A domestic corporation is a citizen of its state of incorporation and principal place of business for purposes of diversity jurisdiction.[1] By contrast, the citizenship of other “unincorporated” domestic business entities (such as limited liability companies and limited partnerships) is determined by the citizenship of each of their “members.” The analysis of the citizenship requirement for diversity jurisdiction is further complicated when the party is a foreign business entity such as a Societas Europaea (European Union), a Joint Venture (Canada), a Public Limited Company (UK, Ireland, and certain members of the Commonwealth), or a Sociedad Anónima (Colombia).

Federal courts have developed various approaches to resolving the citizenship status of foreign business entities. The “juridical person” approach is favored by the Fifth and Ninth Circuits,[2] and the “comparison approach” is favored by the Seventh and Eighth Circuits.[3] A “two-step comparison approach” was recently adopted by the Maryland district court in SNC-Lavalin Constructors Inc. v. Tokio Marine Kiln Insurance Limited, Certain Underwriters at Lloyd’s, Civ. Nos. GJH-19-873 and GJH-19-1510, 2021 WL 2550505 (D. Md. June 21, 2021)[4], following Navy Fed. Credit Union v. LTD Fin. Servs., 972 F.3d 344, 354 n. 5 (4th Cir. 2020) (referencing a Seventh Circuit comparison approach case).

The juridical person view focuses on whether the country where the foreign entity was formed treats the entity as a “juridical person,” defined as a non-human entity that is recognized as a legal authority having a distinct identity that can own property, make contracts, transact business, and conduct litigation in its own name.[5] By law, a juridical person has its own duties and rights and is recognized as a legal person.[6] The analysis is straightforward and asks only if the business’s “home” country treats the business as a juridical person.[7] If so, the entity is treated as a corporation for citizenship purposes; if not, it is considered an unincorporated association and has the citizenship of each of its members.[8]

Under the comparison view, the court compares the foreign entity to certain paradigm characteristics of U.S. corporations or other business entities.[9] Relevant characteristics include whether the entity has a perpetual existence, is governed by a board of directors, is able to issue tradable shares, and is treated as independent of its equity investors.[10] Following the Fourth Circuit’s two-step comparison approach, the court will first look to see if a foreign entity has a clear domestic analogue.[11] If so, the court will evaluate whether the domestic analogue is a corporation or some other type of unincorporated entity; if there is no clear domestic analogue, the court will next look to the “structure of an entity” to determine if its features resemble a U.S. corporation.[12]

Under The Two-Step Comparison Approach, A Societas Europaea Is Analogous To A U.S. Corporation For Purposes Of Diversity Jurisdiction

A Societas Europaea, or “SE,” is a company organized under the corporate laws of the European Union. In determining the citizenship of an SE for federal diversity jurisdiction purposes, the district court in SNC-Lavalin applied the two-step comparison approach. It first looked to see if the SE had a clear domestic analogue in the United States.[13] Based on the defendants’ arguments and supporting documentation, the court concluded that a U.S. corporation is a “plausible” analogue to an SE because an SE has transferable shares, limited liability, and a legal personality independent from its shareholders.[14] Further, the statute creating an SE imposes requirements that are similar to those imposed on U.S. corporations, i.e., registration requirements,[15] reporting requirements,[16] requirements for shareholder meetings and shareholder voting,[17] and requirements for management and oversight.[18]

However, upon finding that a U.S. corporation was merely a “plausible,” not a “clear,” analogue for an SE, the district court had to go further by employing the standard comparison approach embraced by the Seventh and Eighth Circuits. The court considered the relevant characteristics and found that the SE at issue had “a perpetual existence without regard to death, dissolution, or withdrawal of its individual shareholders,” “was governed by a Board of Directors,” and “was able to issue shares that were transferable, subject to certain restrictions.”[19] The SE also “had a corporate existence separate from that of its shareholders.”[20]

In addition, the district court highlighted the SE’s ability “to enter into contracts, own property, transact business, and sue and be sued in its own name and right; [and] to be taxed at a corporate level with its shareholders not subject to taxation on the SE’s revenues or profits.”[21] Further, the SE’s shareholders were not liable for the SE’s debts, and the potential liability of its shareholders was limited to a shareholder’s capital stake in the company.[22] Since the SE had all the features of a U.S. corporation, SNC-Lavalin held that the SE should be treated as such when deciding diversity jurisdiction.[23]

Under The Juridical Approach, A Societas Europaea Would Also Likely Be Considered Analogous To A U.S. Corporation

A court employing the juridical approach would likely reach the same result as SNC-Lavalin. SEs are treated by the European Union as having their own legal personality insofar as the assets of the SE are divided into shares and owned by the shareholders, and the SE has a supervisory board and can only be established by a legal entity.[24] SNC-Lavalin highlighted the fact that the SE at issue had the ability to sue in its own name and right, make contracts, and transact business as a separate legal entity from its shareholders, all of which demonstrated that the SE would be treated as “juridical person” under E.U. law and, thus, akin to a U.S. corporation.

Conclusion

While the citizenship of the SE at issue in SNC-Lavalin was held to be analogous to a U.S. corporation, determining the citizenship of other types of foreign business entities for diversity jurisdiction purposes may lead to different results depending on the district court deciding the case. While the law on this topic is currently limited, this issue will continue to arise as long as foreign businesses continue to conduct business inside the United States.

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If you have any questions regarding this client alert, please contact partners Jeffrey Weinstein, Steven Nassi, or the Mound Cotton attorney with whom you regularly work.  

[1] 28 U.S.C. § 1332(c)(1).
[2] See, e.g., Stiftung v. Plains Mktg., L.P., 603 F.3d 295, 298 (5th Cir. 2010); Cohn v. Rosenfeld, 733 F.2d 625 (9th Cir. 1984).
[3] See, e.g., Jet Midwest Int’l Co., Ltd v. Jet Midwest Grp., LLC, 932 F.3d 1102 (8th Cir. 2019); Fellowes, Inc. v. Changzhou Xinrui Fellowes Office Equip. Co., 759 F.3d 787 (7th Cir. 2014); Lear Corp. v. Johnson Electric Holdings Ltd., 353 F.3d 580 (7th Cir. 2003).
[4] Mound Cotton Wollan & Greengrass LLP represent the insurers in the SNC-Lavalin Constructors Inc. v. Tokio Marine Kiln Insurance Limited, Certain Underwriters at Lloyd’s, et. al., case.
[5] Juridical-Person, Black’s Law Dictionary (11th ed. 2019).
[6] 733 F.2d at 629.
[7] Id.
[8] 733 F.2d at 630; 603 F.3d at 298-99.
[9] 353 F.3d at 583; 932 F.3d at 1105; 759 F.3d at 788-89.
[10] Id.
[11] Navy Fed. Credit Union, 972 F.3d at 345, n.5; SNC-Lavalin, 2021 WL 2550505, at *5.
[12] Id.
[13] 2021 WL 2550505, at * 8.
[14] Id. at *9.
[15] EU Council Regulation No. 2157/2001, art. 12–16.
[16] Id. art. 61– 62.
[17] Id. art. 38, 52–60.
[18] Id. art. 38–45.
[19] 2021 WL 2550505, at *9.
[20] Id.
[21] Id. at *9.
[22] Id.[23] Id.
[24] See European Business Structures, Business.gov.nl, available at https://business.gov.nl/starting-your-business/choosing-a-business-structure/european-business-structures/. Last visited on September 23, 2021.