How a Foreign Company Can Effectively and Successfully Enter the U.S. Market: Protecting the Company’s Assets from U.S. Jurisdiction

Jurisdiction in U.S. Courts

As a general rule, a foreign company that operates in the United States subjects itself to the jurisdiction of the United States courts and the state courts in which the company is doing business, even without the presence of a branch office or a foreign subsidiary. United States law provides that a foreign company subjects itself to the jurisdiction of U.S. courts and laws when it establishes certain “minimum contacts” with the United States or one of the individual states. These “minimum contacts” can be the opening of a branch office or a subsidiary, soliciting sales from U.S. customers through a sales agent or distributor, or through advertising directed at U.S. customers or an Internet website. As the Internet has taken on a greater role as a marketing and sales medium, many companies could be unknowingly subjecting themselves to the jurisdiction of U.S. courts through their websites, even without any physical presence in the United States. [1]

If a court determines that minimum contacts with the U.S. forum exist in order to confer jurisdiction over a foreign company, the company could face the ordeal of litigation in the U.S. court system, with the expenses and burdens that entails, such as high attorney’s fees,[2] damages, including punitive, and jury trials. If the company has established a branch office in the United States, or if it is making sales to U.S. customers through an agent or a website, the assets of the parent company could be at risk for the collection and satisfaction of a judgment issued by a U.S. court.[3] For a foreign company to insulate itself from the jurisdiction of the U.S. courts and to ensure that its assets are protected against the enforcement of a U.S. judgment, it should consider establishing a United States subsidiary. Preferably, this should be done once the company has decided that it will enter the U.S. market and before conducting any business in the United States.

Business Entities and Limited Liability Companies

The U.S. subsidiary of the foreign parent company should be formed in the state where most of the business will be conducted. If this is impossible to determine, the general rule of thumb is to form the subsidiary in the state where the principal office will be located. All states allow for the formation of corporations and limited liability companies (LLC). Due to its ease and flexibility in formation and ownership, a LLC is often the preferred business entity for a company that is establishing its foreign subsidiary.

First created in Wyoming in the late 1970s, limited liability companies are now found in all states, albeit with variations.[4] The limited liability company is often called a hybrid between a partnership and a corporation. It offers many advantages to other business entities, such as partnerships, sole proprietorships, or corporations. For example, in most states, one person is allowed to form and manage a LLC, and unlike a corporation, a LLC does not involve the complexities of issuing shares or annual filings with the Secretary of State. Members can divide profits and losses as they wish, not in proportion to the shares held as in a corporation, and formal annual meetings are not required under the laws of most states. Furthermore, members are allowed to prepare written minutes in lieu of a meeting (the minutes need not be filed with the Secretary of State), and meetings can be held via telephone or video conference. A plus for foreign companies is that in most states, LLCs have no nationality or residence requirements for officers and directors.

Delaware is widely considered to be the preferred state for corporations. Indeed, there are certain advantages if there are concerns about disputes between shareholders, officers or directors or if the corporation plans on issuing a large number of public shares. Delaware, unlike other states, has courts (Chancery Courts) dedicated solely to business disputes; cases are decided by judges, not by juries. However, Delaware offers no particular advantages regarding activities between the business entity, whether it be a LLC or a corporation, and third parties. A foreign company is advised to consider more than Delaware’s reputation as a business friendly state when deciding where to establish its U.S. subsidiary.

Unlike many European and Latin American countries, there is no minimum capital contribution to form a limited liability company or a corporation in the United States. The filing fee varies from state to state but in most cases is relatively inexpensive. For example, in Delaware the filing fee for a LLC is $90.00, while it is $160.00 in Minnesota, $200.00 in New York and $125.00 in Florida. However, annual taxes can be much higher in the different states. The Articles of Organization, often a one-page document, must be filed with the Secretary of State when the fee is paid. This document is generally found online through the Secretary of State website of each state. Internal documents, such as Operational Agreements and Member Control Agreements, should be prepared as well, preferably with a U.S. attorney, in order to show that the U.S. subsidiary is more than a mere “shell” established to protect the foreign parent’s assets. These documents need not be filed with the Secretary of State or any other state office.

