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), United States District Judge George J. Hazel, writing for the U.S. District Court for the District of Maryland, addressed the citizenship of a European Public Limited-Liability Company (Societas Europaea, abbreviated “SE”) – a relatively-new type of entity established under the corporate law of the European Union, with the core legal framework in EU Council Regulation No. 2157/2001 (adopted by Member States in 2001) – for purposes of federal diversity jurisdiction under 28 U.S.C. § 1332.
By way of background, this set of consolidated cases involved a civil action filed by a power plant construction contractor against a group of mostly foreign-entity insurers – including an SE – in the Circuit Court of Maryland for Prince George’s County, which defendants subsequently removed to the U.S. District Court for the District of Maryland on the basis of federal diversity jurisdiction. The federal diversity statute, in relevant part, gives the federal district courts original jurisdiction over “all civil actions” between “citizens of different States,” as well as between “citizens of a State and citizens or subjects of a foreign state,” where “the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs.” See 28 U.S.C. § 1332(a). The plaintiff filed a motion to remand arguing, inter alia, that the requisite complete diversity for the SE defendant had not been adequately demonstrated.
In the first U.S. case to address the issue, Judge Hazel adopted the arguments raised by Semmes, Bowen & Semmes attorneys, in corroboration with Mound Cotton Wollan & Greengrass LLP, holding that a SE would be treated like a U.S. corporation, with its citizenship determined based on its place of incorporation and principal place of business. As Judge Hazel noted: “The parties have not cited, and the Court is not aware of, any case law [addressing] a societas europaea… However, Defendants argue a societas europaea should be treated like a U.S. corporation for the purposes of diversity jurisdiction. The Court agrees.”[i] However, the test to reach that conclusion is not entirely settled in the Fourth Circuit.
As Judge Hazel reviewed, regarding American companies, the analysis is relatively straightforward – a “corporation is a citizen of both its state of incorporation and its principal place of business for purposes of diversity jurisdiction,” whereas “[f]or business entities other than corporations (LLCs, partnerships, etc.), however, diversity depends on the citizenship of all its members.”[ii] In contrast, when it comes to foreign entities, Judge Hazel acknowledged that the “citizenship analysis is complicated,” noting that “it is hard to determine whether a business entity from a foreign country is equivalent to a corporation: ‘not even the United Kingdom has a business form that is exactly equal to that of a corporation.’”[iii]
In addition, Judge Hazel explained there is Circuit split with courts having “followed two divergent approaches” regarding the test to be applied for foreign companies in light of the lack of clear precedent from the Supreme Court.[iv] And although the Fourth Circuit had not definitively ruled on the issue, Judge Hazel noted that the Fourth Circuit had indicated that it “favors a two-step comparison approach,” like that in the Seventh and Eighth Circuits, in which, if a foreign corporation lacks a “clear domestic analogue,” courts should look to the “structure of an entity” to determine if its “features resemble a corporation”[v] – thus, Judge Hazel held: “The Court will apply that approach here” – noting relevant characteristics under that analysis included whether the entity: “[has] perpetual existence, [is] governed by a Board of Directors, [is] able to issue tradable shares …, and [is] treated as independent of its equity investors—who are neither taxable on its profits nor liable for its debts.”[vi]
Regarding the treatment of the SE defendant, Judge Hazel first agreed with defendants that “a U.S. corporation is a plausible analogue to a societas europaea,” citing various provisions in the SE statute providing that a SE has transferable shares, limited liability, and a legal personality independent from its shareholders, as well as provisions imposing “other requirements that are characteristic of U.S. corporations,” including requirements related to registration, reporting, management and oversight, shareholder meetings, and shareholder voting.[vii] Judge Hazel went on to note, however, “to the extent a U.S. corporation is not a ‘clear domestic analogue[,]’ Navy Fed. Credit Union, 972 F.3d at 345 n.5 (emphasis added), the Court will apply the Seventh and Eighth Circuits’ comparison test” to confirm that the SE defendant was “equivalent to a U.S. corporation for the purposes of diversity jurisdiction.”[viii]
Looking to the relevant company characteristics identified by the Seventh Circuit, and the defendants’ briefing and supporting exhibits, Judge Hazel concluded that the SE defendant had “all the features of a U.S. corporation and should be treated as such for the purposes of diversity jurisdiction,” specifically noting that, inter alia, it had perpetual existence without regard to death, dissolution, or withdrawal of its individual shareholders; it was governed by a Board of Directors; it was able to issue shares that are transferable, subject to certain restrictions; it had a corporate existence separate from that of its shareholders; it had the power to enter into contracts, own property, transact business, and sue and be sued in its own name and right; it was taxed at a corporate level; its shareholders were not liable for the company’s debts, and its shareholders’ potential liability was limited to a shareholder’s capital stake in the company.[ix] Treating the SE defendant as a U.S. corporation to determine its citizenship, Judge Hazel looked to its place of incorporation and principal place of business – both of which were abroad – and thus, complete diversity existed with the U.S.-based plaintiff, and plaintiff’s motion to remand was ultimately denied.
