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Doing Business Outside Your State: Foreign Qualification

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What does it mean to qualify to do business in a foreign state, and is it something your company needs to do? What are the legal ramifications if you don’t qualify? If you’re a corporate attorney, are you prepared to advise clients on the matter? Not all business activities constitute you doing business in a foreign state, but there are times that failure to qualify can leave your company facing negative consequences.

Join CSC for a complimentary CLE webinar presented by Michael P. Maxwell and Ciara E. Sprance of Potter Anderson & Corroon LLP, on state foreign qualifications, recent case law, and critical principles of conducting business outside your state.

Webinar transcript

Disclaimer: Please be advised that this recorded webinar has been edited from its original format, which may have included a product demo. To set up a live demo or to request more information, please complete the form to the right. Or if you are currently not on CSC Global, there is a link to the website in the description of this video. Thank you.

Caitlin: Hello, everyone, and welcome to today's webinar, "Doing Business Outside Your State: Foreign Qualification." My name is Caitlin Alaburda, and I will be your moderator today. Joining us today are guest speakers Mike Maxwell and Ciara Sprance from Potter Anderson & Corroon, and Miranda Groom from CSC. I would like to welcome Mike, Ciara, and Miranda and turn things over to them to get us started with today's presentation.

Mike: Thank you, Caitlin. So good morning, everyone. My name is Mike Maxwell. As mentioned, I'm a partner with the Wilmington, Delaware law firm of Potter Anderson & Corroon. Joining me today is my Potter Anderson colleague Ciara Sprance, and Miranda Groom from CSC is also presenting with us.

Today we're going to be discussing foreign qualification of business entities. And so as we progress with the discussion, we're going to unpack some basic terminology, including words I just used foreign and qualification. So the agenda items for today's presentation are up on the screen right now. We're going to cover an introduction. We're then going to talk about corporate activities that generally do not require qualification, corporate activities that generally do require qualification. We'll talk about some cases that are relevant, including a recent Supreme Court's case. We'll also discuss how corporations qualify, cure, and terminate qualification, and then some consequences for failing to qualify and other regulations of foreign entities to keep in mind. And finally, we'll have a conclusion and a Q&A session.

With that, as I mentioned, we'll use some examples from Delaware law to illustrate general concepts that may apply across jurisdictions. But bear in mind that, as noted here on the slide, this presentation is intended to provide an overview of the foreign qualification process, including when to qualify, why qualification is necessary, how to qualify, and what happens if an entity should be qualified but is not. It's not related to any specific state. Each situation should be evaluated based on the particular facts and circumstances of the entity's business and the applicable state laws.

So one thing to keep in mind in this regard is that Ciara and I are both Delaware attorneys, and so not surprisingly our experience generally involves and focuses on Delaware law issues. So that being the case, we're going to use some examples from Delaware law to illustrate general concepts that may apply across jurisdictions. But bear in mind, as we noted, the presentation is related to the general overview.

So in other words, each state is going to have its own rules when it comes to foreign qualification. And needless to say, it's always important for us to check with the relevant statutes in any given state. Fortunately, those laws are conveniently described in the Qualification Handbook published by CSC. So if you're not familiar with the handbook or don't have a copy, you're missing out on a valuable resource and we would recommend that you look for that resource. And if you have questions about how to obtain one, someone from CSC is certainly going to be happy to provide answers.

So with that as the preface, the first question we're going to consider this morning is why attorneys, paralegals, and business decision-makers need to be aware of qualifying to do business in a foreign jurisdiction. So most of us understand that a company, whether it's a corporation, an LLC, a partnership, or some other form of business organization, in many if not most cases is a legal entity, typically created under the laws of one particular state. That's what we'll call its home state. This is the prototype company on which we'll concentrate today.

We're presupposing that an entity is formed under the laws of a U.S. state. We're not addressing non-U.S. entities or entities existing under federal law, such as national banks. The company exists because the laws of its state of formation grant the privilege of formation and enable the entity to conduct business. So as long as the company is properly formed and conducts business wholly within its state of formation, the company should not be subject to regulation by other states.

In the modern economy, however, a company rarely limits its operations to its home state. So before a company conducts any business outside its state of formation, it should determine whether its proposed business activities will require the company to qualify under any foreign states laws. Now I said at the outset that we're going to have some basic terminology to unpack. So we're addressing business entity qualification in a foreign state.

Let's focus now on the last two words — "foreign" and "state." So foreign means other than the business entity's state of incorporation or formation. In other words, foreign means not the home state. And the term state, as used in today's discussion, means one of the 50 states. We're not covering non-U.S. law here. We're not covering municipal or county laws. So foreign state, as we use that term today, is going to refer just to the 49 states, other than the home state.

The qualification statutes stem from a variety of factors, which include among them each state's desire to subject companies conducting business within the state to the jurisdiction of that state's court system so that its courts can render valid judgments against the company in the event that a lawsuit is initiated against the company in that state. The assessment of foreign qualification requirements involves a 50 state analysis, and determination whether a company is doing business in a particular state requires reference to those varied state laws.

So in those laws, doing business is often defined in the negative. So it lists activities that alone are insufficient to require qualification in a foreign jurisdiction. These are termed as "exceptions to doing business." So examples of Delaware statutes include the Delaware General Corporation Law Section 373 and the Delaware Limited Liability Company Act Section 18-912. And we'll touch briefly on those provisions a little bit further along in the course of our discussion.

We should also note at this point that qualification laws are not exclusive. This means that other state laws may apply to foreign entities, such as licensure statutes, substantive regulatory schemes, and tax laws. So in this program we're not addressing all the aspects of an entity's conducting business outside of its home state, and specifically we not speaking to licensure, regulatory, or tax issues.

So a business entity is formed or incorporated or otherwise organized under the laws of a single state, in quite often the state of Delaware. As noted, many entities conduct business in multiple states, and regulation of business activity varies state by state. So if a business is formed in Delaware, for example, and wishes to do business in the state of Florida, it needs to qualify in the latter. So this is foreign qualification.

