In a corporate merger of related entities, such as when an entity merges with a parent or subsidiary, how does qualification affect the resulting entity? In other words, if one of the merging entities is qualified to do business in a state, but the other is not, does the resulting merged entity need to qualify to do business in that state? The state of Illinois has determined that this type of corporate activity does require qualification.

In 2019, the intermediate appellate court in Illinois determined that when an Ohio subsidiary merged with its parent corporation, which was a Delaware corporation registered to do business in Illinois, the newly-created entity also needed to register to do business in the state of Illinois. The court ordered the new entity to pay the penalty for operating in the state after failing registering to register, and to also pay the initial franchise tax fee.

While not all corporate activities require companies to qualify in states outside their state of formation, any activities conducted in a foreign state that are deemed sufficiently “regular, systematic, extensive and continuous” can trigger the qualification requirement. 

This area of the law is very fact-dependent, and many corporate acts fall into the grey area between those that obviously require qualification and those that do not, andcourts interpret and apply this definition differently. Thus, the question of whether a corporation is doing business for qualification purposes is determined on a case-by-case and state-by-state basis.

Qualifying to Do Business in Another State: The CSC 50-State Guide to Qualification provides insight and analysis into the question of qualification, with case illustrations of the types of activities that do and do not trigger and do not trigger the qualification requirement.

The following excerpt is from Chapter 3 the 2020 Edition of The CSC 50-State Guide to Qualification, “Corporate Activities that Require Qualification.” It explores the concept of “third-party sales,” and how courts have ruled on this activity:

Corporations often contract with third-party entities for the sale or delivery of goods or services. In these instances, the third-party agent is typically treated as an independent contractor. The relevant issue regarding qualification is whether the corporation’s activities are incidental to the agent’s activities and therefore exempt from qualification, or whether the corporation’s activities involve extensive oversight of the agent and, therefore, require qualification.

This distinction is illustrated by a case in which a Louisiana corporation entered into a contract with a New York company to assist the New York company in conducting a “going out of business” sale. The Louisiana corporation’s regional vice president regularly solicited companies in New York to manage their sales and was required to handle any problems that arose with those sales in New York. In addition, once engaged by a New York company to handle a sale, the Louisiana corporation maintained control over the operation of the sale by supplying salespersons and extensive advertising. The Louisiana corporation’s revenues from sales it conducted in New York over a six-month period exceeded $4.8 million. Under these circumstances, the court held that the Louisiana corporation was engaged in regular and continuous business conduct within the state of New York and, therefore, was subject to the qualification requirements of New York.

In contrast, more recently, another New York court found that an Italian corporation which manufactured, delivered, and sometimes installed curtains was not doing business in the state. The corporation made and delivered curtains for at least two New York buildings, installed its curtains at another New York building, and listed a New York address on its website. A magazine article revealed that the corporation would be participating in the installation of curtains at four more building projects in New York City.  Defendants argued that the corporation could not sue in New York for unpaid debts because it had failed to qualify as a foreign corporation in New York state. The court disagreed, noting that the magazine article did not list the time frames for the installation projects and finding that there was a question as to whether there were systematic and regular sales and service in the state to warrant qualification.

As this excerpt indicates, determining whether to qualify to do business in a foreign state can be a complex and time-consuming task, but it needs to be done in order to avoid the harsh consequences of making the wrong decision. Qualifying to Do Business in Another State: The CSC® 50-State Guide to Qualification is a comprehensive toolbox that can help businesses make the call.

A valued resource for all 50 states

The book explores the Model Business Corporation Act (MBCA), which serves as a template for most states’ laws governing foreign corporations’ business activities within their borders. It examines the activities listed in the MBCA that are not subject to regulation, and the activities that require a foreign corporation to register to business. There is also a discussion of how internet and e-commerce activity could trigger qualification requirements, and a look at the consequences of doing business without qualifying.

Step-by-step instructions are provided for qualifying to do business in foreign states, as well as registration procedures for charitable organizations.

The handbook also includes a comprehensive scope of annotated qualification statutes for all jurisdictions, giving legal practitioners easy access to the current statutes and relevant case notes that relate to doing business in a foreign state.

Two easy-to-use charts summarize the activities that do not constitute doing business and the consequences of failing to qualify. Both charts include comments and citations. The appendix contains a list of qualification forms for all 50 states and the District of Columbia, with forms on the companion CD-ROM.

2020 Edition

The Qualification Handbook is updated annually. Significant changes found in the 2020 edition include:

  • An updated list of states that have enacted exceptions to their qualification rules for foreign corporations transacting business or providing services while responding to disasters or emergencies.
  • New case studies illustrating activities that do and do not constitute doing business in a foreign state.
  • Updated information on registering and qualifying nonprofits in foreign states.

The charts have been updated and changes to qualification statutes for all 50 states and the District of Columbia have also been captured in the book’s statutory section. 

The 2020 Edition of Qualifying to do Business in Another State is available as a softbound book or as an ebook, compatible with dedicated e-reader devices, computers, tablets and smartphones that use e-reader software or applications. It is also available on the LexisNexis Digital Library.

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To learn more about the 2020 Edition of Qualifying to do Business in Another State, call 1.800.533.1637 or visit us online at www.lexisnexis.com/csc.

Corporate mergers and qualification