OT:RR:CTF: ER H105336 RDC
James B. Harris, Esq.
Thompson & Knight, LLP
One Arts Plaza
1722 Routh Street
Suite 1500
Dallas, Texas 75201-2533
Re: Pasadena Refining System, Inc.; Foreign Trade Subzone 84-N; Request for Reconsideration of HRL H027423 (September 21, 2009).
Dear Mr. Harris:
This is in response to your May 5, 2010, request on behalf of your client, Pasadena Refining System, Inc. organized in Connecticut, (Pasadena CT), that CBP reconsider its determination in Headquarters Ruling Letter (HRL) H027423, issued September 21, 2009. In HRL H027423 we held that Pasadena CT was a new operator of the foreign trade zone, (FTZ), because the approved operator, Pasadena Refining System, Inc. organized in Delaware, (Pasadena DE), ceased to exist after the mergers described below. We have reconsidered the matter based on your Request for Reconsideration dated May 5, 2010, and your Memorandum dated December 21, 2012.
FACTS:
Pasadena DE was the approved operator of the relevant FTZ and a wholly owned subsidiary of Astra Refining System, Inc. (Astra). In 2006, Pasadena DE was merged into its parent, Astra. At the same time, Astra was merged into its parent, Astra Holdings, Inc. (Astra Holdings). Astra Holdings was a subsidiary of Astra Oil Trading NV. Astra Holdings then changed its name to Pasadena Refining System, Inc., (Pasadena CT), a Connecticut corporation. In sum, Pasadena DE, and Astra were merged into Astra Holdings, then Astra Holdings changed its name. Three days after this merger 50 percent of the stock of Pasadena CT was sold to Petrobras America Inc. (Petrobras). After the merger Pasadena CT obtained a new FTZ bond in its name and applied to the grantee of the zone to be approved as a new operator. You say this was not because Pasadena CT believed such action necessary, but "out of an abundance of caution." Request for Reconsideration, May 5, 2010, page 3. Finally, Pasadena CT obtained a new tax identification number.
LAW AND ANALYSIS:
You now argue that under Delaware and Connecticut law a subsidiary that is merged into its parent "continues on as part of the parent corporation" and that Pasadena DE continues to exist as part of Pasadena CT so that Pasadena CT is not a new operator. Request for Reconsideration, May 5, 2010. You claim that CBP is confusing the "concept that the separate existence of the merged corporation terminated and ceases as a result of a merger with the concept that an entity itself terminates and ceases as a result of a dissolution." Memorandum, December 12, 2012, page 2. You also advise that Pasadena DE's pre-merger balance sheet and Pasadena CT's post-merger balance sheet were identical, and that "as a result of the mergers, all of the rights, privileges, powers and franchises [belonging to Pasadena DE and Astra] . . . were as a matter of Delaware law vested in Pasadena CT." Request for Reconsideration, May 5, 2010, page 6. You contend that Pasadena DE continues to exist as part of Pasadena CT so that Pasadena CT is not a new operator.
We disagree that Pasadena DE continues its existence and that Pasadena CT is not a new operator. In fact, the Agreement and Plan of Merger of Astra Refining System, Inc. and Astra Holding USA, Inc., dated August 29, 2006, states that Pasadena DE will cease to exist and Astra will survive the merger. Page 1 of the Agreement and Plan states that "the Merged Corporation shall be merged with and into the Surviving Corporation, . . . the separate existence of the Merged Corporation shall cease and the Surviving Corporation shall survive the merger and continue to exist . . . ." See also, para. 1.3 (". . . the separate existence and corporate organization of the Merged Corporation shall be terminated and cease.") In this case, Astra was named the surviving entity and therefore the merger documents demonstrate that Pasadena DE ceased to exist.
Legacy Customs previously held that “it is settled law that the corporation absorbed in a merger, or consolidation ceases to exist and its existence is not, in any way or form, continued in the surviving or resultant corporation which constitutes a different legal being altogether.” See H222064 (Apr. 10, 1990) and C.S.D. 89-12 (December 15, 1988). You argue that absent federal law, which takes precedence over state law, CBP should follow "the law of the state that governed the merger . . . ." Request for Modification and Revocation, May 5, 2010 at 6. However, the matter at issue, operation of an FTZ, is a federal issue because an FTZ and the authority to operate it are creatures of federal law, i.e., 19 U.S.C. § 81c. Specifically, we are determining whether the FTZ operator status can continue after the operator is merged and ceases to exist. Consequently, federal law and regulations control.
Moreover, state law is consistent with CBP’s position, that the merged corporation ceases to exist as a separate entity. Under both Delaware and Connecticut law, by statute, the merged corporations cease to exist (unless identified as the surviving corporation - which here was Astra). Section 259 of the Delaware Code provides:
When any merger or consolidation shall have become effective under this chapter, for all purposes of the laws of this State the separate existence of all the constituent corporations, or of all such constituent corporations except the one into which the other or others of such constituent corporations have been merged, as the case may be, shall cease and the constituent corporations shall become a new corporation, or be merged into 1 of such corporations, as the case may be, possessing all the rights, privileges, powers and franchises as well of a public as of a private nature, and being subject to all the restrictions, disabilities and duties of each of such corporations so merged or consolidated; and all and singular, the rights, privileges, powers and franchises of each of said corporations, . . . ."
