Charlie Papavizas, Contributor
The U.S Jones Act affects the construction of U.S. offshore wind farms by limiting certain activities in U.S. waters to U.S.-registered vessels owned and operated by qualified U.S. citizens. Much of the expertise in the construction of offshore wind farms is European based. The logical mechanism for marrying European expertise with U.S. firms qualified to operate where the U.S. Jones Act applies are joint ventures. Such joint ventures must take into account the stringent U.S. citizenship requirements applicable to the ownership and operation of Jones Act vessels.
The Jones Act is actually several U.S. laws tracing their origin to 1789 that limit the transportation of “merchandise” (which includes most everything unless there is an exception) and “passengers” between two “points in the United States.” Such “points” include any device, such as a well head or tower, “permanently or temporarily attached” to the U.S. outer continental shelf. Other laws also restrict “dredging” and “towing” when conducted in U.S. waters.
Not all activities associated with offshore wind construction in U.S. waters are governed by the Jones Act. For example, an installation vessel that installs a tower without moving is not transporting merchandise between two points in the United States. But crew transfer vessels, component feeder vessels and other vessel types are likely to be built in the United States and operate as Jones Act vessels.
To qualify to participate in these U.S. domestic maritime trades, a vessel must be built in the United States, must be registered with the U.S. Coast Guard (which makes it a “U.S.-flag vessel”) and must be owned and operated by qualified U.S. citizens absent an exception. Two overlapping types of U.S. citizen come into play to register a U.S.-flag vessel and permit that vessel to be eligible for the Jones Act trades: a registration or documentation citizen and coastwise citizen.
For an entity like a corporation to qualify as a registration citizen, it must be organized in the United States (for example, in Delaware) and certain persons in management must be U.S. citizens. Specifically, the chief executive officer by whatever title must be a U.S. citizen, the chairman of the board of directors must be a U.S. citizen and non-citizens cannot comprise more than a minority of the number necessary to constitute a quorum of the board of directors. So, if the board has five directors, the quorum must be five in order to have two non-citizen directors. Similar requirements apply to limited liability companies and limited partnerships.
In addition, at least 75 percent of the ownership of the current equity in the entity must be owned by U.S. citizens. Every entity that is an owner of a portion of that 75 percent must itself be able to qualify as a Jones Act citizen. This is a stringent requirement that is usually the most difficult to satisfy in that ownership is traced ultimately to human beings.
The 75 percent requirement can be ameliorated somewhat in that the focus of the law and precedents is on current equity and not on contracts to acquire equity such as warrants, options and convertible indebtedness. Moreover, the 75 percent requirement has been interpreted to permit some dilution through tiers of ownership such that, if properly structured, a non-citizen can own up to 49.99 percent of an entity that owns and operates a Jones Act vessel.
There are exceptions to the 75 percent requirement, but generally of limited utility except for the exception for foreign lease financing. Initially enacted in 1996 and substantially amended in 2004, that exception permits a bank, leasing company or financial institution that qualifies as a registry citizen to own a Jones Act vessel even if the registry citizen is 100 percent foreign owned. The catch is that the vessel must be “demise chartered” for at least three years to a qualified Jones Act citizen and that vessel owner cannot have any interest in the use of the vessel, among other requirements. Under a demise charter, full operational control of the vessel is conveyed to the charterer.
When these and other aspects of the citizenship requirements are put together, it is possible to construct a successful marriage of European experience with U.S. Jones Act experience to construct U.S. offshore wind farms. When negotiating a structure, it is important to remember that the citizenship law includes an overarching test whereby the U.S. Government can determine that too much control over the vessel has transferred to a non-citizen. Of particular sensitivity is who has the ability to hire and fire crew, arrange for maintenance of the vessel and procure vessel insurance.
Because the citizenship control tests are vague, it is fortunate that the U.S. Coast Guard will accept requests for confirmation that a structure and contracts will not violate the law. Such requests are usually submitted in the form of a letter including varying degrees of detail from a general description of the transaction to fully negotiated contracts.
Although Jones Act joint ventures have sometimes been controversial in the offshore oil and gas or inland barge sectors, they can be successfully negotiated and closed. The key is an awareness that the law is designed to ensure U.S. citizen control albeit with substantial foreign involvement. And, where there is doubt, a request should be submitted to the Coast Guard for confirmation.
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Charlie Papavizas is the Chair of the Maritime Practice Group in the international law firm of Winston & Strawn LLP.