MasterLimitedPartnerships

fortheShippingand
OffshoreIndustries
Briefing
November 2012
Contents

Introduction
WhatisanMLP?
TaxtreatmentofMLPs
GovernanceofanMLP
WhyformanMLP?
WheretoformanMLP
Contacts

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Introduction
01
01
02
03
04
05
06

Masterlimitedpartnerships,orMLPs,havebeenusedsincethe1970sin
theenergyindustry.MLPswerefirstadoptedforshippingin2005with
theinitialpublicofferingofTeekayLNGPartnersL.P.,followedbyTeekay
OffshorePartnersL.P.in2006andCapitalProductPartnersL.P.in2007.
InterestintheMLPstructureforshippingIPOscooledafter2007butrose
againin2011withtheinitialpublicofferingofGOLARLNGPartnersL.P.
andinOctober2012withSeadrillPartnersLLC(aninnovativetransaction
inwhichfortaxreasonsalimitedliabilitycompanywassubstitutedas
thefunctionalequivalentofthetraditionalmasterlimitedpartnership).

TheNewYorkofficeofWatson,Farley&Williamshasactedfortheissuer
ineachoftheshippingandoffshoreMLPIPOsdescribedabove.

WhatisanMLP?
Amasterlimitedpartnershipisalegalentitythatisusuallyorganizedas
alimitedpartnershipcomprisedofasinglegeneralpartnerandmultiple
limitedpartners.Thelimitedpartnersareusually(i)asinglesponsor
limitedpartner,whobackstheMLPasaspinoffandwillhaveeffective
controloftheMLPandwhohas100%controlofthegeneralpartner,and
(ii)publiclimitedpartnerswhocollectivelycontrolaminorityofthe
MLPsequity.

An MLPscommonorordinaryequity,referredtoascommonunitsthat
representlimitedpartnerinterestsinthepartnership,tradeonasecurities
exchangesuchastheNYSEorNASDAQ.Whilethepubliclimitedpartners
receiveonlycommonunits,thesponsormayreceivebothcommonunits
andsubordinatedunits.Thegeneralpartnerreceivesageneralpartner
interest(typicallyequaltoa2%interestinthepartnership)aswellas
incentivedistributionrights.

Subordinatedunitsarelimitedpartnerintereststhatreceivecash
distributionsonlyaftertheholdersofcommonunitshavereceiveda
minimumquarterlycashdistributionequaltoaspecifiedamountsetforth
inthelimitedpartnershipagreement(plusanyarrearagesofsuch
specifiedamountduefrompreviousquarters).Subordinatedunitsare
typicallyconvertibletocommonunitsonaoneforonebasisthreeorfour

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MASTERLIMITEDPARTNERSHIPSFORTHESHIPPINGANDOFFSHOREINDUSTRIES

TheNewYork
officeofWatson,
Farley&Williams
hasactedforthe
issuerineachof
theshippingand
offshoreMLP
IPOssince2005.

yearsaftertheinitialpublicofferingoftheMLP,solongasaminimumcashdistribution
hasbeenpaidtoallholdersofcommonunitsforthetimeperiodspecifiedintheMLPs
limitedpartnershipagreement.Incentivedistributionrightsrepresenttherighttoreceive
anincreasingpercentageofquarterlydistributionsofavailablecashfromoperating
surplusaftertheminimumquarterlydistributionandspecifiedtargetdistributionlevels
havebeenachieved.

AtypicalMLPstructureisshowninthefollowingdiagram:

TaxtreatmentofMLPs
Ingeneral,theUnitedStatesimposesacorporatetaxonpubliclytradedentities.MLPs
generallytakeadvantageofanexceptiontothisruletobetaxedaspartnershipsforUStax
purposessothattheincomeistaxeddirectlytoitspartners.Inordertoqualifyforthis
exemptionfromtaxationofpubliclytradedentities,90%oftheincomemustbequalified
income.Qualifiedincomeconsistsofvariousformsofpassiveincome(suchasinterest,
dividendsandincomefromleasingrealproperty)andactiveincomeandgainsderived
fromtheexploration,development,miningorproduction,processing,refining,
transportation(includingpipelinesandshipstransportinggas,oilorproductsthereof)or
themarketingofanymineralornaturalresource.