Qualification is the last basic term that we should define for purposes of our discussion today. In this context, qualification largely equates to registration. So we're talking about a formal step to place a company on the record. So again, while the term "foreign qualification" might evoke the notion of an entity from another country satisfying some substantive standards, really what we're referring to here has to do with a domestic company that's conducting business activity in multiple U.S. states and what are the steps required administerially to qualify for that and conduct that business in another state.

So all states have enacted laws requiring foreign entities doing business in a state to qualify. So Ciara is going to talk about why states want entities to qualify to do business. Ciara.

Ciara: Yeah. Thanks, Mike. I'm just going to go to the next slide. So there are many reasons why a state might want a so-called foreign company to register to do business, but we're going to highlight two of the big ones.

So usually the entity will have to file annual or semiannual reports and provide a registered agent for service of process within the state. So this has dual benefits for the state in terms of collecting filing fees and providing business to in-state registered agents. But perhaps the more important reason is that states also want to protect their citizens and their local businesses. By requiring a business to qualify to do business in a state, the state can gather information about the business, the nature of the business, and where it's being operated. It can also provide information for the state to be able to evaluate tax and other reporting or licensing requirements. In particular, the state may want to ensure that a foreign business is subject to the same sorts of licensing requirements that a local business is so as not to provide an unfair advantage to the out-of-state company. Mike.

Mike: Yeah. Thanks, Ciara. So those are all legitimate state interests, and there are others. But this doesn't mean that the states have unlimited authority when it comes to business regulation. The United States Constitution insulates interstate commerce from state regulation. States are entitled to regulate activity to the extent it occurs within state boundaries. That's the fundamental distinction that implicates state regulation.

Notably however, the federal government is not out there actively enforcing the Constitution. There's no dedicated constitutional enforcement department within the federal government. States, on the other hand, do actively enforce their business laws, and primarily reasons for that, generally speaking, come down to a state's interest in protecting its constituents and also generating revenue.

So Ciara, can you talk now about what types of activity will require a company to qualify to do business in a state?

Ciara: Oh, absolutely, Mike. So as you noted earlier, the first thing a company should really do is get a copy of CSC's handbook because it examines questions like these and offers case examples to help legal professionals begin to understand whether a particular company needs to qualify in a foreign state where it does business. And next, they should review the qualification statute in each applicable foreign state, which is also included in the CSC qualification book. So we can provide some general advice on these statutes today and we will, but truly it's not a substitute to reviewing the actual laws.

With that said, many qualification statutes define "doing business" in the negative, as Mike said earlier. And what that means is that by defining "doing business," the statutes provide a list of activities that by themselves are insufficient to require a company to qualify in that foreign jurisdiction. So as Mike also said, these listed activities are normally referred to as "exceptions to doing business."

Now, for example, Delaware defines which activities do not constitute doing business in each of its business entity statutes. If a company engages in any activities in Delaware that are not included in Delaware's exceptions to doing business, then it follows that the company must qualify to do business in Delaware or risk penalties for failing to do so.

Now the potential penalties for failing to qualify will be discussed later in our presentation, but, depending on the state, can include being barred from enforcing contracts or bringing a lawsuit in the state, possible monetary penalties, and in some states individual director liability. So it's very important to understand when you must be qualified.

We should note though that if a company engages in activities in a particular foreign state that are considered exceptions to doing business and as such does not have to qualify to do business in that state, that does not mean that the company is not subject to personal jurisdiction or taxation in the state, which is an important distinction. So a company may be subject to personal jurisdiction or taxation in a state by performing activities that are insufficient to cause the company to need to qualify to do business in that state. As such, it's important to keep in mind the other contexts in which a company's transaction of business has consequences, such as jurisdiction and taxation. And we'll talk about some case law developments here with respect to personal jurisdiction later in the webinar.

One last thing to note on this point, there may be exceptions to the qualification rules for particular types of businesses or industries. For example, in Delaware, there's an exception for out-of-state insurance companies. These are not required to qualify to do business in Delaware with the Secretary of State. However, they are subject to separate rules under other laws, like our state's Insurance Code. As such, it's important to keep in mind that regardless of whether a company is required to qualify to do business in a foreign state, there can be other licenses, permits, or regulatory issues that the company may need to comply with in order to do business in a particular state. Mike.

Mike: Great. Thanks, Ciara. So let's move into types of activities that may distinguish between a company being considered to do business in another state or not. So a company may be subject to negative consequences, including penalties, if it transacts business in a foreign state without first qualifying to do business there. But not all corporate activities require a company to qualify. So the question whether a company is doing business for qualification purposes is determined on a case-by-case and a state-by-state basis.

One generally recognized definition of doing business in a state is regular, repeated, and continuous business contacts of a local nature. Now, of course, different courts can and do interpret and apply this definition and other applicable definitions differently. So for that reason, a case-specific factual evaluation of the activities of the company must be made. So that's in each circumstance you need to look at the circumstances of your particular business, your particular situation to evaluate that. So it's a highly fact-intensive evaluation to determine whether you're doing business in another state.

So the first step in that assessment requires identifying the applicable jurisdiction and the relevant statutory provisions, including the exceptions. Now this initial step also requires an understanding of whether there are different statutes to consider depending on the type of entity at issue. So for example, here in Delaware, a foreign LLC is subject to a qualification statute that's different from the one applicable to a foreign corporation. So whether you're under the Delaware LLC Act or the Delaware General Corporation Law makes a difference. And those are the statutes that I mentioned earlier.

Once the governing statutes and exceptions have been identified, the next step is to review the relevant case law to understand how the courts have interpreted and applied the applicable provisions and the exceptions. So generally speaking, the judicial decisions involve one of two factual scenarios.

The most frequent scenario involves a plaintiff company trying to litigate in a foreign state in which it has not qualified to do business. In this scenario, the defendant typically attempts to prevent the suit by arguing that under applicable foreign state law, the plaintiff is barred from accessing the foreign state's courts because the plaintiff's activities constitute doing business there and the plaintiff has failed to qualify. So we'll talk a little bit more about that later and this sort of litigation bar as a consequence for non-qualification.

