Foreign Investment in the Jones Act October 8, 2014 Charlie Papavizas Chair, Maritime Practice Group [email protected] Maritime FedWatch Blog at winston.com.

Foreign Investment in the Jones ActOctober 8, 2014

Charlie Papavizas

Chair, Maritime Practice Group

[email protected]

Maritime FedWatch Blog at winston.com

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Agenda

1. Foreign investment example

2. U.S. citizenship requirements

3. Permissible foreign investment

4. Public company issues

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1. Foreign investment ex. -- Aker Philadelphia

1) OSG Lease Finance Transaction

• Aker constructed vessels owned by foreign-owned U.S. affiliate (American Shipping Company)

• American Shipping Company bareboat chartered the vessels to OSG

2) Crowley Joint Venture

• “Economic benefits” split 50.1 percent for Crowley and 49.9 percent for Aker

3) Philly Tankers AS

• “Rokke forges Jones Act owner” TradeWinds (June 10, 2014)

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2. U.S. Citizenship Requirements -- Basics

• Jones Act restricts the transportation of “merchandise” between points in the United States to qualified U.S.-flag vessels

• Similar laws apply to –

• Transportation of passengers

• Dredging

• Towing

• Salvage

• Fishing

• Qualified U.S.-flag vessel –

• Registered with the U.S. Coast Guard

• Built in the U.S.

• Owned by U.S. citizens

• Operated by U.S. citizens

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2. U.S. Citizenship Requirements – Basics

• Three basic types –

• Documentation citizen

• Controlling-interest citizen

• Coastwise citizen

• Documentation citizen

• U.S. organized

• U.S. citizen managed

• Controlling interest citizen

• Registry citizen + 50.1 percent interest owned by U.S. citizens

• Coastwise citizen

• Registry citizen + 75 percent interest owned by U.S. citizens

Documentation Citizen

Controlling Interest Citizen

Coastwise Citizen

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2. U.S. Citizenship Requirements -- Control

• Classic 1953 citizenship case prosecuted by Warren E. Burger, Ass’t Attorney General

• Chinese interests invested $2,000; U.S. citizens invested $6 but claimed to have the controlling interest

• Court agreed that there was foreign citizen control:

• “We are . . . compelled to observe the substance rather than the form of the transaction.”

• “It becomes abundantly clear upon examination of the facts in the instant case, that these statutes were designed to preclude the very arrangement, conceived by the New York lawyers, whereby title to the ship was taken in the name of an American corporation, while the beneficial interest and actual control were passed to citizens of China.”

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2. U.S. Citizenship Requirements -- Tracing

• Citizenship is traced upwards in the path of ownership and control to the ultimate owners

• Moreover, each entity that counts towards the 75 percent qualification must also be a coastwise citizen

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3. Permissible Foreign Investment – Lease Finance

• Example 1 -- Aker sub owning vessels chartered to a U.S. citizen

• How: lease finance exception

• Enacted in 1996, substantially restricted in 2004

• Foreign lessors can own Jones Act vessels through a documentation citizen, provided the lessor –

• Is a “leasing company, bank, or financial institution”

• Does not directly or indirectly operate any vessel for hire

• Is independent from the charterer

• Owns the vessel “solely as a passive investment” and

• The vessel is subject to at least a three year bareboat charter to a coastwise citizen

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3. Permissible Foreign Investment -- Aggregation

• Example 2 – Aker having a 49.9 percent “economic benefit”

• How – aggregation or tiering

• Flip side of the tracing rule is that the citizenship analysis focuses on each corporate level or “tier”

• So, it is possible to dilute the 75 percent

• Informal rule that aggregated interest must be less than 50 percent

• Aggregation is taken into account with large fishing vessels

• Must always be careful regarding other control factors – the camel’s back!

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3. Permissible Foreign Investment -- Aggregation

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• Example 3 – Aker forms a foreign sub which orders Jones Act vessels

• How -- timing

• Jones Act applies to current vessel owners and operators – and not to persons having a construction contract or in most cases persons with springing equity rights such as options or warrants

• Similarly, Jones Act generally permits time charters to non-citizens as operational control is not conveyed

3. Permissible Foreign Investment -- Timing

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4. Public Company Issues

• Issue of how to comply with the 75 percent beneficial ownership requirement has concerned public Jones Act companies for many years

• Issue came to a head with Coast Guard $6 M fine of Trico Marine Services, Inc. in Feb. 2011

• Coast Guard found that Trico had excessive foreign ownership primarily via hedge funds

• Coast Guard indicated public companies had to be able to prove U.S. citizen beneficial ownership – potentially impossible with a Depository Trust Company listed security

• Coast Guard also disparaged use of DTC Segregation Account No. 100 (Seg-100) System

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4. Public Company Issues

• As promised in Trico decision, Coast Guard sought comment on public company compliance in Nov. 2011

• Comments almost universally suggested that the Coast Guard approve existing compliance measures such as review of Williams Act reports and Seg-100

• Coast Guard issued clarifying guidance in Nov. 2012

• Recognized that no single compliance method fits all circumstances

• Acknowledged sufficiency of an active beneficial ownership monitoring system

• Left many pre-existing vague issues vague

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Conclusion

• Questions?