Your company may be a foreign company.  Where your company, for example, has operations or makes sales, outside of its home jurisdiction it may be required to register as a foreign corporation in those other jurisdictions.

The most common situation I encounter is a federally (Canada) incorporated company operating in any Canadian province or territory.  While federal incorporation involves listing the company’s head office, the company is still required to register extra provincially where it is doing business.  For example, a federal corporation with a head office in BC would register extra provincially in B.C.

On the U.S. side, the same applies to a Delaware corporation that has a head offices in another state, for example California, and requiring the company to register as a foreign corporation in that other state.  As such, all Delaware incorporated startups based in California are (or should be!) registered foreign corporations in California.

Each jurisdiction has different rules defining when your company has to register as a foreign corporation.  A head office is only one way to be considered a foreign corporation.  As a founder, it’s less important to understand the exact requirements (that’s the lawyers job) than to understand that doing business in jurisdictions outside of where you are incorporated may require the company to register as a foreign corporation.

1.  Securities Law:  If your startup is selling shares or other forms of investment, securities law applies.  In the cross-border context, you may need to comply with the securities laws of your jurisdiction AND those of the purchaser’s jurisdiction.  For example, if a B.C. company sells shares to a U.S. investor, both B.C. and U.S. securities law applies.

Ultimately, as a startup founder, your role is to understand that the securities laws of multiple jurisdictions may apply to a transaction and ensure that your legal advisors address these laws.

2.  Privacy Law:  The privacy laws of every jurisdiction in which your startup has users (theoretically) apply.  In this respect, every startup has cross-border privacy law issues.  Nonetheless, to comply with the privacy laws of every  jurisdiction from which your users originate is, for an early-stage startup, incredibly expensive and time-consuming.

In my opinion, it makes financial sense to comply with the privacy laws of your startup’s jurisdiction and, as your company grows, the privacy laws of each jurisdiction in which you gain traction.  The basis for this approach being the assumption that a company may only face privacy law issues when it achieves traction in a particular market.

3.  Tax:  Need I say more?  Cross-border taxation issues are always a concern when your startup is doing business outside its home jurisdiction.  Tax is far too complex for a brief blog post – simply put, always keep tax in mind.

In sum, all startups face cross-border legal issues, if only due to the borderless nature of the Internet.  At a minimum, it’s important for startups to recognize the potential for the laws of other jurisdictions to impact their company and to plan compliance with these laws.

In previous blog posts I suggested that incorporating in Canada is not a substantial hindrance to receiving U.S. investment.  In some situations, the U.S. investor could require the Canadian company to become a U.S. (likely Delaware) company.  While this sounds simple in practice, how does this Canadian-U.S. company swap work?

While each investment is different, one approach is as follows:

1.  The investor and Canadian company reach an agreement on investment terms.  This agreement also lays out the steps that must be completed as part of the deal (both before the deal is closed, and after) to facilitate the swap.

2.  A U.S. company is incorporated (likely Delaware).  This company will receive investment from the U.S. investor.

3.  The U.S. company acquires the Canadian company through a share exchange whereby shares of the U.S. company are exchanged for shares of the Canadian company.  Through this exchange, the Canadian founders/other shareholders receive equivalent equity in the U.S. company as they had in the Canadian company and the Canadian company becomes owned, 100%, by the U.S. company.

4.  Investment is made in the U.S. company.

There are also additional considerations, such as how the Canadian subsidiary will be used going forward and ownership of intellectual property.  Ultimately, the steps above aim to show you that a Canadian incorporated startup can be later swapped for a U.S. company to satisfy an investor.

Frequently, large technology companies face lawsuits in foreign courts over their failure to comply with foreign laws, primarily those concerning privacy, sales and consumer rights.  In Germany, WhatsApp’s Terms of Service violated consumer protection laws; in Canada, Facebook is challenging the application of Canadian privacy law; and in Australia, Valve’s no return policy allegedly violates consumer protection laws.  As your startup grows, users may come from major markets across the world and create a challenge – how to balance growth with legal compliance?

Governing law clauses (X law applies and X courts have jurisdiction) are frequently unable to prevent the application of foreign laws to your company – just ask WhatsApp, Facebook or Valve.  Therein, to comply with the laws of only one market naturally leaves your startup exposed to legal liability for non-compliance in other markets.  While I suggest considering compliance with the law of each market in which you gain traction, I also recognize that cost concerns and a startup’s focus on growth strategies means that compliance is always on the back burner.

When balancing growth with legal compliance, consider:

1.  Size of your company in each market:  the larger your company is in a market, the more likely the laws of that market will be asserted against you.

2.  General size of your company:  the larger (and wealthier) your company is, the more likely the laws of foreign markets will be asserted against you.

3.  Potential liability:  How large is your company’s exposure to liability for non-compliance in each market?  How comfortable is the company with this exposure?

4.  PR:  Does non-compliance create a substantial chance for bad PR in that market?

Small startups (and large technology companies) frequently focus on growth over legal compliance.  Indeed, at the start of your company, potential liability is low as the company is flying under the radar – here, focusing on growth makes sense.  Once you company grows, legal compliance should be weighed and constantly reevaluated as laws, and your company, change.