The next scenario that we frequently see involves the non-qualified company as the defendant attempting to avoid suit in a foreign state. So the defendant usually argues that it cannot be sued in the foreign state because it is not or was not doing business there.

So in both scenarios, the non-qualifying company attempts to demonstrate that its activities in the foreign state do not rise to the level of doing business in that state. So a court resolving this issue generally analyzes the relevant statutes to determine whether a company's activities require qualification. So accordingly, a client ordinarily will be served well by consulting experienced counsels and others who can help it navigate the "doing business" evaluation. And again, we'll put in another plug for the CSC book, which is also a helpful resource certainly as a starting point.

All right. So continuing on in our discussion. As previously mentioned, there are a number of corporate activities that typically do not require qualification. These are also known as exceptions to doing business or safe harbors. So Ciara, maybe you can spend a little time reviewing for us some of these exceptions to doing business that typically appear in state qualification statutes.

Ciara: Yeah, absolutely, Mike. So again, there are a number of general exceptions that are common across the state statutes, but keep in mind that these are being discussed today only in general terms. You have to look at the individual state statutes for specific exceptions.

So with that said, the first exception deals with litigation. So a typical provision would say that a company may "maintain, defend, or settle any proceeding" in the state without first qualifying to do business there. Thus, if a company's only activity in that state is to commence a lawsuit, then the company need not qualify to do business in that state.

The next exception is that a company may hold board of directors meetings and carry on certain internal corporate activities in a foreign state without again having to qualify to do business there. Additionally, merely maintaining a bank account in a foreign state typically doesn't require qualification to do business. Another common exception is that a company may maintain offices or agencies for the transfer of the company's own stock and securities without having to qualify to do business.

A company again is also not transacting business for qualification purposes if it sells goods in a foreign state through independent contractors, but only so long as the sales transactions maintain interstate characteristics. So interstate characteristics there.

Additionally, soliciting or obtaining orders through mail, employees, agents, or other channels in a given state will not trigger the qualification requirement provided that the orders require acceptance outside that state before they become contracts.

The next exception listed here typically is invoked by banks that create mortgages and then foreclose on the property secured by that mortgage. The states which have adopted these exceptions have agreed that creating mortgages and indebtedness and enforcing mortgages and security interests in properties securing such indebtedness do not require the bank or company seeking to collect on the debt to qualify in the jurisdiction where the property is located.

A somewhat related exception, you'll see here at 8, involves merely owning real or personal property in a foreign state. Although many states have adopted this exception, few state courts have interpreted it, which makes it a little difficult to draw general conclusions about the corporate activities that might follow under its protection. So just keep an eye on that one.

Moving on to exception 9, conducting an isolated transaction that is complete within 30 days and that is not one in the course of repeated transactions of a like nature generally does not constitute doing business for qualification purposes. Now it should be fairly simple to determine whether a company has complied with the statutory time limit in this exception, that 30 days. But it might be a much more complicated matter to determine whether a company's activities constitute an isolated transaction. The answer to that question can vary from state to state, and it will be important to analyze the case law of the particular state at issue to determine how that state's courts interpret the isolated transaction exemption. As a general matter, it is important to understand that a single act or transaction can be more than an isolated transaction if it indicates a willingness or intent to conduct other business in the state. The key issue is whether the activity is sporadic and isolated such that it does not constitute carrying out the ordinary affairs of the company.

The next general exception you see on your screen is for interstate commerce, a concept that Mike briefly touched on a few minutes ago. Now the Commerce Clause of the United States Constitution prohibits states from regulating interstate commerce. States can only regulate intrastate commerce, meaning commerce within that state. Consequently, many states have adopted the exemption of transacting business in interstate commerce. Now note, however, that the interstate commerce exception will apply even in those states that don't have this specific exception because the U.S. Constitution overrides state law. Therefore, if a company's activity within the state is merely incidental to interstate commerce, the company will not trigger the qualification requirement. However, if the activity becomes routinely localized in a particular state, so really intrastate, the company will be required to qualify to do business there.

So finally the last exception we want to note for everybody is the exception for companies responding to state declared emergencies. Now around half of U.S. states have enacted legislative exceptions to their qualification rules for foreign companies that transact businesses or services in a state due to state disasters or emergencies. And three more states have introduced similar bills since then. A lot of this can be attributed to a model business act adopted by the National Conference of State Legislatures in 2014, called Facilitating the Business Rapid Response to State Declared Disasters Act of 2014. It's a bit of a mouthful. The idea behind the model act though is to provide states with model legislative language to waive qualification requirements for companies involved in the rapid response to state declared emergencies, such as earthquakes, tornadoes, or the COVID-19 pandemic. Not all states have adopted a version of the model act though. So it's really important to check applicable state law.

I'll turn this back over to Mike.

Mike: Thanks, Ciara. So one additional thing to remember regarding general exceptions to doing business is that the exceptions we are talking about are generalizations. So each state's statutes may have exceptions different from those we've discussed here. For example, as we mentioned earlier, the DGCL provides an exception to qualification for an insurance company doing business in Delaware. So the type of entity you're dealing with will also often dictate which statute a company will need to review for the exceptions. So as we briefly touched on earlier, a foreign LLC engaging in activities in Delaware would look to the relevant provisions of the Delaware LLC Act, and an out-of-state limited partnership would look to relevant provisions of the Delaware Limited Partnership Act.

All right. So with that, let's move on to slide 13. So let's talk about what doing business means on a general level and the types of activities and conduct that constitute doing business. Ciara.

Ciara: Thanks, Mike. Yeah. So there are certain types of activities or actions that will typically trigger a finding of doing business in a state. For example, if you have a physical presence in a state and hold yourself out as doing business there, such as a listing in a phone book or other business directory or a website showing you as an address in that state, or if you advertise in that state, you likely are going to have to consider or you're going to be considered doing business in that state most likely. If you're considering whether you should register in a particular state though, consider the scope of your business activities there, such as whether you have that physical location, if you have employees, whether you take meetings with customers regularly, or generate significant revenues in that state on an ongoing basis. So all of those sort of triggers I've listed on your screen here are very, very easy to kind of track, but always good to revisit that as necessary. So Mike.

