Foreign Investment in the United States

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Foreign Investment in the United States

• WISTA Annual Conference
• October 16, 2008
• New Orleans, LA

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Introduction

• Moderator Eileen P. Brown, Partner, Thompson
  Coburn LLP
• Panelists
• Marilyn L. Muench, former Deputy Assistant
  General Counsel for International Affairs, U.S.
  Department of the Treasury
• Peter S. Shaerf, Managing Director, AMA Capital
  Partners
• Contributor
• Patricia J. Williams, Director, U.S. Coast Guard
  National Vessel Documentation Center (NVDC)

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Goal

• To outline various U.S. laws and regulations that
  may impact decisions on making foreign investment
  in the U.S. maritime industry so that you may
  spot and address issues as you consider
  transactions

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U.S. Citizen Control

• U.S. government interest in ensuring U.S. citizen
  control of certain assets (i.e., vessels,
  aircraft)
• Overview of U.S. citizen requirements applicable
  to vessels coastwise and registry trade

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U.S. Governmental Review and Certain Restrictions
on Transactions

• Committee on Foreign Investment in the United
  States (CFIUS) multi-agency governmental review
  of acquisition of U.S. assets by foreign
  entities.
• Office of Foreign Assets Control (OFAC)
  administers economic and trade sanctions based on
  U.S. national security, foreign policy or
  economic concerns.

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Discussion

• Impact of high profile cases, such as Dubai Ports
  World.
• Will the current financial crisis and the need to
  attract capital to the U.S. change the analytical
  framework and enforcement decisions associated
  with issues relating to citizenship and foreign
  control?

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• NATIONAL VESSEL DOCUMENTATION CENTER
• WISTA USA ANNUAL CONFERENCE OCTOBER 15-17, 2008
• NEW ORLEANS, LA

Homeland Security
United States Coast Guard
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NVDC
THE NATIONAL VESSEL DOCUMENTATION CENTER 792 T J
JACKSON DRIVE FALLING WATERS WV 25419

• The NVDC is a sub-unit of the Department of
  Homeland Security and the United States Coast
  Guard. Its mission is to facilitate maritime
  commerce and the availability of financing while
  protecting the economic privileges of United
  States citizens through the enforcement of
  regulations, and to provide a register of vessels
  available in time of war or emergency to defend
  and protect the United States of America.

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What is Vessel Documentation?

• U.S. vessel registration is demonstrated by the
  issuance of a Certificate of Documentation
  (COD). A COD is required for the operation of a
  vessel in certain trades and such documentation
  provides evidence of nationality for
  international purposes.

• Who is Eligible to Document a Vessel in the U.S.?
• Natural Persons
• Certain Corporations
• Certain Partnerships (Associations, Etc.)
• Certain Limited Liability Companies
• Government (Federal, State, Local) Entities

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Why Document a Vessel?

• Required for vessels engaged in certain trades if
  measuring at least five net tons
• Entitles vessels to preferred mortgage financing
• Provides for unhindered commerce between states
• Provides conclusive evidence of nationality for
  vessels in foreign waters

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What types of endorsements are available?

• COASTWISE Includes the transportation of
  passengers or merchandise between points embraced
  within the coastwise laws of the U.S. Generally,
  coastwise trade is trade between a point in the
  U.S. and another point in the U.S. (including
  Hawaii, Alaska, Puerto Rico and other
  Territories).
• REGISTRY Includes trade between a point in the
  U.S. and a foreign point or transportation
  between foreign points (foreign trade).
• FISHERIES Includes the processing, storing,
  transporting, planting, cultivating, catching,
  taking, or harvesting of fish, shellfish, marine
  animals, pearls, shells, or marine vegetation in
  the navigable waters of the U. S. or in the
  exclusive economic zone.
• RECREATIONAL Permits operation for pleasure
  only.

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Coastwise Trade/Jones Act Trade

• U.S. citizen control test applied to any owner of
  a vessel entitled to participate in the coastwise
  trade.
• Stock in vessel owning entity must be at least
  75 owned by U.S. citizens.

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What is Lease Financing or Coastwise Under
Charter?

• Statutory change to eliminate technical
  impediments to financing Jones Act vessels
• Not intended to undermine U.S. Control provisions
  for Jones Act vessels
• Permits documentation by a foreign-controlled
  owner when chartered to an eligible citizen
  (charterer is the owner pro hac vice)

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Coastwise Citizenship Requirements for Corporate
Owners

• Organized in the U.S.
• U.S. CEO, Chairman
• Restrictions on aliens no more than a minority
  of the number of directors to constitute a quorum
• At least 75 equity invested in U.S. citizens

• Organized in the U.S.
• U.S. CEO, Chairman
• Restrictions on aliens no more than a minority
  of the number of directors to constitute a quorum
• 100 of the stock may be foreign owned.