SE’s have been growing in popularity as they provide advantages including allowing companies operating in different European countries to operate throughout the European Union with one set of rules, rather than utilizing a network of subsidiary entities.[x] And a number of SE’s have appeared on the EURO STOXX 50® Index, a stock index of 50 of the largest Eurozone companies, apparently including some recognizable names such as Airbus SE and LVMH Moët Hennessy Louis Vuitton SE.[xi] Despite the growing popularity of SE’s, a search by the author indicates that no federal Circuit Courts have yet addressed the citizenship of a SE for purposes of diversity, although operating as a SE could provide a more reliable avenue to obtaining federal jurisdiction than other types of foreign entities.
Additionally, as the Fourth Circuit has cautioned: “Despite the apparent simplicity of diversity jurisdiction, in practice it can become complicated, ensnaring the parties (and judges) in jurisdictional disputes.”[xii] And that is especially true when foreign entities are involved, and as other countries continue to establish new types of business entities that will likely not have clear-cut American-law analogues, Judge Hazel’s decision in this case may have additional value in providing an overview of pertinent considerations that may impact how new entities will be treated for purposes of federal diversity jurisdiction in U.S. courts.
[i] 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, at *8 (D. Md. June 21, 2021).
[ii] Id. at *4 (citing, inter alia, 28 U.S.C. § 1332(c)(1); Hertz Corp. v. Friend, 559 U.S. 77, 80 (2010); Hawkins v. i-TV Digitalis Tavkozlesi zrt., 935 F.3d 211, 223 (4th Cir. 2019) (noting that the dual citizenship rule has been limited to “true-blue” corporations); James G. Davis Constr. Corp. v. Erie Ins. Exch., 953 F. Supp. 2d 607, 610 (D. Md. 2013) (stating that an unincorporated association is a citizen of any state in which its members are citizens)).
[iii] Id. at *4 (citing, inter alia, White Pearl Inversiones S.A. (Uruguay) v. Cemusa, Inc., 647 F.3d 684, 686 (7th Cir. 2011)).
[iv] Id. at *5.
[v] Id. at *5 (citing Navy Fed. Credit Union v. LTD Fin. Servs., LP, 972 F.3d 344, 354 n.5 (4th Cir. 2020) (referencing a Seventh Circuit comparison approach case – BouMatic, LLC v. Idento Operations, BV, 759 F.3d 790, 791 (7th Cir. 2014); and Hawkins v. i-TV Digitalis Tavkozlesi zrt., 935 F.3d 211, 224 (4th Cir. 2019) (“To be sure, we might well be inclined to adopt the Seventh Circuit’s approach if we were reviewing the issue de novo.”)).
[vi] Id. at *5 (citing, inter alia, Lear Corp. v. Johnson Electric Holdings Ltd., 353 F.3d 580, 582–83 (7th Cir. 2003); Jet Midwest Int’l Co., Ltd v. Jet Midwest Grp., LLC, 932 F.3d 1102, 1105 (8th Cir. 2019)) (internal quotations omitted). In contrast, the Fifth and Ninth Circuits have adopted a “juridical-person approach,” which considers a foreign business entity to be a citizen for diversity purposes “so long as the entity is considered a juridical person under the law that created it.” Id. at *5 (citing, inter alia, Cohn v. Rosenfeld, 733 F.2d 625, 629 (9th Cir. 1984); Stiftung v. Plains Mktg., L.P., 603 F.3d 295, 298 (5th Cir. 2010)).
[vii] Id. at *8 (citing EU Council Regulation No. 2157/2001 at Preamble ¶ 13, art. 1 ¶ 2-3, art. 12–16, art. 38–45, and art. 52–62).
[viii] Id. at *8.
[ix] Id. at *9 (citing, inter alia, defendants’ affidavit and exhibits).
[x] See, e.g., Albert H. Kritzer, 2 International Contract Manual § 56:38 (Dec. 2020 Update); https://europa.eu/youreurope/business/running-business/developing-business/setting-up-european-company/index_en.htm.
[xii] Hawkins v. i-TV Digitalis Tavkozlesi zrt., 935 F.3d 211, 222 (4th Cir. 2019) (citing Hertz Corp. v. Friend, 559 U.S. 77, 84–88, 130 S.Ct. 1181 (2010)).