Mike: Thanks, Ciara. So we have activities conducted in a foreign state that are regular, systemic, extensive, and continuous, the kind that can trigger a qualification requirement. So as you might imagine and as we discussed already, this area of the law is pretty fact intensive.

So many corporate acts fall into a gray area between those that obviously require qualification and those that may not. So this is a spot where, again, plugging the CSC Qualification Handbook and looking to that as an initial guide is very helpful because that delves into activities that are likely to require qualification. Again, while this list on the slide is not exhaustive, it's a representation of the kinds of activities that typically require qualification. So those activities include, as you can see here, accounting, advertising, banking, construction, sales, and third-party sales.

So moving on to slide 15. So ultimately determining whether a company is doing business in a state is going to include an analysis that takes in the totality of the circumstances. So in other words, if a company engages in multiple activities that on a one-off or even maybe a two-off basis would otherwise be exempt, the cumulative effect of those activities might result in a finding that the company is doing business in the state. As one hypothetical, having a sales rep might not be enough even if they're an employee, and having warehoused goods in a third-party facility may not be enough on its own. As you see on the slide here, the two together could be enough.

So Ciara is now going to touch on a few of the examples listed in the previous slide. Ciara.

Ciara: Yeah, thanks. And again, just a few examples just to highlight for you sort of the importance of understanding these different exceptions. So I think we're going to move forward. Here we go.

So the first example is accounting. So as noted in CSC's 50-State Guide to Qualification, "Many states have enacted licensing statutes requiring out-of-state certified public accounting companies to obtain temporary permits before practicing in their states." Now although the CSC book does not discuss these licensing requirements, accounting companies should note that they must obtain these temporary permits before conducting accounting activities in those states. Courts will often consider the state's licensing laws as one of several factors when determining whether a foreign accounting company is doing business in the state for qualification purposes.

We'll turn now to slide 17. So the next example has to do with banking. Now most states have general qualification statutes that identify the maintenance of a bank account as a business activity that does not require qualification. In the four states listed on your screen that do not provide a bank account exception, the question becomes whether maintenance of a bank account triggers the obligation to qualify as a foreign company.

So, for example, the Delaware qualification statute is silent as to whether maintenance of a bank account in Delaware requires qualification. But at least one commentator has suggested that the maintenance of a Delaware bank account alone or even together with other minor activities, such as advertising in a Delaware newspaper, would not by themselves be sufficient to constitute doing business in Delaware. So this is where it's really good to be keyed into case law again and understanding when you might be required to qualify.

So I think Mike preempted us. We're going to talk about case law developments next. Very exciting. Mike.

Mike: Thanks, Ciara. Yeah. All right. So we're going to touch briefly here on some case law developments or relevant cases. Some of these are more recent than others, but all of these are cases that are relevant to and can affect qualifying to do business in a foreign state. So some of these relate to personal jurisdiction and others to the general concept of doing business.

So to set the table, personal jurisdiction is a legal concept that refers to a court's authority over each party involved in a particular lawsuit and includes the court's power to render an enforceable decision against those parties. So one type of personal jurisdiction is called general jurisdiction. If a court in a particular state has general jurisdiction over a party, that means that the court can render a decision against that party relating to any issue regardless of whether the lawsuit is related to the party's contact with the state. On the other hand, if a court has only specific personal jurisdiction over a party, that means the court may only decide a case that arises out of or relates to the party's specific contacts with the state.

So with that as background, we'll run through some recent case law and some not so recent case law. And Ciara is going to talk about what it I think is the most recent Supreme Court decision that we've had on qualifying to do business and could have a big impact on a company's decision as to whether to qualify to do business in a foreign state. That's the Mallory case. So we'll touch on that in a little bit.

Before we get to that though, we're going to talk about the U.S. Supreme Court in 2014, the Daimler AG v. Bauman case. So personal jurisdiction can be established if a foreign company has a principal place of business within the state where the suit is brought, or if the company is incorporated in that state. But if neither of those elements is present, then in order to find personal jurisdiction, courts must determine whether that company's affiliations with the state are so "continuous and systematic as to render it essentially at home in the state." So in other words, the contacts must establish the same type of close relationship with the state where the suit is filed as being incorporated there or owning a principal place of business in that state.

So state courts have reacted to the Daimler decision in a couple different ways. So one example is the Delaware Supreme Court's 2016 Genuine Parts decision. That decision interpreted state law in light of Daimler. So in the Genuine Parts case, the court held that merely registering to do business in the state and having a registered agent appointed to receive service of process does not subject a foreign corporation to general personal jurisdiction in Delaware for claims unrelated to Delaware. The court said that qualification in Delaware does not amount to a broad consent to personal jurisdiction in any cause of action and that "any use of a service of process provision for registered foreign corporations must involve an exercise of personal jurisdiction consistent with the Due Process Clause of the 14th Amendment."

Now more recently, the U.S. Supreme Court, in 2021, unanimously held, in Ford Motor Co. v. Montana Eighth Judicial District Court, that when a company serves a market for a product in the state and that product causes injury in the state to one of its residents, the state's courts have specific personal jurisdiction to hear the case. So the main legal issue in this decision was whether the state courts have specific personal jurisdiction over a corporate defendant that has purposefully availed itself of doing business in a forum state, but has not directly caused the plaintiff's injuries in that state through its conduct in that state.

So the Ford Motor Co. decision or the case decided two companion cases as well, so each of which involved a plaintiff resident of the forum state who was injured in the forum state by an allegedly faulty Ford vehicle. Ford did not design or manufacture the vehicle in the forum state, nor did it sell the vehicle to a dealer in the forum state. So in short, in each case Ford had nothing to do with the allegedly faulty Ford vehicle's presence in the forum state as each plaintiff bought its vehicle in a secondary market through a private sale.

