Foreign Qualification of a Business (Part 2 of 2)

In my prior post on foreign qualification, I covered some of the basics of a company’s legal obligation to register for foreign qualification in a state.  In this post, I will take a deeper dive into the original purpose of foreign qualification laws and their potential fate.

The History of Foreign Business Qualification Rules

Foreign qualification laws arose in the middle of the nineteenth century. Back in the day of the gold rush and the pony express, judges observed stiff limitations on their jurisdiction over natural persons. A judge could only assert legal dominion over someone if the judge’s court could deliver documents to the person within the borders of the state. In the eyes of the law, states were incapable of controlling what happened outside the state’s boundary lines, whether through law or through court action.

At the time, corporations were emerging as commonplace business entities. Earlier in the 1800s, states had begun standardizing the process of chartering business by adopting incorporation statues. The rapid adoption of incorporation statues expanded access to the corporate form. The statutes allowed founders to shield themselves from personal liability for business activities by having the corporation recognized in the eyes of the law as a separate legal entity. 

Corporations were deemed “creatures of state statute,” meaning that they could only operate and exist if permitted under the laws of a state. In several high profile cases, it was determined that a corporation, as a creature of statute, was fundamentally bound to the state where it is incorporated. A corporation could act through its agents in other states, but the corporation itself did not exist outside the borders of its state of incorporation.

Increased Interstate Commerce Brings Change

Problems arose when state residents, injured by the acts of a corporation formed in another state, tried to bring suit against that corporation. Faced with the conflicting doctrines that (a) courts could only assert jurisdiction over entities located within the state and (b) corporations only existed within their states of formation, many suits against foreign corporations were dismissed for lack of jurisdiction. 

Some plaintiffs appealed these dismissals, claiming the dismissal of claims was and unjust unintended consequence of the incorporation statutes. Ultimately, the United States Supreme Court held that, if a state passes a law requiring a foreign corporation to register an office within the state, then the corporation could be sued within the state directly. Foreign qualification laws then swept the nation.

Continuing Changes in the Intervening Centuries

In the intervening centuries, two major changes have eroded the need for foreign qualification statutes. First, stiff jurisdictional requirements have been relaxed. A court can now exercise jurisdiction over any entity that makes minimal contacts with the state, whether they are capable of being served with court documents within the state or not.

Second, a corporation is no longer thought of as existing solely within the boundaries of a state. At first, courts recognized that a foreign corporation could be “present” within another state by doing business there. This development was tempered by various tests used to determine if a corporation’s activities actually constituted the presence of the corporation in the state. Later, courts turned away from the metaphysical questions surrounding a corporation’s presence, and chose to focus directly on whether it was fair to subject a corporation to a state’s jurisdiction based on the level of activity of the corporation in the state.

Expect Simpler Statutes

The American Bar Association, in its most recent guidance on the Model Business Corporations Act (MBCA), has suggested tweaking the foreign qualification provisions found in the MBCA. Their changes would do away with the bulky foreign qualification provisions and replace them with a simplified registration obligation. States will decide the fate of foreign qualification statutes over the next decades as the American Bar Association crystalizes its advice and revises the MBCA.