Traditional U.S. Citizen (considered a Section 2
Citizen)
Documentation Citizen (requirements for Foreign
Trade or Lease Financing)
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Citizenship Documentation Required for Coastwise
Endorsements

• Traditional Coastwise
• CG-1258 (Application)
• No additional requirements

• Lease Finance Coastwise
• CG-1258 (Application)
• Affidavit from owner
• Citizenship Statement of charterer (must qualify
  as Section 2 citizen)
• charter (must be for at least 3 years)
• any subcharters
• Charterer must be owner pro hac vice

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Financing Documented Vessels
In general, there are no citizenship requirements
applicable to mortgagees of U.S. documented
vessels, except

• The American Fisheries Act, Pub. L. 105-277,
  places stringent citizenship requirements on
  mortgagees of fishing vessels 100 Feet or greater
  in length (46 USC 31322)

• Recently (Pub. L. 110-181), the Coast Guard was
  authorized to request reports from mortgagees to
  ensure compliance with 46 USC 12139 46 CFR
  67.31 (Foreign Control Provisions)

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Permissible Foreign Investment Dependent on Form
of Investment and Trade Endorsement Sought

• TRADE ENDORSEMENT CITIZENSHIP REQMTS MORTGAGEE
  LIMITS
• RECREATIONAL BASIC U.S. UNRESTRICTED
• REGISTRY BASIC U.S. UNRESTRICTED
• COASTWISE U.S. 75 U.S. UNRESTRICTED
• EQUITY
• COASTWISE/LEASE BASIC U.S. , UNRESTRICTED
• FINANCE UNRESTRICTED
• EQUITY, OTHER
• REQUIREMENTS
• FISHERY lt100 FT U.S. 75 EQUITY UNRESTRICTED
• FISHERY gt100 FT U.S. 75 EQUITY MUST BE
  ELIGIBLE TO
• IN THE AGGREGATE DOCUMENT FISHING
  VESSEL (OTHERS AS APPROVED BY
  MARAD)
• BASIC U.S. OWNERSHIP REQUIREMENTS FOR
  CORPORATIONS ARE ORGANIZED IN U.S., U.S. CEO,
  U.S.
• CHAIRMAN, AND RESTRICTIONS ON ALIENS FOR QUORUM
  PURPOSES

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U.S. Government Review of Foreign Investment in
the U.S.
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Committee on Foreign Investment in the United
States (CFIUS)

• CFIUS - a multi-agency U.S. government entity
  that evaluates the national security implications
  of mergers and acquisitions that could result in
  foreign control of U.S. businesses

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Committee on Foreign Investment in the United
States (CFIUS)

• Principal member agencies include
• Department of the Treasury (Chair)
• Department of Commerce
• Department of Defense
• Department of Energy
• Department of Homeland Security
• Department of Justice
• Department of State

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Committee on Foreign Investment in the United
States (CFIUS)

• CFIUS can decide to refer cases to the President
  and can recommend unfavorable action, including
  divestment or blocking of a transaction. Only
  the President can decide to divest or block a
  transaction.

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Key Concepts for CFIUS Process

• Notification of mergers and acquisitions to CFIUS
  is voluntary, but CFIUS can request parties to a
  transaction to submit a notice if they do not do
  so on their own.
• CFIUS focuses on the national security
  implications of an eligible transaction.
  Although national security is not defined,
  CFIUS has interpreted it broadly and it includes
  within its ambit critical infrastructure.
• A transaction is subject to CFIUS jurisdiction
  only if it involves foreign control.
• Transactions that are not notified to CFIUS for
  review at the time the transaction is being
  completed remain indefinitely subject to future
  review and to possible unfavorable action.

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Office of Foreign Assets Control (OFAC)

• OFAC, located within the Department of the
  Treasury, is the primary enforcer of economic
  (non-military) sanctions imposed by the U.S.
• OFAC sanctions can be imposed
• against entire countries (e.g., Cuba) or more
  limited regions of countries (e.g., Sudan)
• against particular categories of companies or
  individuals, such as those found to be engaged in
  terrorism or drug trafficking

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Office of Foreign Assets Control (OFAC)

• OFAC sanctions usually are enforced by
  restricting actions that can be taken by U.S.
  firms and individuals with respect to the
  sanctioned entities.
• Restricted activities often include the
  facilitation of transactions with such
  sanctioned entities.
• OFAC regularly publishes and updates information
  relating to its sanctions programs, including the
  identities of sanctioned entities.

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Foreign Investment in Shipping or Dónde están
los euros? or ??? e??a? ta e??? or Ou sont
les euros?

• Peter S. Shaerf
• Managing Director
• AMA Capital Partners
• October 16th 2008

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The number of publicly listed maritime companies
in the U.S. has exploded
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Global Market Capitalization
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Global Volume Traded
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Have We Scared them away?
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Why it can work..

• Barriers to entry
• Lack of liquidity !!
• Lack of understanding of sectors
• Long term stability of market

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But why it doesnt work..

• Regulatory intervention
• Union affiliation
• Cost differentials
• Comparable global opportunities
• Lack of Liquidity
• Minority positions

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Hypothetical Scenarios for Discussion
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Hypothetical 1

• European shipowner/operator to acquire
• U.S. registered vessels
• U.S. shipping company
• an interest in a U.S. shipping company

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Hypothetical 2

• Sovereign wealth fund to acquire
• controlling interest in a U.S. shipyard

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Hypothetical 3

• Asian shipowner with international businesses
  (including Cuba) acquires
• U.S. company (not necessarily marine-related)

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Questions?