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

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

3. Seward & Kissel LLP 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

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

5. Seward & Kissel LLP Typical Ownership Structures

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

7. Seward & Kissel LLP 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.”

8. Seward & Kissel LLP 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

9. Seward & Kissel LLP 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

10. Seward & Kissel LLP 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

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

12. Seward & Kissel LLP 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

13. Seward & Kissel LLP 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

14. Seward & Kissel LLP 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

15. Seward & Kissel LLP 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

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

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

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

19. Seward & Kissel LLP 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

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

21. Seward & Kissel LLP 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

22. Seward & Kissel LLP 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”

23. Seward & Kissel LLP 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

24. Seward & Kissel LLP 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

25. Seward & Kissel LLP 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

26. Seward & Kissel LLP 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

27. Seward & Kissel LLP 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

28. Seward & Kissel LLP Revised Structure with LLCs