Contributed by Curt R. Hearn, Jones Walker LLP
You are a company based in Europe with expertise or experience in the offshore wind industry. You have never had operations or a commercial presence in the United States before. There are now commercial opportunities presented that you would like to pursue in the United States or in its offshore waters. Here is a brief summary of issues that should be on your radar.
No need to form a domestic corporation in the United States. In general, overseas companies may solicit business, buy and sell products and services, or otherwise conduct commercial operations within the United States directly, without forming a domestic subsidiary. The decision as to whether to form a US subsidiary is usually driven by tax considerations or a desire to contain liabilities within the newly formed company.
Corporations are creatures of state law. With very few exceptions (for example, national banks), there are no “US” corporations because there are no federal corporate laws. Numerous federal laws regulate all types of corporate activity, but there is no federal law pursuant to which companies are organized. Each state has its own corporate statutory framework, and those statutes set forth the steps that must be taken to create and maintain the legal entity. In addition, these statutes establish the basics of entity capitalization and rights of equity holders and address important topics of corporate governance, such as establishing relationships and duties between the owners and managers of the entity. One important distinguishing element of state corporate statutes is that they are fairly flexible, setting forth certain guardrails but otherwise allowing the owners of the business to set corporate governance parameters. Another factor that merits your attention is that a significant number of issues that may be of importance are addressed by a constantly evolving jurisprudence. A board’s fiduciary duties, conflict of interest issues, and implied or apparent authority are often left to the courts to decide, and not all states come out the same way on these issues.
For a variety of reasons, including a sophisticated judiciary well-schooled in corporate and business matters, Delaware is the state that is often selected as the jurisdiction of formation, although Nevada is another popular jurisdiction.
Selection of form of entity. The form of entity will largely be driven by tax considerations. If you are forming your entity as a subsidiary, or as part of a joint venture where there are other corporate investors, you will likely choose to be organized either as a corporation (which will be subject to US taxation at the entity level) or as a limited liability company (in which the owners can elect either to be taxable at the entity level or as a pass-through entity, in which revenues, profits, and losses are passed through, and taxable to, the owners). You should discuss with your tax advisors the most tax-advantageous available structure. From a corporate perspective, the key thing to know is that although an election can be made to have the limited liability company taxed as a partnership, owners of both entity forms will not be liable for the debts and obligations of the entity unless there is a compelling reason to pierce the “corporate veil.”
Coastwise trade. Although it is generally true that foreign companies are not required to have US citizens in their ownership group, there are certain industries where the companies themselves must prove that they are US citizens, including companies that own or operate vessels in the United States coastwise trade. Three different factors are usually determinative in satisfying the citizenship requirement: (i) who are its owners, (ii) where was the entity organized, and (iii) who manages the entity. If the owners of more than a specified percentage of the units of ownership (25% in the coastwise trade context) cannot establish that they are US citizens, the entity will not be deemed a US citizen. If the entity is not organized under the laws of a US jurisdiction, the entity will not be a US citizen. If the entity has a chief executive officer who is not a US citizen, then the entity will not be deemed to be a US citizen.
Why is this important? Because much of the work necessary to build, maintain, service, and operate an offshore wind installation will be deemed to be coastwise trade that necessitates the usage of an entity that is a US citizen. Moreover, if vessels are to be utilized, then those vessels will need to be US flagged, which likely means that you will have to contract or team up with a US company that owns vessels that are already eligible to engage in coastwise trade.
One effective way to team up with a US company is through a joint venture. That joint venture will be established through the formation of an entity to which the parties will contribute assets and capital. The contributions may be vessels or cash or contracts or intellectual property. Again, remember that if the entity is going to procure contracts or undertake work such that it will be deemed to be engaging in coastwise trade, then the entity will need to be a US citizen. That means that the equity position of the non-US owner will have to be limited, the non-US owner cannot have the ability to exercise control over the entity by contract or otherwise, and the chief executive officer (if there is one) will have to be a US citizen.
This does not mean, however, that the non-US citizen must be a totally passive owner. Although impermissible control may not be exercised, a non-US investor does have the right to protect its investment by embedding in the organizational documents the right to consent to certain fundamental corporate acts, such as forming business combinations, hiring and replacing executive officers, incurring a material amount of indebtedness, or entering into large-scale contracts, including any contracts that present potential conflict of interest issues. However, these consent rights cannot be so sweeping as to confer upon the non-US investor the ability to unduly interfere with the day-to-day operations of the joint venture.
Another important factor in creating a joint venture is thinking through how the parties will unwind or exit the relationship. There are a number of reasons that joint ventures come to an end—the purpose of the joint venture has been completed, the business model of the joint venture has failed or become obsolete, or the parties have had a falling out and there is no repairing of the relationship. The parties should agree, in advance, on how the joint venture will be unwound in such case.
Curt Hearn is co-leader of the Corporate Practice Group and member of the offshore wind initiative at Jones Walker LLP in New Orleans, La.