978-1133019145 Chapter 13 Solution Manual

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CHAPTER 13

Foreign Corporation Qualification

THEME

Chapter 13 is an introduction to foreign corpora-

tions, focusing on the procedures for qualifying

a corporation to do business in states other than

the corporation’s state of domicile. Although the

main focus here is on corporations, many of the

same laws and procedures apply to other forms

of business organizations, including limited lia-

bility companies.

CHAPTER GOAL

The goal of this chapter is for students to be-

come familiar with the following terms and

topics concerning foreign corporations:

• Foreign corporation

• Factors to be considered when determining

whether foreign corporation qualification is

necessary

• Procedures for qualifying foreign corpora-

tions

• Procedures for maintaining the good stand-

ing of a foreign corporation and for with-

drawing the foreign corporation from doing

business in a particular state

• The role of corporate paralegals assisting

with foreign corporation qualifications

• Resources available to corporate paralegals

who may be assisting with foreign corpora-

tion qualifications

SUGGESTED APPROACH

Class discussions on this chapter may focus on

state long-arm statutes as they relate to corpora-

tions and other business organizations. Students

should be familiar with the statutes in their

home states concerning foreign corporations and

with the procedures for qualifying foreign cor-

porations.

LECTURE NOTES

Determining When Foreign Corporation

Qualification Is Necessary

1. The state of the corporation’s charter or in-

corporation is the corporation’s state of

domicile, regardless of where the corpora-

tion transacts its business.

2. A corporation is considered a foreign cor-

poration in every state or jurisdiction other

than its state of domicile.

3. If a corporation is to transact business as a

foreign corporation, it must first obtain

permission from the proper state official of

the foreign state.

4. State long-arm statutes give the courts of

each state personal jurisdiction over corpo-

rations and other business organizations

that voluntarily go into that state for the

purpose of transacting business.

5. A defendant corporation need not be phys-

ically present in a foreign state for the

courts to have jurisdiction over it, but it

must have certain minimum contacts with-

in the state.

6. Because foreign corporations are subject to

the jurisdiction of any state in which they

transact business, they must provide an

agent in each foreign state to accept service

of process.

7. Guidance can be found in the statutes of

the foreign state for determining when a

corporation is considered to be transacting

business in a particular state, and therefore

is subject to foreign corporation qualifica-

tion requirements.

8. Like the Model Business Corporation Act

(MBCA), the statutes of many states pro-

vide a list of activities that do not neces-

sarily constitute transacting business in that

state, but remain silent on exactly what

does constitute transacting business.

CHAPTER 13 Foreign Corporation Qualification 93

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9. When deciding whether it is necessary to

qualify a corporation to do business in a

particular foreign state, the following fac-

tors should be considered:

• The extent, duration, and nature of the

corporation’s involvement in the for-

eign state

• The foreign state’s statutory interpreta-

tion of what does, or does not, consti-

tute transacting business in that state

• The cost of qualification and the penal-

ties for transacting business in the for-

eign state without authority

Rights, Privileges, and Responsibilities of a

Foreign Corporation

10. State door-closing statutes provide that

corporations that do business in a state

without the necessary authority are pre-

cluded from maintaining an action in that

state.

11. Qualified foreign corporations are subject

to the statutes of the foreign states in which

they are qualified. However, the internal

affairs of the corporation are usually gov-

erned by the laws of the corporation’s state

of domicile.

Qualification Requirements

12. An application for a certificate of authority,

along with any other required documents,

is usually filed with the appropriate state

authority to qualify a corporation or other

business organization to do business in a

foreign state.

13. A certificate of good standing from the

corporation’s state of domicile is often re-

quired for filing with the application for

certificate of authority.

14. Each state has its own name requirements

for corporations that transact business in

that state. If the foreign corporation’s name

does not meet with those requirements, it

may have to adopt an assumed name for

transacting business in that state.

Amending the Certificate of Authority

15. Whenever any significant information in-

cluded in the certificate of authority chang-

es, such as a change in the registered office

or agent in a given foreign state, the corpo-

ration must immediately notify the secre-

tary of state in the foreign state by filing an

application for amended certificate of au-

thority.

Maintaining the Good Standing of the For-

eign Corporation

16. Foreign corporations are usually subject to

annual reporting requirements in the for-

eign state. Annual reports are typically

filed with the secretary of state on forms

generated by the secretary of state.

