The Drive for Transparency: The Impact on Ownership Structures Will the Corporate Veil be Pierced?

1. The Drive for Transparency: The Impact on Ownership StructuresWill the Corporate Veil be Pierced? Lawrence Rutkowski Seward & Kissel LLP Intertanko Legal and Insurance Seminar Metropolitan Hotel January 20, 2004 Seward & Kissel LLP

2. The Drive For Transparency • “Gangsters of the Sea [who] profit cynically from the lack of transparency in the current system.” • Jacques Chirac, January 2003 Seward & Kissel LLP

3. The Drive for Transparency • “The lack of transparency shown by the shipping industry, particularly over a ship’s ownership, has been one of the main causes of the tanker industry’s negative image.” • Intertanko Weekly News, December 19, 2003 Seward & Kissel LLP

4. The Drive for Transparency • Oil Pollution Act • ISM Code • ISPS Code • Patriot Act • Maritime Security Act • Sarbanes Oxley • Public Debt/Equity Markets Seward & Kissel LLP

5. Typical Ownership Structures Seward & Kissel LLP

6. Liability Issues • Oil Pollution Act of 1990 • Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) • Parent Liability/Piercing the Corporate Veil Seward & Kissel LLP

7. OPA ‘90 • Basis of Liability • “each responsible party for a vessel or a facility from which oil is discharged, or which poses the substantial threat of a discharge of oil, … is liable for the removal costs and damages … that result from such incident.” Seward & Kissel LLP

8. OPA ‘90 • Responsible parties include: • any Owner • any person holding legal or equitable title • any Operator • any person (including owners and demise charterers) who conducts or who is responsible for the operation of a vessel • any Demise Charterer Seward & Kissel LLP

9. OPA ‘90 • Strict liability standard • liability is without regard to fault • need only prove that (a) a discharge or threat of discharge of oil occurred and (b) defendant is a responsible party • Joint and several liability • each responsible party is liable for the full extent of the proscribed damages Seward & Kissel LLP

10. CERCLA • Applicability • Release or threatened release of hazardous substance which causes the incurrence of response costs • Hazardous substances are extensive but limited to those listed under the statute Seward & Kissel LLP

11. CERCLA • Basis of Liability • Similar to OPA ‘90 • Responsible parties are jointly, severally and strictly liable Seward & Kissel LLP

12. CERCLA • Responsible parties include: • any Owner • Coast Guard regulations exclude financial lessors • any Operator • has been interpreted to impose liability upon corporate parents and individual shareholders who: (a) were familiar with the activities of the subsidiary’s facility, (b) had the ability to control the subsidiary’s activities and (c) could have made decisions that would have avoided the pollution Seward & Kissel LLP

13. CERCLA • Scope of Liability • Responsible parties are jointly, severally and strictly liable for: • all costs of removal and remedial action incurred by the federal or state government • any other necessary response costs • damages for injury to, destruction of, or loss of natural resources (including assessment costs) • costs of any health assessment or health effects study Seward & Kissel LLP

14. CERCLA • Exceptions to Limits on Liability • No limit on liability if the release was the result of : • willful misconduct or willful negligence within the privity or knowledge of such person • the violation of any applicable Federal regulation within the privity or knowledge of such person • No limit on liability if responsible party fails or refuses to provide all reasonable cooperation and assistance requested by a public official Seward & Kissel LLP

15. CERCLA • Exceptions to Limits on Liability (con’t) • Punitive damages up to 3 times incurred costs if responsible party fails without sufficient cause to properly provide removal or remedial action upon order of the President Seward & Kissel LLP

16. Parent Liability Issues • Piercing the Corporate Veil • Direct Involvement – Operator Liability Seward & Kissel LLP

17. Piercing the Corporate Veil • The Issue: • When will liability for the acts of a subsidiary be extended to the parent company? Seward & Kissel LLP

18. Piercing the Corporate Veil • No bright-line test • Courts will consider many factors • Presumption against piercing Seward & Kissel LLP

19. Piercing the Corporate Veil • Factors considered: • Corporate separateness is not maintained • Inadequate or no capitalization of subsidiary • Co-mingling of funds, lack of separate accounts • Extensive economic integration • Exercise of total control over the subsidiary • Absolute unity of interests, Unified public persona • Interchange of personnel and information • Overlapping directorships/officers • Lack of corporate formalities • Subsidiary is mere alter ego of parent Seward & Kissel LLP

20. Piercing the Corporate Veil Is there a more liberalized standard for piercing the corporate veil in environmental cases? Seward & Kissel LLP

21. Piercing the Corporate Veil • U.S. v. Bestfoods • Mutual control of parent and subsidiary is not enough • Duplication of all of the directors or executive officers is not enough • Presumption that parent officers/directors and subsidiary officers/directors act in respective capacities • Burden of proof on plaintiff to prove otherwise Seward & Kissel LLP

22. Direct Involvement • Parent company may be directly liable as an “operator” of a vessel or facility • Bestfoods refined the definition of ‘operator’: • “an operator must manage, direct or conduct operations specifically related to pollution, that is, operations having to do with the leakage or disposal, or decisions about compliance with environmental regulations” Seward & Kissel LLP

23. Direct Involvement • The classic what-not-to-do case • Amoco Cadiz • Court found that parent was directly involved in the operation of the vessel that suffered an oil discharge • Facts: • Distressed tanker vessel seeks help during nasty storm • Tanker personnel seek permission for tug, etc. directly from parent and not from owner-subsidiary • Tanker hits rocks before second tug could arrive Seward & Kissel LLP

24. Direct Involvement • Lessons from Amoco Cadiz • Reaffirms concept that a parent and a subsidiary may have common directors and officers • However, a prudent parent company will ensure that its day-to-day operations are separate from those of its subsidiary • Directors and officers of subsidiary should have the autonomy to act on behalf of the subsidiary without having to get approval of the parent Seward & Kissel LLP

25. Corporate Veil/Direct Involvement • Analysis • In order to limit the extension of liability to Parent under OPA ‘90 or CERCLA: • Parent must ensure that it maintains basic corporate formalities between itself and its subsidiaries • Parent and Subsidiary may share directors and officers but those of Subsidiary should be able to act alone without Parent approval Seward & Kissel LLP

26. Is There a Better Way? • Limited Liability Companies • Can be “member managed” • Fewer “corporate” formalities -- fewer chances for error • Direct Statutory Support for Limitation of Liability Seward & Kissel LLP

27. The LLC – Statutory Support • The Limited Liability Company Acts of Liberia and the Marshall Islands are modeled on the Delaware Limited Liability Company Act • All specifically state that the members shall not be liable for the debts of the LLC Seward & Kissel LLP

28. Revised Structure with LLCs Seward & Kissel LLP