AlloftheshippingIPOsthathaveusedtheMLPstructuresince2005areconnectedtothe
energysector,withpublicofferingsbyliquefiednaturalgas(orLNG)carriers(suchas
TeekayLNGPartnersL.P.),floatingstorageandregasificationunit(orFSRU)operators
andLNGcarriers(suchasGOLARLNGPartnersL.P.),crudeandproductcarriers(such
asCapitalProductPartnersL.P.),crudecarriersandfloatingproductionstorageand
offloadingunit(orFPSO)operators(suchasTeekayOffshorePartnersL.P.)andoffshore
drillingcompanies(suchasSeadrillPartnersLLC).Eachofthesecompanieswasformed
underthelawoftheRepublicoftheMarshallIslands.

MASTERLIMITEDPARTNERSHIPSFORTHESHIPPINGANDOFFSHOREINDUSTRIES

GovernanceofanMLP
Limitedpartnerships,unlikecorporations,arenotboundbyonerousstatutory
governancerequirements.Instead,limitedpartnershipstatutes(suchastheMarshall
IslandsLimitedPartnershipAct,whichcloselyfollowstheDelawareRevisedUniform
LimitedPartnershipAct)generallyallowthepartiestoagreeonthetermsthatwill
governtherights,obligationsanddutiesofthegeneralpartnerandthelimitedpartners.

ThisapproachpermitstheMLPssponsortocustomizethetermsofthelimited
partnershipagreementpriortotheofferingofunitstothepublic(suchastheformulathat
willbeusedtodeterminewhetherandinwhatamountcashdistributionswillbepaidto
thecommonunitholders).

Likeordinarylimitedpartnerships,anMLPslimitedpartnershipagreementprovides
thatmanagementoftheMLP(namelytheauthoritytooverseeanddirectitsoperations,
policiesandmanagement)isvestedinthegeneralpartner.Insomecases,suchasin
CapitalProductPartnersL.P.andGolarLNGPartnersLP,thelimitedpartnership
agreementfurtherprovidesforthegeneralpartnertodelegatesuchmanagement
authoritytoaboardofdirectorsandofficersattheMLPlevelwiththegeneralpartner
retainingtherighttoapprovecertaintypesofmajordecisions(suchasapprovalofa
proposaltomergetheMLPwithanotherentity,sellallorsubstantiallyallofitsassets,or
dissolvetheMLP).Incontrast,anMLPslimitedpartnershipagreementtypicallylimits
theabilityoflimitedpartnerstoparticipateinthecontroloftheMLPsbusinessandthus
provideslimitedpartnerswithnarrowlydefinedvotingrights.Thefollowingtable
outlinescertainactionsandwhethertheapprovalofthegeneralpartner,theboardof
directorsand/orthelimitedpartnersiscommonlyrequired(thetableassumesthatthe
MLPsgeneralpartnerhasdelegatedauthoritytoaboardofdirectorsattheMLPlevel):

Action
ApprovalsRequired
Issuanceofadditional Boardapprovalrequired;noapprovalrequiredfromholders
units
ofcommonunits;generalpartnerapprovalrequiredforall
issuancesnotreasonablyexpectedtobeaccretivewithin12
monthsofissuanceorwhichwouldotherwisehavea
materialadverseimpactonthegeneralpartneroritsinterest
intheMLP.

Amendmentofthe
Certainamendmentsmaybemadebytheboardofdirectors
partnership
withouttheapprovalofthelimitedpartners.Other
agreement
amendmentsgenerallyrequiretheapprovaloflimited
partnersholdingamajorityofcommonunits.

MergeroftheMLPor
Approvaloflimitedpartnersholdingamajorityofcommon
thesaleofallor
unitsandapprovalofthegeneralpartnerandtheboardof
substantiallyallofits directors.
assets

03

Limited
partnerships,
unlike
corporations,
arenotboundby
onerousstatutory
governance
requirements.

TheLimited
PartnershipAct
oftheMarshall
Islandsgenerally
allowstheparties
toagreefreelyon
rights,obligations
andduties.

