Foreign Corporations

Corporations Code § 171 defines “foreign corporation” to mean any corporation other than a domestic corporation. Basically, a foreign corporation is a corporation not formed under California laws.

A foreign corporation that transacts business in California is subject to the General Corporation Law. As such, a foreign corporation may not transact intrastate business in California without first obtaining the proper certifications. Corporations Code § 2105(a).

What is Intrastate Business?

Transacting intrastate business means "entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce." Corporations Code § 191(a). There is no set number of transactions that falls within the definition. Each case must be looked at individually and reviewed by a number of factors.

Exceptions to Qualifying as a Foreign Corporation

There are situations when a foreign corporation is conducting business in California, but is not required to qualify as a foreign corporation. A foreign corporation is not considered transacting intrastate business when conducting any of the following activities:

Maintaining or defending any action or suit or any administrative or arbitration proceeding, or effecting the settlement thereof or the settlement of claims or disputes.

Holding meetings of its board or shareholders or carrying on other activities concerning its internal affairs.

Maintaining bank accounts.

Maintaining offices or agencies for the transfer, exchange, and registration of its securities or depositaries with relation to its securities.

Effecting sales through independent contractors.

Soliciting or procuring orders, whether by mail or through employees or agents or otherwise, where those orders require acceptance outside this state before becoming binding contracts.

Creating evidences of debt or mortgages, liens or security interests on real or personal property.

Conducting an isolated transaction completed within a period of 180 days and not in the course of a number of repeated transactions of like nature.

Corporations Code Section 191(c)(1)-(8)

Quasi-California Corporations

There are foreign corporations and there are "quasi-California corporations." A foreign corporation is considered a "quasi-California corporation" if:

The average of the corporation’s business factors (i.e., the average of its property factor, payroll factor, and sales factor, as defined under the California Revenue and Taxation Code) is more than 50 percent during its latest full income year; and

More than half of its outstanding voting securities are held of record by persons having California addresses, as appears on the books of the corporation on the record date for the latest meeting of shareholders held during its latest full income year or, if no meeting was held during that year, on the last day of the latest full income year.

Quasi-California corporations are subject to Corporations Code Section 2115. This section requires quasi-California corporations to comply with the following California chapters and sections:

Chapter 1 (general provisions and definitions), to the extent applicable to the following provisions;

Section 301 (annual election of directors);

Section 303 (removal of directors without cause);

Section 304 (removal of directors by court proceedings);

Section 305, subdivision (c) (filling of director vacancies where less than a majority in office elected by shareholders);

Section 309 (directors standard of care);

Section 316 (excluding paragraph (3) of subdivision (a) and paragraph (3) of subdivision (f)) (liability of directors for unlawful distributions);

Section 317 (indemnification of directors, officers, and others);

Sections 500 to 505, inclusive (limitations on corporate distributions in cash or property);

Section 506 (liability of shareholder who receives unlawful distribution);

Section 600, subdivisions (b) and (c) (requirement for annual shareholders meeting and remedy if same not timely held);

Section 708, subdivisions (a), (b), and (c) (shareholders right to cumulate votes at any election of directors);

Section 710 (supermajority vote requirement);

Section 1001, subdivision (d) (limitations on sale of assets);

Section 1101 (provisions following subdivision (e)) (limitations on mergers);

Section 1151 (first sentence only) (limitations on conversions);

Section 1152 (requirements of conversions);

Chapter 12 (commencing with Section 1200) (reorganizations);

Chapter 13 (commencing with Section 1300) (dissenters rights);

Sections 1500 and 1501 (records and reports);

Section 1508 (action by Attorney General);

Chapter 16 (commencing with Section 1600) (rights of inspection).

Not a Quasi-California Corporation and Not a Qualified Foreign Corporation

There are circumstances where a foreign corporation does not need to qualify as such in California; however, because of that foreign corporation's activities in California, the corporation may need to comply with certain California laws. For example, a foreign corporation with a principal executive office in California that holds board meetings in California must comply with California Corporations Code Sections 1501, 1600, 1602. These sections require annual reports and other reports to shareholders, permit inspection of the shareholders' lists, and allow directors to inspect corporate books and records.

Procedures to Qualify as a Foreign Corporation

A foreign corporation must submit the appropriate paperwork to the Secretary of State. Among the documents, one is a statement and designation by foreign corporation. This form is available on the Secretary of State's website. Here is a link to the form for a stock corporation. The Secretary of State requires additional forms as well. Our Sacramento Business Attorneys would be happy to go over the requirements to qualify as a foreign corporation during an initial consultation.

Failing to Qualify as Foreign Corporation

A corporation that must qualify as a foreign corporation in California, but fails to do so, may run the risk of several possible penalties.

For every day of unauthorized intrastate business that is willfully transacted there is a possible fine of $20. Corporations Code § 2203.

Transacting intrastate business by a foreign corporation with first qualifying with the Secretary of State is a misdemeanor. As such, criminal fines may be imposed from $500 to $1000. Corporations Code § 2258.

The foreign corporation may not be able to sue on claims regarding transactions. Corporations Code § 2203.

There are additional penalties that may apply if a foreign corporation fails to qualify. It's important to take the necessary time to understand the requirements of foreign corporations to ensure that your corporation is not penalized.

Contact Sacramento's Business Attorneys to Discuss Foreign Corporations

Feel free to contact our business law firm to set up an initial meeting to discuss foreign corporations.

Call Us: (916) 669-8400

*The information provided in this post does not constitute legal advice or opinion. The information is for guidance purposes only. Individual situations vary and you should contact us for a consultation. Sacramento Business Law Attorneys Foreign Corporations.

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