17. Foreign corporations may also be subject

to taxation by the foreign state. Often, taxes

are calculated on the annual form filed with

the secretary of state. In some instances, a

separate tax report is required.

Withdrawing from Doing Business as a For-

eign Corporation

18. When a corporation is no longer transact-

ing business in any given state, it may

withdraw as a foreign corporation by filing

an application for a certificate of with-

drawal.

The Paralegal’s Role

19. Paralegals are often responsible for quali-

fying foreign corporations and for seeing

that annual reports are filed in the foreign

state.

20. Important resources for paralegals who are

assisting with foreign corporation qualifi-

cations include the following:

• Corporate statutes from the foreign state

• Information available from the secre-

tary of state, or other appropriate state

official, in the foreign state

• Corporation service companies

94 PART I Guide for Instructors and Answers to Chapter Review Questions

service or otherwise on a password-protected website for classroom use.

21. Corporation service companies provide

incorporation and foreign corporation qual-

ification services in every state in the coun-

try. Corporation service companies can be

very helpful, especially when foreign cor-

poration qualification is necessary in sev-

eral states.

CASE BRIEFS

Harold Lang Jewelers, Inc. v. Johnson, et al.,

576 S.E.2d 360 (N.C. 2003)

Purpose: This case provides an example of

when a corporation must qualify to transact

business as a foreign corporation, and the possi-

ble consequences of not qualifying when neces-

sary.

Cause of Action: Breach of contract

Facts: Harold Lang Jewelers (“Lang”), the

plaintiff and appellant in this suit, was a Florida

corporation that brought a suit against the de-

fendant in North Carolina to collect money the

defendant allegedly owed for jewelry sold or

consigned. At trial, the defendant, Jerger John-

son, d/b/a Johnson Jewelers (“Johnson”),

brought a motion for dismissal, arguing that

Lang could not sue in a North Carolina court

because Lang was a Florida corporation trans-

acting business in North Carolina without a li-

cense and certificate of authority to transact

business. The district court granted the motion

for dismissal and Lang appealed.

The lower court found that Lang,

through its employee, had sold and consigned

merchandise to jewelry stores in several North

Carolina cities for more than 20 years. Lang’s

employee came to North Carolina at least once

or twice a month for the purpose of transacting

business. The employee always brought jewelry

with him for delivery. When he visited jewelry

stores in the state he would either make a direct

sale or consign the jewelry. The lower court de-

termined that this constituted the transaction of

business in North Carolina.

Plaintiff argued that the court did not

have sufficient facts to support its conclusion

that Lang was, in fact, transacting business in

North Carolina. Lang also claimed that the trial

court should have continued the case to permit

Lang to obtain the requisite certificate of author-

ity.

Issues: Was the plaintiff transacting business

under the definition of the laws of the state of

North Carolina? Was the plaintiff prohibited

from bringing suit in the state of North Carolina

because the plaintiff corporation did not have a

certificate of authority to transact business in

North Carolina?

Conclusion: The Court of Appeals of North

Carolina upheld the decision of the lower court,

finding that the court acted within its discretion

in dismissing the action.

Discussion: To “transact business” is defined by

both statute and common law in North Carolina.

Similar to the Model Business Corporation Act,

North Carolina statutes set forth examples of

what is not considered transacting business.

North Carolina courts have found that transact-

ing business in the state is to “require the engag-

ing in, carrying on or exercising, in North Caro-

lina, some of the functions for which the corpo-

ration was created.” The business done by the

corporation must be substantial, continuous, sys-

tematic, and regular. Pursuant to N.C. Gen. Stat.

§ 55-15-02, a foreign corporation that transacts

business in North Carolina is barred from main-

taining an action in any state court unless it has

obtained a certificate of authority to transact

business prior to trial.

The Court of Appeals upheld the lower

court’s findings that Lang’s business activity in

North Carolina was regular, continuous, and

substantial, and that it was transacting business

in the state. The Court of Appeals further deter-

mined that Lang’s claim that there should have

been a continuance granted for Lang to obtain a

certificate of authority was baseless, indicating

that Land had not cited, nor had the court found,

any case where a continuance was granted by a

court in similar circumstances. The Court of

Appeals also pointed out that “Lang was aware

that Johnson’s motion was pending and could

CHAPTER 13 Foreign Corporation Qualification 95

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have obtained the certificate in the year and a

half that passed between the filing of the motion

and the court’s dismissal of the case.”