Watson,Farley&Williams November2012

04

MASTERLIMITEDPARTNERSHIPSFORTHESHIPPINGANDOFFSHOREINDUSTRIES

Electionofa
majorityofthe
membersofthe
boardofdirectors

Withdrawalofthe
generalpartner

Removalofthe
generalpartner

Transferof
ownership
interestsinthe
generalpartner

Theholdersofcommonunitsareusuallygrantedtheright
underthelimitedpartnershipagreementtoappointamajority
(butnotall)ofthemembersoftheboardofdirectors.Aplurality
ofthevotesoftheholdersofthecommonunitsisrequiredto
electboardmembersappointedbysuchholders.Thesponsor
hastheabilitytoappointtheremainingmembersoftheboard
ofdirectors.

Undermostcircumstances,theapprovalofamajorityofthe
commonunits,excludingcommonunitsheldbythegeneral
partnerandthesponsor,isrequiredforthewithdrawalofthe
generalpartnerinamannerwhichwouldcauseadissolutionof
thepartnership.

Notlessthan66%oftheoutstandingunits,includingunits
heldbythegeneralpartnerandthesponsor,votingtogetheras
asingleclass.Asapracticalmatter,sincethesponsorwill
usuallyholdmorethan33%ofthecommonunits,removalof
thegeneralpartnerbypublicholdersofcommonunitsis
impossible.

Noapprovalrequiredatanytime.

WhyformanMLP?
TheprinciplereasontoformanMLPisaccesstocapitalonfavorableterms.Inadditionto
theusualbenefitsofraisingpubliclytradedcapitalthroughacorporation,anMLPis
muchmoretaxefficient.Shareholdersofacorporationareconfrontedwithdouble
taxation,thecorporationisliabletopaytaxesonitsearnings,andthentheshareholders
areliablefortaxesonanydividendsthattheyreceive(orpotentialtaxationuponsaleof
thecorporationsstock).Partnersofalimitedpartnership(ormembersofalimited
liabilitycompanythatelectstobetaxedasapartnership)aretaxedonlyattheindividual
level;thereisnoU.S.federalorstateincometaxatthepartnershiplevel.Thistaxbenefit
isfrequentlyreferredtoaspassthroughincome,asincomepassesthroughtheentity
withouttax.

Partnersarepersonallyresponsibleforpayingtaxesontheirindividualportionsofthe
limitedpartnershipsincome,gains,lossesanddeductions.Limitedpartnersmayalso
recordaproratashareofthelimitedpartnershipsdepreciationontheirowntaxforms,
whichcouldhavetheeffectofreducingordeferringsuchlimitedpartnerstaxable
incomeforaparticularyear.Inaddition,aportionofcertaindistributionsmayqualify
asareturnofthepartnerscapital,therebyreducingthepartnerstaxablebasisfora
particularyear.Whileeachpartnerisresponsibleforthetaxesonhisorher
proportionateshareofincomeofthelimitedpartnership,evenifthelimitedpartnership
doesnotpayanycashdistributionduringaparticularyearorquarter,MLPsgenerally
aredesignedtobeabletoattempttomakequarterlydistributionstotheirpartnersthat
willexceedanytaxowed.

MASTERLIMITEDPARTNERSHIPSFORTHESHIPPINGANDOFFSHOREINDUSTRIES

Becauseofthepassthroughtreatment,morecashisusuallyavailablefordistributions
topartnersthanwouldbeavailablehadthecompanybeenacorporation.Thisgenerally
makesMLPunitsmoreattractivetoinvestorsthanequivalentsharesofacorporation
(notwithstandingthedifferentstructuredescribedabove),whichincreasesunitvalue.

WheretoformanMLP
Asnotedabove,alloftheshippingandoffshore MLPstodatehavebeenformedinthe
RepublicoftheMarshallIslands.Thisisduetothefavorabletaxtreatmentinthe
MarshallIslandsaffordedtononresidententitiesandtheirnonresidentequityholders
(seethenextparagraph)andbecausetheMarshallIslandsLimitedPartnershipActis
basedupontheDelawareRevisedUniformLimitedPartnershipAct,whichiswellknown
toinvestors.