Nevertheless, there may be considerable protection from a “shell” company. Persuading a U.S. court to disregard the corporate protection or “pierce the corporate veil” is a difficult process. The “shell” company can gradually be filled as the business and the U.S. market share grow, to become a full-grown, separate business organization. As the business grows, the foreign parent and the U.S. subsidiary should modify their business dealings in order to continue to protect the foreign parent’s assets and limit its liability in the United States courts.

Part Two of the series will deal with the contractual and business issues between the foreign parent company and the U.S. “child” as the subsidiary and its U.S. market presence expands, and will also consider employment and immigration law issues.

[1] The jurisdiction of U.S. courts over foreign companies and individuals through the operation of a website site is an area of law in development and one for which no bright-line test exists. Generally, to show that jurisdiction should be conferred and that due process is not violated, it must be shown that “minimum contacts” exists because a defendant has “purposefully availed” itself of the forum state’s jurisdiction. In the context of a website, courts often distinguish between a passive and interactive site, finding that a “purposeful availment” of the forum state’s jurisdiction exists when there is an “interactive” site (as opposed to one that is purely informational) and additional and more active contacts with the forum, such as Internet sales to the forum residents, conducting business in the forum state through numerous contacts, or entering into specific dealings with forum residents.

[2] Unlike in many European countries, the United States legal system does not have a “loser pays” rule, under which the losing party pays the attorney’s fees for the prevailing side. Each party is responsible for paying its own costs and expenses, unless there is a statute that provides otherwise (found generally in employment statutes, under which the employer is responsible for the employee’s attorney’s fees, and some civil and human rights statutes).

[3] For the foreign company’s assets to be at risk for the satisfaction of a judgment, it would be necessary for the plaintiff to enforce the judgment in the courts in the foreign company’s country. Although a complicated and uncertain process, foreign courts have shown an increased willingness to enforce foreign judgments issued against its nationals.

[4] Like many areas of U.S. law, there are no federal laws regarding limited liability companies. Each state has its own legislation regarding the formation and management of limited liability companies and corporations. For this reason, the foreign parent must work with an attorney licensed in the state in which the company wants to establish subsidiary. U.S. attorneys are permitted to practice law only in the states in which they are licensed.

Jurisdiction in U.S. Courts

As a general rule, a foreign company that operates in the United States subjects itself to the jurisdiction of the United States courts and the state courts in which the company is doing business, even without the presence of a branch office or a foreign subsidiary. United States law provides that a foreign company subjects itself to the jurisdiction of U.S. courts and laws when it establishes certain “minimum contacts” with the United States or one of the individual states. These “minimum contacts” can be the opening of a branch office or a subsidiary, soliciting sales from U.S. customers through a sales agent or distributor, or through advertising directed at U.S. customers or an Internet website. As the Internet has taken on a greater role as a marketing and sales medium, many companies could be unknowingly subjecting themselves to the jurisdiction of U.S. courts through their websites, even without any physical presence in the United States. [1]

If a court determines that minimum contacts with the U.S. forum exist in order to confer jurisdiction over a foreign company, the company could face the ordeal of litigation in the U.S. court system, with the expenses and burdens that entails, such as high attorney’s fees,[2] damages, including punitive, and jury trials. If the company has established a branch office in the United States, or if it is making sales to U.S. customers through an agent or a website, the assets of the parent company could be at risk for the collection and satisfaction of a judgment issued by a U.S. court.[3] For a foreign company to insulate itself from the jurisdiction of the U.S. courts and to ensure that its assets are protected against the enforcement of a U.S. judgment, it should consider establishing a United States subsidiary. Preferably, this should be done once the company has decided that it will enter the U.S. market and before conducting any business in the United States.

Business Entities and Limited Liability Companies

The U.S. subsidiary of the foreign parent company should be formed in the state where most of the business will be conducted. If this is impossible to determine, the general rule of thumb is to form the subsidiary in the state where the principal office will be located. All states allow for the formation of corporations and limited liability companies (LLC). Due to its ease and flexibility in formation and ownership, a LLC is often the preferred business entity for a company that is establishing its foreign subsidiary.

