Citizenship Requirements
The Merchant Marine Act of 1920, commonly known as the “Jones Act” requires that any vessel engaged in the U.S. coastwise trade be owned and operated by U.S. citizens. To qualify as a U.S. citizen under the Jones Act an entity must both be a “documentation citizen,” meaning it is domiciled in the U.S. and meets certain management requirements, and at least 75% of its equity interests must be owned by U.S. citizens. A more comprehensive discussion of the citizenship requirements for the U.S. coastwise trade under the Jones Act is set forth in Seward & Kissel’s prior Simply Speaking post, found here.
The ownership structure of U.S. public companies presents unique challenges to establish their qualification as a U.S. citizens for Jones Act purposes since virtually all U.S. public company shareholders hold their shares in ”street” name through brokers or other intermediaries. As result of this nominee ownership structure, public companies may not have access to citizenship or other identifying information about individual beneficial holders.
Public Company Resources
To establish U.S. citizenship under the Jones Act, public companies have come to rely on the “fair inference” rule, which allows them to establish U.S. citizenship by showing that at least 95% of their beneficial owners have an address in the U.S. and to actual citizenship information with respect to each holder of more than 5% of the company’s total outstanding shares. The citizenship analysis must be performed with respect to each class of stock or ownership interest and at each tier of the ownership structure.
While the fair inference rule avoids the need to obtain citizenship information on every beneficial holder, it still requires companies to obtain significant shareholder information. There are several resources available to public companies to obtain this information. These include the following:
- Section 13d Reporting Obligations:
Section 13(d) of the Securities Exchange Act of 1934, as amended, requires each beneficial owner of more than 5% of a public company’s outstanding shares to file periodic ownership reports, including the reporting holder’s citizenship, on a Schedule 13(d), or, under certain circumstances a Schedule 13(g). Section 13 reports are publicly filed and available on the SEC website when filed. While Section 13 filings may be a useful tool for public companies to determine Jones Act compliance, their value is limited by the fact that they may not reflect “real time” ownership positions about 5% or greater holders, and do not provide information with respect to holders of less than 5% of an issuer’s outstanding shares. Additionally, Section 13(d) is only applicable with respect to classes of shares registered with the SEC.
- Seg. 100 segregated shareholder accounts:
The Depository Trust Company, or DTC, acts as the central depository of all public company shares held through U.S. brokerage accounts. DTC provides the ability to segregate shares beneficially held by non-U.S. citizens of public companies in the maritime and other sectors having citizenship requirements, thereby providing the ability of issuers to determine the number of shares held by non-U.S. citizens. The determination of a beneficial holder’s citizenship for purposes of inclusion in DTC’s “Seg. 100” segregated account is made by a shareholders’ broker, however both DTC and brokers expressly disclaim any liability for the ultimate citizenship determinations.
Public companies are able to engage their transfer agent or Broadridge to conduct a “geographic survey” that will provide the number of holders and the aggregate number of shares held by such holders in each jurisdiction outside of the U.S. as of a particular date chosen by the issuer.
- Non-Objecting Beneficial Owners (NOBO) and Record Holders:
While public companies cannot require ultimate beneficial owners holding shares in “street” name to share citizenship or other identifying information with the company, beneficial owners may elect to permit their brokers to share such information voluntarily. The number of a such “non-objecting beneficial owners” will vary widely by issuer, but often represent a significant portion of a public company’s holders. To access such information, a company may request a “”NoBo list” from Broadridge Financial Solutions and a small number of other providers of shareholder communication services on behalf of DTC and participating brokers. NoBo lists will provide the address, name and number of shares held by each ultimate non-objecting beneficial holder as of a particular date selected by the company.
Similar to non-objecting beneficial owners, a limited number of public company shareholders elect to hold shares as a “shareholder of record” rather than through a broker or other nominee. Although record holders typically constitute a very small percentage of the total shareholdings of the company, information with respect to record holders is readily available to public companies and their transfer agent in real time.
By relying on the above resources and the assistance of knowledgeable securities law advisors, public Jones Act companies are generally able to determine with a reasonable degree of certainty their compliance with Jones Act ownership requirements. In addition, although beyond the scope of this post, public companies seeking to comply with the Jones Act are often structured to include specific protective provisions within their corporate charter documents, e.g., setting forth ownership limitations for non U.S. citizens or requiring all beneficial shareholders to disclosure citizenship and other information to the company.
