In an action that may signal future changes to vessel documentation requirements for publicly traded companies, the U.S. Coast Guard published a Notice in the Federal Register November 3 seeking comments on mechanisms currently employed by such companies in order to assure compliance with U.S. citizenship requirements.

At least 75% of the stock or other equity interest in companies owning vessels operating in the coastwise [aka Jones Act] trade must be held by citizens of the United States as defined in 46 U.S.C. § 50501.  These citizenship requirements apply at each tier of ownership.  In other words, if stock or equity interests in a vessel-owning company are in turn held by other entities which are not individuals, “each entity contributing to the stock or equity interest qualifications of the entity holding title [to the vessel] must be a citizen eligible to document vessels in its own right with the [coastwise] trade endorsement sought.”  46 CFR § 67.36(d).

The Coast Guard relies on the self-certification as to a vessel documentation applicant’s qualification for coastwise trading endorsements.   However, as indicated in the Coast Guard’s notice, if evidence of possible non-compliance is found, the vessel-owning company has the burden of establishing that it satisfies the applicable U.S. citizenship requirements.  The question is:  How do publicly traded companies do this?

The Coast Guard’s focus on the issue arises out of its recent investigation into the citizenship of Trico Marine Services, Inc, and its affiliates.  The results of the Coast Guard’s investigation into Trico’s citizenship and its memorandum setting forth the agency’s final action can be viewed at the following link:  http://www.uscg.mil/hq/cg5/nvdc/nvdcreport.asp. The Coast Guard’s investigation of Trico was prompted by allegations by a shareholder of the company who was engaged in a dispute with management.  In analyzing the information provided by the company to support its citizenship, the Coast Guard emphasized that, unlike the Maritime Administration, the Coast Guard does not adhere to the “fair inference rule,” under which seventy-five percent beneficial ownership by U.S. citizens is inferred for publicly traded companies with more than 30 stockholders if the company can show that 95% of the registered addresses of the company’s shareholders are located in the United States.  46 CFR § 355.3(b).  The Coast Guard cited its longstanding rationale for rejecting this rule, which is that the documentation laws are restrictive and intended to limit the persons eligible to document vessels under U.S. laws and acquire certain trading privileges.   Therefore, “[t]he Coast Guard will not be bound by any presumptions or inferences in making eligibility determinations for documentation purposes.”  58 FR 60,256, 60,259 (Nov. 15, 1993).

In the Trico matter, the Coast Guard found that despite repeated opportunities, Trico was unable to establish that 75% of its stock was owned by U.S. citizens.  The agency was unsympathetic to the company’s contention that its status as a publicly traded company restricted its ability to provide evidence of U.S. citizenship.  The Coast Guard instead stated that if the company chose to engage in coastwise trade under the Jones Act, it was required “to structure itself and its equity securities in such a way, and to put in place procedures and mechanisms by which it can satisfy its obligations under the Jones Act.”

Based on its analysis, the Coast Guard determined that the Certificates of Documentation for Trico’s vessels were improperly issued and recommended that those certificates be cancelled. The Coast Guard further recommended penalties totaling $5,978,000.  The Coast Guard reserved decision on whether to recommend seizure and forfeiture of Trico’s vessels pending further findings on whether Trico acted with intention to violate the law.  The specific recommendations regarding Trico were largely mooted by Trico’s Chapter 11 bankruptcy and sale of its vessels.

However, the Coast Guard also recommended that the agency consider seeking comment from the industry as to how publicly traded companies comply with the Coast Guard’s U.S. citizenship requirements, and that recommendation led to the agency’s November 3, 2011 notice.

Specifically, the agency seeks comment on:

  1. the mechanisms that publicly traded companies have employed, including but not limited to restricting sale of their stock to U.S. citizens or using a transfer agent to administer a dual stock certificate system, to assure compliance with U.S. citizenship requirements; and
  2. the manner in which such mechanisms function to assure and provide proof of compliance with U.S. citizenship requirements.

The agency adds that it “will not retaliate against commenters that question or complain about citizenship requirements or any policy or action of the Coast Guard.”  Comments are due February 1, 2012.

This is a matter that will be of particular interest to publicly traded companies that are either already engaged in coastwise trade or are looking to invest in companies so engaged.  The vessel documentation requirements at issue apply not only to equity investors but also to lenders in lease-financing transactions in which financing companies hold title to vessels engaged in coastwise trade.  The comments received by the Coast Guard, and any subsequent regulatory action taken by the Coast Guard, will hopefully provide publicly traded companies with guidance as to how to comply with the law so as to facilitate continued investment in the Jones Act fleet.