EntitiesthatareformedintheMarshallIslandsthatdonotconductbusinessor
operationsintheMarshallIslands(nonresidententities)arenotsubjecttoincometax
intheMarshallIslands.Similarly,nonresidentequityholdersofMarshallIslandformed
entities,includinglimitedpartnerships,limitedliabilitycompaniesandcorporations,are
notsubjecttoMarshallIslandstaxationorwithholdingondistributionsordividends,
includingupondistributiontreatedasareturnofcapital.Nonresidentequityholdersare
alsonotsubjecttoMarshallIslandsstamp,capitalgainsorothertaxesonthepurchase,
ownershipordispositionofunitsorstockandarenotrequired underMarshallIslands
lawtofileataxreturnrelatingtoownershipofunitsorstock.Interestingly,becausethere
arenotaxesimposedbytheMarshallIslands,andmanyshippingcompaniesformedin
theMarshallIslandsasMLPsdonotoperateintheUnitedStates(andthereforewould
notbesubjecttoU.S.incometaxifitwereacorporation),certainMarshallIslandsformed
MLPselecttobetreatedascorporationsforU.S.federalincometaxpurposes.

TheMarshallIslandsLimitedPartnershipActresemblesprovisionsofthelimited
partnershiplawsofanumberofstatesintheUnitedStates,mostnotablyDelaware
(uponwhichtheMarshallIslandsLimitedPartnershipActwasbased).TheMarshall
IslandsLimitedPartnershipActalsoprovidesthatitistobeappliedandconstruedto
makeituniformwiththeDelawareRevisedUniformLimitedPartnershipActand,so
longasitdoesnotconflictwiththeMarshallIslandsLimitedPartnershipActordecisions
oftheMarshallIslandscourts,interpretedaccordingtothenonstatutorylaw(orcase
law)ofthecourtsoftheStateofDelaware.Becausepotentialinvestorsarefamiliarwith
issuersformedinstateswithintheUnitedStates(particularlyDelaware),theMarshall
Islandsisalogicaljurisdictiontoformanentityasinvestorsdonotrequireadditional
understandingrelatingtogovernance.

Shouldyouliketodiscussanyoftheissuesraisedinthisbriefing,oranyothercorporate,securities,tax
orMarshallIslandslegalmatter,pleasegetintouchwithamemberofourteamshownonthenextpage,
oryourregularcontactatWatson,Farley&Williams.

05

Alloftheshipping
andoffshoreMLPs
havebeenformed
intheMarshall
Islands.

Watson,Farley&Williams November2012

06

MASTERLIMITEDPARTNERSHIPSFORTHESHIPPINGANDOFFSHOREINDUSTRIES

Contacts

DanRodgers
Partner
NewYork

drodgers@wfw.com
+12129222206

SteveMillman
Partner
NewYork

smillman@wfw.com
+12129222205

SteveHollander
Counsel
NewYork

shollander@wfw.com
+12129222252

AllreferencestoWatson,Farley&WilliamsandthefirminthisbrochuremeanWatson,Farley&WilliamsLLPand/oritsaffiliatedundertakings.Any
referencetoapartnermeansamemberofWatson,Farley&WilliamsLLP,oramemberoforpartnerinanaffiliatedundertakingofeitherofthem,or
anemployeeorconsultantwithequivalentstandingandqualification.

ToensurecompliancewithrequirementsimposedbytheU.S.InternalRevenueService,weinformyouthatanyUnitedStatestaxadvicecontainedin
thiscommunicationisnotintendedorwrittentobeused,andcannotbeused,forthepurposeof(i)avoidingpenaltiesundertheUnitedStates
InternalRevenueCodeof1986,asamended,or(ii)promoting,marketingorrecommendingtoanotherpartyanytransactionormatteraddressed
herein.

ThisbriefingisproducedbyWatson,Farley&Williams.Itprovidesasummaryofthelegalissues,butisnotintendedtogivespecificlegaladvice.The
situationdescribedmaynotapplytoyourcircumstances.Ifyourequireadviceorhavequestionsorcommentsonitssubject,pleasespeaktoyourusual
contactatWatson,Farley&Williams.

Watson,Farley&Williams2012
1000001683NEW20/11/2012

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