Times You May Not Need a US Affiliate

Ten days ago I was in Belfast, speaking on a joint Invest Northern Ireland- Catalyst program about doing business in the US. Much virtual ink has been spilled on this blog about when an Irish or Northern Irish company should form an affiliate in the US, and the reasons why. At the Belfast program, a participant asked me when an Irish or Northern Irish company might not need to form an affiliate in the US. Specifically, I was asked whether having/using a ‘hot desk’ in the US would require the Irish or Northern Irish company to form a US affiliate. The short answer is ‘no.’

Of course, there is a bit more explanation needed (I’m a lawyer after all…).  First, the answer to the question of whether one needs to form an affiliate in the US depends in part on whether the parent company can be deemed or determined to be doing business in one of the US states. That analysis can vary from state to state, and each US state has its own rules. But, in general, the use of a ‘hot desk’ on a periodic basis should not cause an Irish or NI company to be deemed to be doing business in most states. The second point is that the ‘doing business’ determination can and will change the more things an Irish or Northern Irish company does with that ‘hot desk.’ The more activity–making sales, servicing customers, executing contracts, hiring employees or contractors–and the greater the likelihood that the parent company would be deemed to be doing business in that state, and that’s when I recommend the formation of a US affiliate.  In other words, the more you do with a ‘hot desk’ and the more commercial contacts you have, the greater the likelihood that you’d be deemed to be doing business in a US state (or more than one) and should consider forming an affiliate.

Minimizing ‘Alter Ego’ Risk for Irish and Northern Irish Parents of US Affiliates

Previously, I’ve written how forming a U.S. affiliate can be like using a lightning rod for U.S. litigation risk. Properly used, a U.S. affiliate can help keep U.S. litigation risk away from the Irish/NI parent and its investors. Forming a U.S. affiliate is not enough, and the lightning rod is useless if the U.S. affiliate is considered to be an ‘alter ego’ of the Irish/NI parent.

The corporation (and limited liability company) form in the U.S. generally shields an entity’s investors from the entity’s liabilities; investors would stand to lose their investment, and nothing more, if the entity collapses. There are some limited circumstances where an American court can ‘pierce the veil’ of this liability shield, and impose entity liabilities on an investor—one of those circumstances is when the entity in question is an ‘alter ego’ of one if its investors. In other words, if a U.S. affiliate were deemed to be an ‘alter ego’ of its Irish or Northern Irish parent, the parent and its investors could be responsible for the U.S. affiliate’s liabilities.

When determining whether a subsidiary is an alter-ego of its parent, U.S. courts consider many factors, including whether the:

  • Parent owns all of the stock in the subsidiary;
  • Subsidiary is adequately capitalized;
  • Corporate formalities are observed;
  • Parent and subsidiary share corporate officers and directors;
  • Subsidiary has its own offices, employees and bank accounts;
  • Parent pays the salaries of the employees of the subsidiary;
  • Parent siphons money out of the subsidiary;
  • Subsidiary and parent share administrative services, employees or insurance arrangements without proper, arm’s length compensation between them;
  • „Parent uses the subsidiary’s property as its own; and
  • Subsidiary’s function is a mere façade for the parent company.

Irish and Northern Irish parent companies can minimize the risk of having their U.S. affiliate being deemed to be an ‘alter ego’ of the parent by:

  • Properly capitalizing and insuring the subsidiary. U.S. courts are less likely to extend jurisdiction over foreign parent if the plaintiff can collect the full amount of a judgment against a properly capitalized U.S. corporation;
  • Complying with corporate formalities;
  • Creating the subsidiary’s own bank account;
  • Documenting rationale for the subsidiary’s capital structure;
  • Documenting inter-company loans;
  • Maintaining appropriate debt/equity balance;
  • Having the subsidiary hire and pay for its own employees; and
  • Creating the subsidiary’s own board of directors.

None of this is bullet-proof, of course, but the above steps should help the U.S. affiliate act like the lightning rod as intended.

It’s About the Process…

When Irish and Northern Irish companies ask if there is *one* thing they can or should do to minimize the risk of operating in the US, I channel my inner Mr. McGuire (from the movie The Graduate) and say ‘process.’ It’s not quite as pithy as ‘plastics,’ but it works. What I mean by that remark is this: adopting and consistently using a process for developing and executing US contracts will go a long way in terms of risk mitigation. Comprehensive, American-style contracts, and the process by which they are built, are the most powerful defenses in an Irish or Northern Irish company’s risk-avoidance arsenal. Continue reading

Life Sciences Companies and Free %$&*@# Speech

Irish and NI life sciences companies operating in the US likely are familiar with the concept of “off-label” promotion–providing information about drug/device uses that have not been cleared by the FDA (even where the FDA has approved of certain other uses for such drug/device)–and the FDA’s restrictions on the same. In a recent case (Amarin Pharma, Inc. v. United States Food and Drug Administration, August 5, 2015), the 2nd U.S. Circuit Court of Appeals held that the FDA cannot prosecute companies and their representatives under the Federal Food, Drug, and Cosmetic Act for truthful, non-misleading discussion, even if about off-label uses for a drug/device. Further, the court enjoined FDA in the case from considering the off-label communications to be evidence of misbranding. The decision makes clear that false or misleading statements are not protected speech. This decision is binding only within the jurisdiction of the Federal Second Circuit Court of Appeals: Federal courts in New York, Connecticut, and Vermont.  However, the decision is clearly a win for industry to communicate proactively truthful and non-misleading information about clinical trial results. My colleagues Alan Minsk and Bill Kitchens have written an excellent client alert on this case and its impact, available here. Despite the questionable use of a song title from the band Queen, the update is well worth the time for any Irish or NI life sciences company operating in, or looking to expand to, the U.S.

Everybody is an Employee…Maybe…Possibly

Businesses operating in or expanding to the US, including those from Ireland and Northern Ireland, use independent contractors to avoid some of the baggage associated with the employer/employee relationship under US law.  The use of independent contractors recently has gotten more complicated due to the US Department of Labor’s publication of Administrator’s Interpretation 2015-1.  The Interpretation is part of the Department’s closer monitoring of the ‘independent contractor’ designation. Businesses from Ireland or Northern Ireland operating in or expanding to the US, and using the services of an independent contractor (such as a sales agent) should take another look at how they designate a person as an ‘independent contractor,’ as soon as possible. Continue reading

Effectively Using a Lightning Rod

It’s been a while…my apologies! Waiting at an airport on a winter weather delay has me thinking of all the times I’ve been delayed because of summer weather like…lightning storms. It also gave me a chance to talk to a non-US company client about doing business here, and their structuring options; which also relates to my earlier post about when a company is deemed to be doing business here, for jurisdictional purposes.

Continue reading

Delaware is Right, Unless It’s Not

In the context of forming a U.S. affiliate, I’m often asked by non-U.S. companies whether Delaware is the always the best jurisdiction to form an entity. My answer: not always.

Irish and Northern Irish businesses should realize that the formation of business entities in the U.S. is done at the state level, not the Federal level. While Delaware is an attractive jurisdiction for corporate law, it’s not a huge business center—at least not the size of New York, California, Illinois, Texas, etc. That leaves the Irish/NI parent with a choice: (i) form the legal entity in the state where it will do most of its business; (ii) form the legal entity in Delaware and register it as a ‘foreign’ corporation in the state where it will do most of its business. Continue reading