So despite these facts, the Supreme Court found that the forum state properly had jurisdiction. The court parsed whether each plaintiff's claim had arisen out of or related to Ford's activities in the forum state and held that a claim can relate to the defendant's activities even without a causal relationship. So the court found that Ford by advertising, maintaining retail dealerships, and providing parts and services for vehicles in the forum state created a market in that state for its cars. So further, each plaintiff's harm in the forum state was caused by a Ford vehicle that was of the same type as Ford marketed in the state, which resulted in the court's finding of a relation to the creation of the market and triggered a finding of specific jurisdiction.

So this is the first case since the 1980s that saw plaintiffs prevail in a personal jurisdiction case before the Supreme Court. That said, the Ford case is a fairly narrow decision that may not apply if a plaintiff is not a resident of the forum state or if the defendant doesn't market the exact type of product in the forum state that caused the alleged harm.

And then, on the Delaware side, in the Genuine Parts case and this Reinz Wisconsin Gasket case, we have two good examples of why it's important to understand the consequences of both doing and qualifying to do business in a foreign jurisdiction. One consequence is being subject to specific personal jurisdiction in that state. And also apologies for continuing to beat this drum, but people need to keep in mind that different states' legislatures and courts may respond differently to precedent. So it's always important to review the relevant statutes for your particular jurisdiction as well as the relevant case law.

All right. So I mentioned that Ciara would discuss the recent Supreme Court case. So I think we can turn to that now, Ciara.

Ciara: Yeah. Sounds good, Mike. So I'll try and keep this very brief. So in November 2022, the U.S. Supreme Court heard oral arguments from Mallory v. Norfolk Southern Railway regarding the ability of states to require corporations to agree to the jurisdiction of a state's courts as a condition for doing business in the state. Now in June 2023, the Court in a 5-4 decision found in favor of the plaintiff, ruling that so-called "consent by registration jurisdiction doesn't violate the Due Process Clause of the 14th Amendment" and that general personal jurisdiction can be established just by qualifying to do business in a state.

So the Mallory case was filed in Philadelphia's Court of Common Pleas. It involved a plaintiff who was a Virginia resident that was a former employee of Norfolk Southern that sued the railroad company, which was a Virginia corporation, with claims that he developed cancer from on-the-job exposure to asbestos and other toxic chemicals. Now despite both the plaintiff and the railroad being based in Virginia, the plaintiff claimed that Pennsylvania courts had personal jurisdiction over the defendant because of a Pennsylvania statute stating that if a foreign corporation qualifies to do business in Pennsylvania, general personal jurisdiction is established in the Pennsylvania courts. Now the defendant successfully contested personal jurisdiction at both the trial court and the Pennsylvania Supreme Court levels on the grounds that establishing general personal jurisdiction through business qualification is a violation of the 14th Amendment.

The plaintiff obviously appealed to the U.S. Supreme Court, and the case was heard in November. So during oral arguments, the plaintiff took the position that under the Pennsylvania foreign qualification statute, any company that registered to do business in Pennsylvania under that statute automatically consents to general jurisdiction in the state. The defendant argued that the Court should instead be guided by some of their other case law decisions, including the 1945 decision in International Shoe, where the Court found that companies can be sued based on their business activities in state but not merely because they've registered to do business there.

Now the Court ultimately found that its 1917 decision in Pennsylvania Fire Insurance Company v. Gold Issue Mining was controlling. Now there it involved a Missouri statute that was very similar to the one at hand in Mallory and which required that out-of-state insurance companies desiring to transact business in the state agree to appoint a state official to serve as the company's agent for service of process and to accept service on that official as valid in any suit. So in holding that the exercise of jurisdiction over the defendant was valid, the Court found that the Missouri statute was consistent with the Constitution and with long-settled legal tradition, which permitted suits against individuals in any jurisdiction where they could be found. The court did not see fit to treat a fictitious corporate person differently. Of particular import to the Court, though, was that the defendant had agreed to accept service of process in Missouri on any suit as a condition of doing business there.

So basically the holding in Mallory is that a consent, you can have a registration statute that compels foreign companies to accept personal jurisdiction as a condition to doing business there. And so if we have more time at the end, I have a bit of a further discussion with how courts have been wrestling Mallory in the meantime. But I think in the interest of time I'll flip it back to Mike to discuss slide 19.

Mike: Thanks, Ciara. All right. So seems the fact and maybe we'll cover this a little bit more in some of our Q&A and discussion, but the fact that the Pennsylvania statute required a foreign corporation's consent to jurisdiction as a condition for doing business there was critical to the holding in Mallory, which again is another reminder that there's no substitute for careful reading of each state's applicable qualification statutes.

All right. So moving on here, we're going to talk a little bit about the intersection of qualification to do business with internet and e-commerce operations. So everyone knows that the internet has revolutionized a company's ability to transact business across state boundaries. So whether it's buying and selling products and services or conducting virtual meetings and other business operations or just communicating, the sheer volume of business activity that takes place over the internet on any given day is pretty mind boggling. So it's no surprise that the internet activity has gotten lots of attention in the courtroom, and corporate decision-makers are facing lots of legal issues involving their e-commerce and other internet activities.

Now a company's gateway to the internet is its website. So one significant legal issue regarding websites is whether a company's use of a website constitutes doing business in a state outside the one in which either the company is located or the website was created. So a company needs to determine whether maintaining or owning the website means that it has to qualify to do business in any state where either the website can be accessed or customers use the products or services that are offered on that site.

Now there's relatively little statutory law and case law addressing the question of whether owning or operating a website constitutes doing business for qualification purposes. However, there are numerous cases that address a similar issue, and that is whether a company's internet activities in a foreign state constitute doing business sufficient to justify the courts of that state exercising personal jurisdiction over the company. So exploring the issue of jurisdiction with regard to websites we think can be useful when trying to determine a company's need to qualify to do business based on a website's activity.

So in broad terms, the important distinction between transacting any business for purposes of personal jurisdiction and doing business for purposes of qualification statutes is that a greater amount of business activity generally is required in order to compel a foreign company to qualify to do business within a state than the amount of activity that may be needed to merely subject it to personal jurisdiction. So this means that it is easier for a company engaging in activities in a foreign state to satisfy the minimum contact test for jurisdictional purposes than it may be to satisfy the doing business test for qualification purposes.