8 Del. C. § 259(a) (2012). The Connecticut statute has similar language and provides:
(a) When a merger becomes effective:
(1) The corporation or other entity that is designated in the certificate of merger as the survivor continues or comes into existence, as the case may be;
(2) The separate existence of every corporation or other entity that is merged into the survivor ceases;
Conn. Gen. Stat. § 33-820 (2012). Therefore, Pasadena DE ceased to exist when it was merged into its parent and hence, the approved FTZ operator, Pasadena DE, no longer exists. Accordingly, Pasadena CT must be a new operator.
Further, Delaware courts have held that the subsumed corporation in a merger ceases to exist under Delaware law. In Beals v. Washington International, Inc., (386 A.2d 1156 (Del. Ch. 1978)) the Delaware court interpreted its statute to provide "a constituent corporation ceases to exist upon merger . . . . " Id. at 1161. In Beals, Company B was merged into Company A. The plaintiffs, former stockholders of Company A, named Company B as a defendant. The defendants' motion to quash the service of process on Company B was granted because the court determined that Company B "no longer exists and the action cannot be maintained against it." Id. at 1161. As rationale for its decision, the Beals Court stated:
In resolving questions centering on corporate existence or dissolution, it should be kept in mind that corporations exist only by legislative act. International Pulp Equipment v. St. Regis Kraft, D.C. Del., 54 F. Supp. 745 (1944). Since by statute, corporate existence is terminated on the date of merger, U.S. v. Borden, N.D. Ill., 28 F. Supp. 177 (1939), a corporation ceases to exist on merger for all purposes, including service of process, unless the legislature provides otherwise. Sevits v. McKiernan-Terry, S.D.N.Y., 264 F. Supp. 810 (1966).
Id. Based on Beals, Pasadena DE, regardless of whatever rights, privileges, powers and franchises passed to Pasadena CT as a result of the merger, after the merger Pasadena DE ceased to exist as a corporate entity. Accordingly, since the approved operator of the FTZ no longer exists, any entity said to be operating the zone must be a new operator.
Despite the plain text of the Delaware and Connecticut law, you assert that:
Section 259(a) of the DGCL [Delaware General Corporate Law] provides that in a merger, the subsidiary corporation combines with, and continues its existence in, the parent corporation. Therefore, the combined entity possesses all the rights, privileges, powers and franchises, and is subject to all restrictions, disabilities and duties of the subsidiary corporation. Accordingly, under Delaware law, combining a subsidiary with a parent results in a continuation of the subsidiary corporation through the parent corporation. This result is a major distinction between a merger and a dissolution. In a dissolution, the subsidiary corporation disappears and terminates, and its creditors are paid and the remaining assets are distributed to the parent corporation. By contrast, in a merger, the subsidiary corporation continues on in the parent corporation, without losing its life.
Request for Reconsideration, May 5, 2010, page 6. However, as explained above, only the surviving corporation continues, not the corporations that are merged into it. Thus, your position is inconsistent with both the text of the Delaware and Connecticut statutes as well as a ruling by a Delaware court.
Moreover, the two cases you rely upon in your Memorandum dated December 21, 2012, Sterling v. Mayflower Hotel Corp., 93 A.2d 107 (1952) and Argenbright v. Phoenix Fin. Co., 187 A. 124, 126 (Del. Ch. 1936), do not contradict the conclusion that Pasadena DE ceased to exist after the merger. In Sterling v. Mayflower Hotel Corp., the court affirmed the denial of plaintiffs' request for injunctive relief and found no unfairness or fraud regarding a planned merger. In Argenbright v. Phoenix Finance Co., the court sustained the corporations' demur on the minority shareholders' action to rescind the sale and distribution of corporate assets. The court denied the demur on the minority shareholders' claim for breach of trust based upon conversion of the proceeds from the distribution. Neither of these cases refute the conclusion that a corporation merged into another ceases to exist and are inapposite. Accordingly, you provide no legal basis to alter the determination in HRL H027423, that Pasadena DE ceased to exist after it was merged into Astra.
You also contend that HRL H027423 did not address two key points, i.e., whether there "was a change in ownership, and did that change in ownership result in a new corporate entity as operator." We believe this assertion is a reference to the CBP Foreign Trade Zone Manual, Publication number 0000-0559A (2011) (FTZM). The FTZM at 4.13 states:
Change in Ownership of Operator - If ownership of the operator firm changes hands through sale or other transfer, the procedure to be followed depends on whether the firm is individually owned, a partnership, or a corporation.