Bayonne Block Co., Inc. v. Porco, 654 N.Y.S.2d

961 (City of New York 1996)

Purpose: This case is an example of a business

that was conducting certain transactions within

the state, but was found not to be transacting

business under the state’s statutes concerning

foreign corporation qualification.

Cause of Action: Breach of contract

Facts: Plaintiff Bayonne Block Co., Inc. (“Ba-

yonne”) was a foreign corporation that brought

suit against defendant Frank T. Porco (“Porco”)

in the city of New York to collect money alleg-

edly owed to it for providing construction mate-

rials to Mulford Construction Corp. Porco was

named as a defendant pursuant to a guaranty of

payment he executed. Bayonne’s business with-

in New York was limited to taking orders from

and delivering goods to buyers in New York

State. Plaintiff had no office in New York and

did not advertise or otherwise transact business

within the state. Porco brought a motion to strike

Porco claimed that plaintiff was not entitled to

utilize the laws of the state of New York be-

cause it was not licensed to transact business

within the state. New York State’s Business

tion “doing business” within the state from us-

ing the courts unless the corporation is author-

ized to do business in New York State.

Issue: Was plaintiff Bayonne doing business

within the state of New York as defined by state

Conclusion: Bayonne was not doing business

within the state of New York as that term is de-

fined under the laws of the state of New York.

Bayonne was not barred from bringing suit in

the state’s courts.

Discussion: The court here found that if the for-

eign corporation’s contacts within the state of

New York are merely for the purpose of solicit-

ing business and activities incidental to the sale

and delivery of merchandise into the state, the

foreign corporation is engaged in interstate

commerce and need not be licensed or registered

by the secretary of state to utilize the state’s

courts.

REVIEW QUESTIONS

1. Assume that Quality Liquor Company has

its main office in your home state, where it

transacts the majority of its wholesale liq-

uor business. Recently, Quality Liquor has

been taking orders from a neighboring

state. It has begun sending its salespeople

into the state in an attempt to increase its

business. Assuming that the neighboring

state follows the Model Business Corpora-

tion Act, does Quality Liquor need to qual-

ify as a foreign corporation in that state?

No, transacting business in interstate

commerce does not constitute “transact-

ing business” for most purposes. How-

ever, if Quality Liquor Company’s busi-

What if Quality Liquor were to set up a

branch office in the neighboring state?

Yes, Quality Liquor would probably be

2. What are “door-closing” statutes as they re-

late to foreign corporations?

They are state statutes that provide that

any corporation doing business in the

3. Explain why a foreign corporation that is

qualified in a foreign state may not be able

to transact all of the same business in the

foreign state that it is authorized to transact

in its state of domicile.

96 PART I Guide for Instructors and Answers to Chapter Review Questions

service or otherwise on a password-protected website for classroom use.

ter and the laws of its state of domicile,

unless those laws are in conflict with the

laws of the foreign state. If the foreign

4. Assume that it is your responsibility to

qualify your corporate client, Alex Enter-

prises, in a foreign state that has adopted

the Model Business Corporation Act. Will

terprises”?

Yes, the name must comply with the

statutory requirements of the foreign

state. “Alex Enterprises” would not be

What are the possible solutions to this

foreign state, or it may adopt an as-

5. What is a fictitious name, and why is it

used?

fictitious name is a name that may be

6. What is the purpose of a registered agent in

a foreign state?

A registered agent must be appointed by

a foreign corporation to receive service

7. What are the possible consequences of ne-

glecting to file an annual registration

statement for a foreign corporation?

tered office address used in their state not

be a post office box?

The registered office is often the place

prescribed by state statute for the ser-

9. In states that follow the Model Business

Corporation Act, what steps must be taken

when the corporation amends its articles of

incorporation to change its authorized

number of authorized shares of stock is

What steps must be taken when the corpo-

An application for amended certificate

of authority must be filed with the secre-

10. Under what circumstances might it be ben-

If the corporation is considering doing

business in a foreign state in the future,

and would like to reserve its name, or if

a corporation would like to use its name

CHAPTER 13 Foreign Corporation Qualification 97

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