So logically, if a company's contacts with a foreign state are not sufficient to justify the exercise of personal jurisdiction, a court should find that those same contacts will not trigger a company's duty to qualify in that state. So Ciara is going to give us a little bit more detail on this point.

Ciara: Absolutely. So the 2014 U.S. Supreme Court decision in Daimler, which I'm aging myself, but I remember learning about in law school, made a huge impact on judicial opinions regarding whether personal jurisdiction is created by internet activity or websites. Now although Daimler was not an internet case, it did explore the outer limits of personal jurisdiction in cases implicating global matters, including whether or not personal jurisdiction can be based on a website that can be accessed around the world. So the analysis must determine whether minimum contacts grant a court personal jurisdiction.

So before the Daimler decision, many courts would have applied a sliding scale test tailored to internet activities to determine the level or types of activities that constituted minimum contacts. At one end of the scale, you had passive websites, which alone did not generate sufficient contacts with a foreign state necessary to establish personal jurisdiction. A passive website is only used to post information. It does not actively solicit orders for goods or services or support other commercial activities.

Now at the other end of the scale were active websites, as you might imagine, which generate sufficient business over the internet to establish personal jurisdiction. An active website serves as a gateway for conducting business over the internet between the website owner and residents of a particular state.

Now interactive websites fall in sort of the center of the scale, and courts determine whether to exercise personal jurisdiction over the interactive website owner on a case-by-case basis. So a little background, interactive websites are hybrid sites that contain elements of both passive and active websites. These websites allow users to exchange information with the website creator, order products, make reservations, and conduct other business, often with a credit card. Now the owner of an interactive website will not necessarily be subject to personal jurisdiction in a foreign state. But to make this determination most courts are going to look at the "level of interactivity and commercial nature of the exchange of information that occurs on the website as well as whether the website owner targeted or aimed its efforts at the foreign state."

Now a 2021 United States District Court for the Western District of Pennsylvania decision denied a defendant's motion to dismiss on the grounds that the court lacked personal jurisdiction over the defendant, and this includes some helpful guidance for us. Now the decision stated that although the defendant, a California apparel business, operated a website and social media platforms that were capable of doing business with a Pennsylvania customer, such as the plaintiff, the mere fact that these online platforms tried to appeal to a customer base outside of California without specifically referring to Pennsylvania in any particular way was insufficient to establish a base for exercising in personam jurisdiction. However, the court denied the defendant's motion to dismiss without prejudice in order to allow the plaintiff to conduct jurisdictional discovery.

And so there are going to be some additional factors that the courts will consider in evaluating jurisdictional issues for websites. Mike.

Mike: Thanks, Ciara. So post Daimler, the courts have applied a three-part effects test in determining whether specific personal jurisdiction can be established. So this test requires a showing that the defendant, one, committed an intentional act which was, two, expressly aimed at the foreign state and, three, caused harm, the brunt of which is suffered and which the defendant knows is likely to be suffered in the foreign state.

So certain courts have combined both the sliding scale and the effects test in the personal jurisdiction analysis. So in fact some federal courts have stated that a determination of personal jurisdiction based solely on the effects test is rare. So as a result of the Daimler decision, courts are now using the effects test as only one of the considerations in ascertaining whether contacts were continuous and systematic enough to render the foreign company essentially at home in the foreign state. Similarly the status of the website as described under the sliding scale test, whether it's active, passive, or interactive, is still used by many courts, but is only one factor of many in making a personal jurisdiction determination.

Now again, here, there's minimal case law on the question of whether email sent to a party in another state can single-handedly establish jurisdiction. But a few cases that have been decided on the subject suggest that it can. And so in one Connecticut case, the court found that it had jurisdiction over a Massachusetts company in a resident slip-and-fall action where the injury occurred at the company's Massachusetts location as the company engaged in conduct that included emailing and soliciting business by reaching out to Connecticut residents and seeking their membership.

Then in 2019, the New York County Commercial Division found that the defendants were subject to New York jurisdiction under its so-called single act statute, which provides that a New York Court may exercise personal jurisdiction over any foreign entity that transacts business within the state or contracts anywhere to supply goods or services in the state of New York. So in this case, the plaintiff, a New York company had entered into a letter of intent with the defendant, an Illinois company, and filed for breach of contract in New York. The defendant challenged personal jurisdiction, but the New York court found that the defendant was subject to jurisdiction as a result of engaging in voluminous electronic communications, which consisted of emails and phone calls with the New York plaintiff. The defendant argued that it was physically located in Illinois for every email, phone call, or text. But the court focused on the business that was being transacted rather than the defendant's physical location, and it found that the Illinois company had projected itself into the state of New York in order to create an ongoing contractual relationship with the New York plaintiff.

So in the context of emails and the issue of emails as the basis for personal jurisdiction, it's still an evolving area the law. Again, not a lot of decisions on that, but something to keep in mind when you're making your determinations of whether you're qualified to do business or you're subject to personal jurisdiction, in particular dealing with personal jurisdiction in the e-commerce context.

All right. So now we're going to move to slide 20. There we go. So we're going to come off the mountaintop now a little bit and descend from our consideration of theoretical issues to some of the more practical issues. So we're going to talk nuts and bolts here. As noted previously, qualification involves a formal registration. So Miranda, from CSC's perspective, can you maybe give us a practical handle on how companies qualify to do business in a foreign jurisdiction?

Miranda: Yes, I would be happy to Mike. Thank you. Below is a high-level overview. So let's get into some of those details.

Name availability. CSC provides a name check on every order. Sometimes this means using a state website. Other times it might mean calling the state directly. Things that might affect name availability are similar names, prohibited words, or restricted words. Prohibited and restricted are different because restricted words usually means it can be used. There will just be additional supporting documents or approvals required. We will get into more of that later in the presentation.

Next you'll gather your supports, which include the most common, a certificate of good standing, existence, compliance, whatever that home state calls it. In the case of a restricted word, it might include a copy of a professional license or approval from a banking or insurance division.

You will need to figure out who you want to appoint and maintain as a registered agent. States may have options for individuals or entities to be agent. Some may allow the business to act as their own, while others may require a third party. CSC does offer agent representation services domestically and internationally, as well as for some special agencies that might require it.