. . . . If the firm is a corporation and the change in ownership does not result in a new corporate entity with a different corporate charter, the change will be treated as a name change as described in Section 4.13(b), below, FTZM. If the firm is a corporation and the change results in a new corporate entity, a new application for activation shall be made under the procedures in 19 CFR 146.6 and Section 4.12 FTZM.
FTZM 4.13(a). You contend that the "reorganization of the subsidies of Astra Oil Trading NV made no change in the ultimate ownership of the Operator [Pasadena DE/Pasadena Ct]." Request for Reconsideration, May 5, 2010. You state that since Astra Oil Trading NV was the ultimate owner of Pasadena DE and the resulting corporation, Pasadena CT, remained a wholly owned subsidiary of Astra Oil Trading NV, the ownership of Pasadena DE did not change. You also argue that there was no change in ownership that resulted from the sale of half of the stock of Pasadena CT to Petrobras. However, that section of the FTZM only addresses when the entity continues to exist but the ownership changed. After finding, as explained above, that the approved operator, Pasadena DE, ceased to exist as a matter of law after the merger, there is no reason to consider whether there "was there a change in ownership." The fact that the approved zone operator no longer existed after the merger obviates the need to consider whether there was a change in ownership of the operator.
Moreover, even if we were to consider the contention that the merger did not result in a change in ownership, three days after the merger, half of Pasadena CT was sold to Petrobras, creating a change in ownership of the corporation you say should be deemed the FTZ operator. The United States District Court for the Southern District of Texas and the First District Court of Appeals of Texas both describe Pasadena CT as being a joint venture owned by Astra Oil Trading NV and Petrobras. The First District Court of Appeals of Texas, recently described the ownership of Pasadena CT in this way:
In September 2006, a joint venture was started between Pasadena Refining System, Inc. ("PRSI"), [Pasadena Ct] . . . . and PRSI Trading Company LP ("the Trading Company"), an associated partnership, which supplied the refinery with feed stocks and crude oil. Petrobras America Inc. ("Petrobras America") and appellee, Astra Oil Trading NV ("Astra Oil") each owned one-half of the shares in PRSI. A Shareholders Agreement governed PRSI's operations.
Petrobras Am., Inc. v. Astra Oil Trading NV, 2012 Tex. App. LEXIS 2458 (Tex. App. Houston 1st Dist. Mar. 29, 2012) (emphasis added). The United States District Court for the Southern District of Texas, Houston Division, said that Astra Oil and Petrobras were "co-owners" of a joint venture, Pasadena CT:
Petitioners Astra Oil Trading NV . . . ("Petitioners") seek in this action judicial confirmation of an arbitral award rendered in their favor against Respondents . ("Respondents"). Petitioners [Astra Oil Trading NV, et. al.] and Respondents [Petrobras America, Inc., et. al.] were 50% co-owners of a joint venture consisting of two companies. The first company--Pasadena Refining System, Inc. ("PRSI")--owns a refinery in Pasadena, Texas. PRSI was governed by a Shareholders Agreement between [Astra Oil Trading NV] and [Petrobras America, Inc., et. al.] . . . .
Astra Oil Trading NV v. Petrobras Am. Inc., 718 F. Supp. 2d 805 (S.D. Tex. 2010). Therefore, Astra Oil Trading NV's ownership of Pasadena DE, Astra and Pasadena CT changed after the merger.
There is also evidence that Pasadena CT acted as if Pasadena DE no longer existed. After the merger Pasadena CT obtained a new FTZ bond in its name, applied to the grantee of the zone to be approved as a new operator, and obtained a new tax identification number. Request for Reconsideration, May 5, 2010. While you say that this was not because Pasadena CT believed such action necessary, but "out of an abundance of caution," (Request for Reconsideration, May 5, 2010, page 3), however, these actions demonstrate that the management of Pasadena CT thought the changes to the corporate entity that operated the FTZ were significant enough to notify CBP and the surety.
Finally, you argue that Pasadena DE's status as operator of the FTZ vested in the surviving corporation where it is preserved and continued." You contend that there is no federal law to trump the state law that vests all the rights, privileges and powers of the merged corporation in the surviving corporation. You say that means that Pasadena DE's right to operate the FTZ vested in Pasadena CT, the surviving corporation. However, operation of an FTZ is a privilege not a right. Moreover, CBP does not permit the sale or transfer of the FTZ operator status between entities. The CBP Regulations and the FTZM require that new FTZ operators be approved prior to operating a zone. See FTZM 4.13(a) and 19 C.F.R. § 146.7(e). As explained above, since Pasadena DE ceased to exist, CBP's approval to operate the FTZ also ceased. Pasadena CT therefore, must be a new operator. This new operator must apply for approval to operate the FTZ.
HOLDING:
Based on the above, we find that there is no legal basis to alter the determination in HRL H027423, that Pasadena Refining System Inc. (Pasadena DE) ceased to exist after the merger and the resulting entity, Pasadena CT is a new entity and hence, is a new zone operator.
Sincerely
Sandra L. Bell
Executive Director
Regulations and Rulings
Office of International Trade