Corporations are creatures of state law, formed under the laws of a specific state. A corporation which confines its operations to its state of incorporation does not need to worry about the corporate laws of other states.
But shareholders of corporations want them to grow and increase profitability. For this purpose, corporations will expand operations outside their state of incorporation. Outside of its state of incorporation, a corporation is a "foreign" corporation.
States not only regulate and tax corporations incorporated in their state, but also foreign corporations that do business in their states. Foreign corporations must register to do business in states in which they are not incorporated. In exchange for agreeing to be subject to jurisdiction in states where they are registered, foreign corporations are granted the rights of a domestic corporation (i.e., a corporation actually incorporated in that state). A recent Delaware case shows the risks in failing to register as a foreign corporation. (Centralia Mining Co., v. Deneen Crawford, Delaware Supreme Court, No. 543, 2010, decided February 14, 2011)
Centralia Mining Company is a Pennsylvania corporation that, in 1959, purchased Crossroads Shopping Plaza (which the Court, to avoid confusion, refers to as the "Shopping Center") located in New Castle, Delaware. Through its purchase of the Shopping Center, Centralia engaged in commercial leasing activities. But Centralia's problem was that it never registered to do business as a foreign corporation in Delaware. Moreover, in 1991, Centralia changed its name from "Centralia Mining Company" to "Crossroads Shopping Plaza, Inc." But it remained a Pennsylvania corporation without authority to transact business in Delaware as a foreign corporation.
On December 13, 2005, Deneen Crawford was shopping at the Family Dollar store located at the Shopping Center. She slipped and fell on a puddle of water. In December, 2007 Crawford sued Family Dollar and the Shopping Center's owner, as best as she could ascertain. Crawford settled with Family Dollar for $25,000. On February 18, 2010, Crawford obtained a default judgment against Centralia Mining Company for $125,000. Of course, Centralia Mining Company (now Crossroads Shopping Plaza, Inc.) had no knowledge of the suit at the time.
Three months later, on May 17, 2010, Crossroads Shopping Plaza, Inc. did what it should have done twenty years previously; it registered with the Delaware Secretary of State as a foreign corporation. It then moved to vacate the default judgment. Crossroads argued that its failure to respond was due to excusable neglect. Crossroads was also critical of Crawford's efforts to find the owner of the Shopping Center.
The Superior Court of Delaware was not sympathetic and, on appeal, neither was the Delaware Supreme Court. The Supreme Court pointed out the obvious - Crossroads Shopping Plaza, Inc. could have avoided the whole situation by registering as a foreign corporation. By doing so, it would have designated a registered agent which would have received notice of the claim and, presumably, given Crossroads an opportunity to defend itself.
But, argued Crossroads, shouldn't Crawford have been more diligent in her investigation and found the eponymous owner of the Crossroad Shopping Plaza?
After the accident, Crawford conducted a title search of the Shopping Center and discovered the record owner to be "Centralia Mining Company," a Pennsylvania corporation. The Delaware Secretary of State confirmed that Centralia had no registered agent in Delaware. Then Crawford searched the Pennsylvania Department of State and found a "Centralia Mining" created in 2001 with a principal place of business in Shamokin, Pennsylvania. Consistent with Delaware's long-arm statute, Crawford served her complaint on the Delaware Secretary of State and then sent a copy to Centralia Mining at the Shamokin address.
Unfortunately for Crossroads Shopping Plaza, Inc., the current "Centralia Mining" in Pennsylvania had no connection with Crossroads Shopping Plaza, Inc. So the complaint went unanswered, resulting in the default judgment.
As noted, the Delaware Supreme Court let the default judgment stand. First and foremost, Crossroads Shopping Plaza, Inc. failed to comply with the statutory registration requirements for foreign corporations, a failure which had been continuing for 50 years. Second, Crawford's efforts to find the owner of the Shopping Center were reasonable. Finally, Crawford had no knowledge that Centralia Mining Company (the initial purchaser of the Shopping Center) had changed its name to "Crossroads Shopping Plaza, Inc." because Crossroads had failed to register as a foreign corporation.
As a result, Crossroads Shopping Plaza, Inc. had to face the consequences of its failure to register as a foreign corporation, including imposition of a $125,000 default judgment against it.
The lesson in all this? A corporation that ventures outside its state of incorporation should take care of other states' laws and registration requirements. Although registering as a foreign corporation will subject the corporation to the state's jurisdiction and taxation, some consequences, as shown in the Crawford case, could be even more severe.