Like the change in seasons, every few months brings a new report of potential consolidation in the liner shipping sector. Container carriers continue to look for new ways to address overcapacity and reduce costs while maintaining the highest possible level of service to their shipper customers. Vessel sharing alliances have been part of the solution, as they can dramatically reduce capital costs. But they do not reduce overhead costs, as each carrier continues to maintain its own marketing and administrative operations. To achieve efficiencies and reduce overhead costs, many carriers are looking at potential mergers as a means to grow their networks while reducing capital cost and lowering overhead spending.

A merger of two liner shipping companies involves the combination of large organizations with multiple offices around the world and myriad contractual relationships, including (to name just a few) agreements with other carriers, customers, equipment providers, and terminals. Due diligence for liner combinations can prove a formidable task, as specialized maritime sector contracts, regulations, and legal regimes can lead even experienced merger & acquisition experts into perilous and unfamiliar waters. Similarly, post-merger integration efforts must take into account unique maritime law rules, rights, and remedies to keep the tie-up off the rocks.

When evaluating a major carrier as a merger target, there are a broad range of maritime contracts and other measures that must be reviewed carefully, both to identify any material risks and liabilities lurking below the surface, and also to plan for a speedy and painless integration process.

While the list below focuses on the issues from a U.S.- law perspective, some version of this exercise should be undertaken for every major market in which the combining carriers operate.

  • Regulatory compliance: Is the target operating in compliance with the unique rules and regulations applicable to liner shipping, including the U.S. Shipping Act of 1984 and the regulations of the U.S. Federal Maritime Commission? Does the carrier have a clean bill of health on antitrust, trade sanctions, and antibribery issues?
  • Environmental compliance: Does the carrier have appropriate environmental controls in place, or is it at risk for U.S. environmental prosecution for shipboard discharges? All of these regulatory matters pose particular challenges for shipowners and operators calling U.S. ports.
  • Contracts with vendors and operating partners: Close attention must be paid to contracts with terminal operators, stevedores, inland truck and rail operators, agents, logistics and warehouse partners, equipment providers, technology partners, and other maritime companies to ensure the target is not exposed to unusual risks, and to assess the viability and strategy to consolidate these supplier relationships posttransaction. A similar approach should be taken for agreements with other carriers, including vessel sharing and alliance agreements, especially for mergers crossing alliance lines.
  • Customer service contracts: Careful attention must be paid to major accounts, to assess cargo and service commitments, liability terms, and possible damages.
  • Time and bareboat charter arrangements, and vessel finance agreements: Ship finance and chartering experts must give close scrutiny to the terms under which the target's fleet is chartered or financed.
  • Taxation: The United States and many other countries have unique tax provisions for international shipping, including revenue from intermodal operations. Ensuring that these rules and exemptions have been properly applied is an important part of assessing the target.
  • Shoreside labor union contracts and pension obligations: A potentially overlooked but critical part of combining operations is understanding what rights unions or workers might have to block or penalize efforts to consolidate or eliminate services.

There are many other specialized contracts and maritime operations that merit scrutiny as well, such as technical management and crewing agreements, U.S. government contracts, marine insurance and workers compensation, and outstanding maritime claims and liens, to name a few. The key to managing these issues efficiently is having proper maritime legal expertise on hand to address these issues, allowing the core corporate team to focus on constructing a firm foundation for the combined enterprise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.