Make sure to comply with publication and recording. These requirements vary and are governed by state statute. However, clients may ask for a publication or to record a filing outside of this requirement, and that's acceptable too. CSC can provide these services by working with local papers and county clerks.

Naturally along with all of the above, the required documents will need to be prepared, whether the individual does that, a law firm, or a service company like CSC.

There are questions asked as part of the qualification paperwork that will help determine filing fees and formulas, which vary greatly between a flat fee of $51 in Hawaii to a complex fee structure in Illinois that factors in the proportion of business conducted, property owned within the state to business and property everywhere, and can be many thousands of dollars.

Annual report filings, taxes, and fees, those are all examples of subsequent filings. States like California require an annual report to be filed in 90 days. There will be additional fees. While states like Alaska require a business license to be filed anytime prior to the start of business.

Understanding ramifications of qualifying as a foreign corporation. Corporations and other entity types, such as LLCs or LPs can all have different reporting and tax structures. It is important to know which structure best meets your business needs and goals. A lawyer or CPA can help navigate this decision. This is not something CSC would advise on.

Also, once qualified, the entity may have future obligations to the state, like continued annual reports. Back to you, Mike.

Mike: All right. Thanks, Miranda. So with respect to ramifications of qualifying as a foreign corporation, just as there may be consequences for not qualifying, there are likewise consequences if a company does qualify. For example, once you qualify to do business in a state, you may be subject to jurisdiction in that state, and you'll have annual fees to maintain and will likely need to engage and pay an agent to maintain your qualification.

So let's move to our next slide here. So Ciara is going to now briefly discuss how a company may cure failures to qualify. Ciara.

Ciara: Yes. So a bad thing happened, you didn't qualify, and you need to figure out how to fix that fact. So a company may find that it's doing business in a foreign state without a certificate of authority and as a result may be subject to certain statutory penalties. Now I mentioned about this earlier. But although state laws will vary on whether and how a company may cure this type of defect, generally the company may file an application for qualification and pay all required fees as well as any penalties associated with its failure to qualify in its late filing. And in this case, the effect of the filing is generally retroactive. So some good news there.

However, in certain situations and in certain states, failure to qualify may prevent a company from maintaining a lawsuit in that state, that litigation bar that we discussed earlier. So, therefore, a company should not opt out of qualifying a state on the assumption that it can cure the failure to qualify in the future, particularly if you think any claims are going to accrue in that interim period.

So Miranda from CSC is going to come back and discuss now some examples that she's seen with respect to curing failures of a company to qualify as well as terminations of qualification. Miranda.

Miranda: Thank you, Ciara. Happy to as well again. It is important to understand how the failure happened. Curing failures depends on the why, the what, the how it happened, and it varies state by state.

One common example of failing to qualify is within the state of Tennessee. The state provides a 60-day grace period before penalties are incurred. After 60 days, the Secretary of State will assess a penalty that is equal to three times the amount of the qualification filing fee and three times the amount of the annual report filing fee that would have been due had it filed prior to commencing business. If the entity indicates they've been doing business in Tennessee for more than 12 months prior to filing, the entity must supply a letter of no objection, commonly referred to as a tax clearance from the Department of Revenue, to verify that all fees, taxes, and penalties owed to the state have been paid. The process gets long, complex, and costly. So if you think about Tennessee's filing fee of $600, you times that by 3, you're now up to $1,800, and then all the annual reports that were due times three. It can get very expensive.

Another example would be failing to file a subsequent filing, such as a first annual report. In Missouri, you must file your first annual report within 60 days. If the entity fails to do so, they are administratively revoked. That's what we call involuntarily terminated. And they have to reinstate. Now you're in a similar situation as Tennessee because in order to get back into good standing, you're required to work with the Missouri Department of Revenue to report taxes, get that clearance document, and pay a penalty to the Missouri Secretary of State. The penalty to the state is not as expensive as Tennessee, but the process with the Department of Revenue, as you can imagine, can become lengthy and complex.

And then sometimes there is nothing the entity can do, as in the case of Connecticut. If you fail to file your annual report, the state will revoke, involuntarily terminate the entity, and they are not allowed to cure it. So the entity will be filing new and losing all of their filing history.

Previous examples for Missouri and Connecticut are the result of an involuntary termination. A voluntary termination is when the entity files formal documents stating they will no longer be doing business. Obtaining tax clearance can also be part of a voluntary termination process, and in many cases CSC can assist.

What happens to future service of process when an entity voluntarily terminates depends on the state. When the entity voluntarily terminates, the entity is able to provide the state with a mailing address for future service of process. In Maryland, it is required to maintain an actual agent for one year, and CSC does offer this one-year service. If you are involuntarily terminated, the entity is not given the option to elect where they want their service to go.

Back to you, Ciara, for the next slide.

Ciara: Thanks, Miranda. So we'll go ahead to slide 22, so failure to qualify. Now a lot of companies may fail to pay attention to foreign qualifications, whether it be intentionally or unintentionally. On the unintentional side, it just might not occur to anyone to qualify to do business in a certain state. And as you've learned over the course of this webinar, figuring out whether you have to qualify to do business can be a bit of a tough issue to navigate.

On the intentional side though, some people may not want to qualify because they want to avoid all of the filing fees, the additional taxes, the reporting requirements, the needing to appoint an agent for service of process, and all of the related and associated fees and expenses. And in light of Mallory, they might also be thinking they want to avoid consenting to general personal jurisdiction in states that have such a requirement in their statutes.

So I'm going to turn over to Mike for slide 23.

Mike: Thanks, Ciara. So let's say you've got an obligation to qualify, but you don't do it. So maybe we can talk about the consequences of that. Many states impose penalties or other consequences where a foreign company must but does not qualify to do business. So these measures typically are designed to encourage compliance. So Ciara, maybe you can give us an idea of the types of penalties that states use to enforce the foreign qualification laws.

Ciara: Happy to do so, Mike. So the main penalty is to prevent foreign companies from maintaining lawsuits in a foreign state's courts. Although some states provide for monetary penalties as well. Again, that's that litigation bar we discussed.