First created in Wyoming in the late 1970s, limited liability companies are now found in all states, albeit with variations.[4] The limited liability company is often called a hybrid between a partnership and a corporation. It offers many advantages to other business entities, such as partnerships, sole proprietorships, or corporations. For example, in most states, one person is allowed to form and manage a LLC, and unlike a corporation, a LLC does not involve the complexities of issuing shares or annual filings with the Secretary of State. Members can divide profits and losses as they wish, not in proportion to the shares held as in a corporation, and formal annual meetings are not required under the laws of most states. Furthermore, members are allowed to prepare written minutes in lieu of a meeting (the minutes need not be filed with the Secretary of State), and meetings can be held via telephone or video conference. A plus for foreign companies is that in most states, LLCs have no nationality or residence requirements for officers and directors.

Delaware is widely considered to be the preferred state for corporations. Indeed, there are certain advantages if there are concerns about disputes between shareholders, officers or directors or if the corporation plans on issuing a large number of public shares. Delaware, unlike other states, has courts (Chancery Courts) dedicated solely to business disputes; cases are decided by judges, not by juries. However, Delaware offers no particular advantages regarding activities between the business entity, whether it be a LLC or a corporation, and third parties. A foreign company is advised to consider more than Delaware’s reputation as a business friendly state when deciding where to establish its U.S. subsidiary.

Unlike many European and Latin American countries, there is no minimum capital contribution to form a limited liability company or a corporation in the United States. The filing fee varies from state to state but in most cases is relatively inexpensive. For example, in Delaware the filing fee for a LLC is $90.00, while it is $160.00 in Minnesota, $200.00 in New York and $125.00 in Florida. However, annual taxes can be much higher in the different states. The Articles of Organization, often a one-page document, must be filed with the Secretary of State when the fee is paid. This document is generally found online through the Secretary of State website of each state. Internal documents, such as Operational Agreements and Member Control Agreements, should be prepared as well, preferably with a U.S. attorney, in order to show that the U.S. subsidiary is more than a mere “shell” established to protect the foreign parent’s assets. These documents need not be filed with the Secretary of State or any other state office.

Nevertheless, there may be considerable protection from a “shell” company. Persuading a U.S. court to disregard the corporate protection or “pierce the corporate veil” is a difficult process. The “shell” company can gradually be filled as the business and the U.S. market share grow, to become a full-grown, separate business organization. As the business grows, the foreign parent and the U.S. subsidiary should modify their business dealings in order to continue to protect the foreign parent’s assets and limit its liability in the United States courts.

Part Two of the series will deal with the contractual and business issues between the foreign parent company and the U.S. “child” as the subsidiary and its U.S. market presence expands, and will also consider employment and immigration law issues.

[1] The jurisdiction of U.S. courts over foreign companies and individuals through the operation of a website site is an area of law in development and one for which no bright-line test exists. Generally, to show that jurisdiction should be conferred and that due process is not violated, it must be shown that “minimum contacts” exists because a defendant has “purposefully availed” itself of the forum state’s jurisdiction. In the context of a website, courts often distinguish between a passive and interactive site, finding that a “purposeful availment” of the forum state’s jurisdiction exists when there is an “interactive” site (as opposed to one that is purely informational) and additional and more active contacts with the forum, such as Internet sales to the forum residents, conducting business in the forum state through numerous contacts, or entering into specific dealings with forum residents.

[2] Unlike in many European countries, the United States legal system does not have a “loser pays” rule, under which the losing party pays the attorney’s fees for the prevailing side. Each party is responsible for paying its own costs and expenses, unless there is a statute that provides otherwise (found generally in employment statutes, under which the employer is responsible for the employee’s attorney’s fees, and some civil and human rights statutes).

[3] For the foreign company’s assets to be at risk for the satisfaction of a judgment, it would be necessary for the plaintiff to enforce the judgment in the courts in the foreign company’s country. Although a complicated and uncertain process, foreign courts have shown an increased willingness to enforce foreign judgments issued against its nationals.

[4] Like many areas of U.S. law, there are no federal laws regarding limited liability companies. Each state has its own legislation regarding the formation and management of limited liability companies and corporations. For this reason, the foreign parent must work with an attorney licensed in the state in which the company wants to establish subsidiary. U.S. attorneys are permitted to practice law only in the states in which they are licensed.