links to secretaries of state and downloadable forms for applications to qualify to transact business) Corporation http://corp.delaware.gov/agents/agts.shtml service companies: Delaware) www.sos.ca.gov/business/private_service_ companies.htm (California)Case Illustration: Activities That Constitute Doing Business J. Role of Paralegal Almost all of the activities relating to qualifying a corporation to transact business in a foreign jurisdiction can be performed by paralegals, including the following: . Applying for name registration; . Researching state statutes to determine what activities constitute "trans- acting business" and the procedures for qualifying; . Making arrangements for someone to serve as an agent for service of process for the corporation in the foreign state (see Chapter Eight for list of agents); Obtaining a certificate of good standing from the state of incorporation; . Preparing and filing the application for authority to transact business in the foreign state (see Figure 13-1); Calendaring the dates for annual reports and tax payments; and Preparing the application for withdrawal when a corporation ceases to do business in a foreign jurisdiction (see Figure 13-2), Case Illustration Activities That Constitute Doing Business Case: Highfill, Inc. v. Bruce & Iris, Inc., 855 N.Y.S.2d 635 (App. Div. 2008) Facts: Plaintiff, a Louisiana corporation that had not qualified to transact business in New York, brought suit against a New York corporation for breach of contract in New York. The contract arose out of plaintiff's agreement to conduct a "going out of business" sale for the defendant. The court dismissed the plaintiff's complaint because the plaintiff had not qualified to do business in New York. Holding: Affirmed. The business activities engaged in in New York by the plaintiff were not casual or occasional but were systematic and regular as well as essential to the plaintiff's business. The plaintiff's regional vice president for the area regularly and continuously solicited business in New York, Plaintiff also retained control over sales it managed and had conducted more than $6.5 million in sales. Because the plaintiff was doing business in New York without having obtained authorization to do so, it was barred from maintaining an action in New York,Corporations D. Procedures in Qualification 205 is a foreign 10. Conducting an isolated transaction that is completed within 30 days and that is not one in the course of repeated transactions of a like nature; and ns provides a 11. Transacting business in interstate commerce. that citizens sue the cor- This list is not exhaustive: Other activities may also be considered as not the board of "transacting business. " Most states have similar lists, but others provide little state ard will pass a utory guidance. In such instances, case law within the state will need to be analyzed take needed to determine what sorts of activities have been considered in the past to be "trans- opes that the acting business." Generally, engaging in repeated, systematic, and continuing busi- sidered, and ness in the state will require qualification. Because qualifying is a rather it is available straightforward procedure, any doubts regarding the issue should be resolved in favor of qualification. Qualification will, however, subject the corporation to service oration by a of process in that state as well as to various reporting requirements, fees, and taxes. D. Procedures in Qualification All states have statutes setting forth the requirements for foreign corporations for not transact qualifying to transact business. Almost all states have forms available from the Qualifying to transact office of the secretary of state. MBCA $ 15.03 requires the following information business the secretary Process of secking tion), is what in the qualification application: permission from foreign the qualifica jurisdiction to do business . Name. The name of the foreign corporation must comply with the stat- nnual share- therein utes of the state in which it seeks to qualify. Thus, it may need to include a open a bank corporate signal such as "Inc." or "Corp." Moreover, the name cannot be to engage in the same as or confusingly similar to that of a domestic corporation in the state or another foreign corporation already authorized to do business in statutes enu- the state. tion without State of Incorporation. Identification of the state under whose law the following ac- foreign corporation is incorporated is necessary so that consumers and potential investors are able to conduct an investigation of the foreign corporation. Date of Incorporation and Duration. The application must include 's or carrying both the date of incorporation and the period of duration for the corporation. Principal Address and Agent. The application must provide the street ration of the address of the foreign corporation's principal office and its registered office in the state in which it is qualifying as well as identifying a registered agent at that office. A qualified foreign corporation must maintain a registered gh agents or office in each state in which it transacts business. The registered agent, e before they whose function is to receive service of process, may be an individual who resides in the state or a corporation. Many statutes provide that if there is y interests in no registered agent, the secretary of state will receive service of process on behalf of the foreign corporation. Many corporation service companies ecurity inter- provide their services to corporations to act as registered agents. For exam ple, CT Corporation serves as the registered agent for more than 250,000 corporations. A list of service companies is provided in Chapter Eight.13 Qualification of Foreign Corporations A. Introduction Corporations may be formed in one state and yet do business in others. You have seen that many large corporations have elected to incorporate in Delaware due to is moderate fees and taxes, extensive case law, and permissive statutes. Most of these corporations transact business in other states. For a foreign corporation to Imfully conduct business in a state other than its state of incorporation, it must "qualify" or be authorized to do business there. In general, most states require that the foreign corporation file an application to transact business, appoint an agent for service of process, and pay the appropriate filing fees and taxes. Failure to qualify may result in fines being imposed on the corporation or a refusal to allow the corporation to maintain a legal action in that state. When the corporation ceases to conduct business in a state, it should formally withdraw from doing business as a foreign corporation. B. Basis for Qualification corporation incorporated in a state is a domestic corporation in that state. Domestic corporation nition of corporate status is granted only by each state's secretary Corporation doing business in the state in which it was of state, a corporation has no has no legal existence beyond the borders of the state in formed Which it is incorporated . To conduct nduct business in other states, the corporation must be granted authority; it must qualify to do business in those states. A corporation 203