Denial of access to courts precludes unqualified foreign companies from maintaining lawsuits within those states' borders until they obtain the certificates of authority after they've registered or qualified. So for example, if an unqualified company files suit, the defendant may move to dismiss on the ground that the company lacks standing to bring suit. Some states permit a court to stay a proceeding where a foreign company has not qualified rather than dismissing it until such company is qualified, which is good news for the unqualified company. In contrast, though, some states' penalty provisions do not give an unqualified foreign company an opportunity to cure that deficiency after having filed a lawsuit. In fact, most states expressly permit unqualified companies to defend themselves when they're brought to court, and many state courts will interpret those provisions to also allow unqualified foreign companies to file counterclaims against the opposing party in the same lawsuit.

Additionally most states will include a provision stating that failure to qualify before doing business in a foreign jurisdiction does not impair the validity of its corporate acts. So there's some good and some bad to know there. Just again be aware of what your obligations are.

We'll turn to slide 24. So consequences of failing to qualify. Monetary penalty is what I'm sure a lot of us want to know about. So most states include a monetary penalty provision for a company's failure to comply with qualification requirements. Many of these states do not impose a substantial civil penalty for failure to qualify, but instead require payment of back fees and taxes plus a penalty for lateness. Other states may impose either a lump sum penalty or include the same provision of payment for all fees and taxes plus an additional monetary penalty, ranging from $10 per day to a penalty not to exceed $5,000. Now, for example, under Section 378 of the Delaware General Corporation Law, a foreign corporation doing business in Delaware without complying with Delaware's qualification requirements is subject to fines of $200 to $500 for each offense.

Now, Miranda, can you provide any examples that you've encountered of penalties for companies that failed to qualify or talk more about this chart here?

Miranda: Yes, absolutely. The chart below is representative of an actual client that began doing business in states below but failed to qualify for 15 years. The chart shows what state fees would have been had the company qualified the day it started business versus what it incurred due to the failure to qualify. This is just penalties to the state. This does not include your other regulatory agencies, like Revenue.

So as stated before, Texas has a similar minimum fee of $600. We saw that Tennessee example earlier. Fifteen years later, it's $9,815. Illinois, as also spoken to earlier, has a very complex fee structure, and the minimum fee is $1,814.27. However, 15 years later, again the minimum fee is going to be $21,522.07. Florida, easy, 70 bucks Fifteen years later, now you're going to be paying $1,920. Georgia, $225. Fifteen years later, you're going to be paying $825.

Mike will take the next slide to talk more about personal liability.

Mike: Great. Thanks, Miranda. So finally, some states may impose monetary and criminal penalties on a company's directors, officers, and agents if they transact business on behalf of an unqualified foreign company. So, for example, under Section 378 of the DGCL, the Delaware General Corporation Law, an agent of a foreign corporation that is qualified or failed to qualify in Delaware may be subject to fines of $100 to $500. Under Louisiana law, the responsible officers, employees, or agents of a company that is transacting business in the state without authority to do so are subject to imprisonment in addition to fines.

So some very different consequences depending on what state you're in. So again critical to look at each state's laws and statutes and applicable case law as well. And again, another plug for the CSC book. That can be a great starting point for that.

All right. So we'll turn to the next slide, and we're going to turn it back over to Ciara.

Ciara: Yeah. So we're getting up towards time now, so I'm going to try and keep this a little on the shorter side. But basically, so these are the other consequences for a failure to qualify. And so other consequences can be those tax penalties we discussed. But additionally, a failure to qualify could appear in a contract dispute where the other side is looking for anything to throw at you. And so if you provided, for instance, in an agreement reps and warranties that the company is in material compliance with all obligations, but the company has failed to register or qualify, that could result in a breach of contract. There also may be similar issues with respect to compliance with the SEC and other disclosure requirements.

So our next slide.

Mike: So everyone, we're nearing the end of our journey today. We're going to conclude with our repeated reminder that other types of laws and regulations need to be considered when a company is looking to do business in a foreign jurisdiction. So Ciara, maybe you can describe some of these additional laws or regulations that might apply to an out-of-state entity.

Ciara: Yeah, of course. At a very high level, so first are laws relating to particular licenses and permits, and we discussed that earlier. So qualification to do business in a foreign state does not mean that a company is free to engage in whatever business it wants to. Certain businesses and industries will require special licenses and permits. That can be at the state, county, or even city level.

Companies may have other regulatory issues to deal with as well. For example, banks must qualify under the Delaware banking laws before conducting banking business in Delaware. And then, finally, many states may also require a company to register with the Department of Revenue or equivalent agency for tax purposes.

Miranda, do you have anything you want to chime in here on?

Miranda: No, I think you did a fabulous job covering some of that. What can make it easier for entities to qualify and adhere to the above common requirements is when these agencies allow third parties like CSC to assist with things, such as obtaining that special license, permit, or requesting approval for restricted words. Here at CSC, we have worked with our teams on building relationships with many of these other agencies and have processes in place where we, in fact, can help assist in many cases.

Mike: All right. So to review, as we have repeatedly stated throughout the presentation today, check each state's requirements. Be proactive. Facts and circumstances are going to be the crucial part of any qualification decision. And each state determines how, when, and why a foreign entity must qualify. So again, you've got to check each state on a state-by-state basis. Consult the specific laws of the state in question, along with resources that vendors such as CSC make available. Again, the CSC book on qualifying to do business in another state is a great starting point.

Consider control and business activity within the state. You need to know the ins and outs of the nature of your business or your contacts with the state. Consider whether your activity is exclusive to domestic jurisdiction or if it's interstate commerce. And if it's interstate commerce, what's the nexus to the foreign state? Are you on that? Have enough contacts or enough interaction with the state so that we are potentially doing business or subject to personal jurisdiction and needing to evaluate further whether you need to qualify to do business. And then, again, what are the consequences of registering or not registering to do business in the state?

So again, fact intensive, requires state-by-state analysis. If you have questions, look to vendors or your advisors to help you with those questions.