Chapter 13 – Qualification of Foreign Corporation

Domestic vs. Foreign Corporations

• Domestic corporation:  Corporation doing business in the state in which it was formed
• Foreign corporation:  Corporation doing business in a state other than the state in which it was formed

Transacting Business

• Transacting business:  generally, statutory list of activities in which a corporation can engage in a foreign state without being required to qualify to do business therein

Actions that Do Not Qualify as Doing Business

• MBCA § 15.01(b) states that the following activities 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 or agencies for the transfer, exchange, and registration of the corporation’s own securities or maintaining trustees or depositories with respect to those securities;
  • 5. Selling through independent contractors;
  • 6. Soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, 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;
  • Actions that Do Not Qualify as Doing Business
  • 8. Securing or collecting debts or enforcing mortgages and security interests in property securing the debts;
  • 9. Owning, without more, real or personal property;
  • 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
  • 11. Transacting business in interstate commerce.

Application for Qualification

• MBCA Sec. 15.03 requires the following information:
  • Name
  • State of Incorporation
  • Date of Incorporation and Duration
  • Address
  • Identities of Directors and Officers

Effects of Qualifying

• The foreign corporation will be subject to any restrictions imposed on domestic corporations.
• The foreign corporation will be subject to service of process in the new state.
• The corporation must pay various fees to the state that has permitted it to transact business within its borders.
• The corporation must file annual reports with the state.

Effects of Failure to Qualify

• 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).

Withdrawal of Foreign Qualifications

• When a corporation ceases doing business in a state in which it has qualified as a foreign corporation, it should file an application for withdrawal. This will ensure that the corporation is no longer subject to service of process, taxes, or annual reporting requirements in the state.
• Withdrawal: process of cancelling authority to do business in a foreign state

Key Features of Foreign Qualification

• Corporations that intend to transact business in other states must “qualify” 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 considered relatively peripheral or isolated and thus do not require corporate 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 jurisdiction.  Qualification will result in the corporation being amendable 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 forbidden from instituting action in that state’s courts and is usually subject to monetary fines and penalties.  A few states take a harsher approach and provide that acts engaged in while the corporation was not qualified are void and that it cannot defend itself in court.
• When a corporation makes changes in its state of incorporation, it should conduct research to determine if foreign jurisdictions in which it operates must be notified of those changes.
• Once a corporation ceases doing business in the foreign jurisdiction, it should withdraw its qualification.