Procurement Automation Institute, Inc., No. 4236 (January 9, 1997) Docket No. SIZ-96-10-9-79 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. ________________________________ ) SIZE APPEAL OF: ) ) Procurement Automation ) Institute, Inc. ) ) Appellant ) Docket No. SIZ-96-10-9-79 ) Solicitation No. ) W501431-A2 ) Environmental Protection Agency ) Washington, DC ) ________________________________) DIGEST Affiliation exists when the minority shareholder of the challenged firm is the sole shareholder of another firm, and that minority shareholder, under the express provisions of a shareholders' agreement, must approve major business decisions of the challenged firm, thereby compromising the autonomy of that firm. DECISION January 9, 1997 HOLLEMAN, Administrative Judge: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. Sections 631 et seq., and 13 C.F.R. Part 121. Issue Whether affiliation exists when the minority shareholder of the challenged firm is the sole shareholder of another firm, and that minority shareholder, under the express provisions of a shareholders' agreement, must approve major business decisions of the challenged firm, and whether this authority compromises the autonomy of the challenged firm. I. BACKGROUND A. The Solicitation On May 9, 1996, the Environmental Protection Agency, Washington, D.C. (EPA), issued the subject solicitation, as a negotiated procurement to provide training courses for the professional development of contracting personnel. The Contracting Officer (CO) assigned to the procurement Standard Industrial Classification (SIC) code 8299, Schools and Educational Services, Not Elsewhere Classified, with a corresponding average annual receipts size standard of $5 million.[1] The procurement was totally set aside for small business. Offers were due on June 20, 1996. On September 11, 1996, the CO notified the unsuccessful offerors that Procurement Automation Institute, Inc. (Appellant or PAI) was the apparent successful offeror. On September 11, 1996, Northwest Procurement Institute, Inc. filed a size protest with the CO. The protester asserted Appellant was affiliated with Educational Services Institute, Inc. (ESI), an other-than-small business. On September 12, 1996, the CO referred the protest to the Small Business Administration (SBA) Area II Office of Government Contracting in King of Prussia, Pennsylvania (Area Office), for a size determination. On September 13, 1996, the Area Office notified Appellant of the protest, and requested certain information. On September 18, 1996, Appellant submitted a completed SBA Form 355, together with other corporate information. B. The Area Office Determination On September 27, 1996, the Area Office issued a size determination, making a number of findings of fact. Appellant was owned by Dr. Diane Murphy (51%), and by Edwin L. Phelps (49%), and ESI was wholly owned by Mr. Phelps. Appellant's average annual receipts alone did not exceed the size standard, but would do so if the firm were found affiliated with ESI. Appellant was incorporated in 1988 but, on August 31, 1990, Dr. Murphy purchased sufficient stock to give her 51% of the outstanding stock. Also on that date, she, Appellant, and Mr. Phelps, executed an "Amended and Restated Stockholders' Agreement" (Agreement). The Agreement permits Dr. Murphy to manage the day-to-day affairs of the firm, but requires her to obtain Mr. Phelps' written approval before she -- (1) takes any action requiring stockholders' approval; (2) issues stock or grants options; (3) declares dividends; (4) incurs obligations in excess of $25,000; (5) mortgages or pledges corporate assets; (6) makes capital expenditure in excess of $10,000; (7) enters into any contract with any affiliate; (8) changes the nature or character of the firm's business; (9) enters into any joint venture which would compete with Appellant or ESI; or (10) acquires or disposes of any corporate assets, or cancels or compromises any debt due Appellant. Further, the Agreement requires Appellant to maintain its offices in the same building as ESI, and grants Mr. Phelps the right of first refusal on any issue or sale of Appellant's stock or securities. Under the Agreement, Dr. Murphy agrees not to solicit any of Appellant's customers, or hire any of its employees, for one year after she leaves the firm. If either Dr. Murphy or Appellant breaches any provision of the Agreement, Mr. Phelps is immediately entitled to an additional vote on the Board of Directors and additional stock sufficient to raise his interest in Appellant to 50%. The Area Office concluded that, because Appellant could make no major decisions without Mr. Phelps' approval, thereby compromising its autonomy, he had the power to control Appellant. Therefore, the Area Office concluded from the totality of the circumstances Appellant was affiliated with ESI, and thus, was other than small. On October 1, 1996, Appellant received the size determination. On October 9, 1996, Appellant filed the instant appeal, together with an affidavit from Dr. Murphy. C. Arguments on Appeal Appellant asserts the Area Office erred because, under this Office's precedents, a minority shareholder does not control a corporation unless no one shareholder is powerful enough to counter him. When a minority shareholder's percentage of stock is insufficient to outvote another shareholder, the Area Office cannot find the minority shareholder controls the firm. Appellant relies on Size Appeal of FLIR Systems, Inc., No. 3870 (1994); Size Appeal of Faith Construction, Inc., No. 3355 (1990); Size Appeal of Flow Research, Inc., No. 3249 (1990); Size Appeal of Advanced Composite Materials Corporation, No. 3221 (1989). Appellant further asserts the Area Office erred because the Agreement does not require Mr. Phelps' approval before PAI may take any of the enumerated actions, but only that it consult him. Appellant further asserts the provisions of the Agreement are moot, since the firm has never taken eight of the ten actions. In fact, Appellant asserts Mr. Phelps is very detached from the firm's affairs. In addition, Appellant asserts its offices are located in the same building as ESI only for ease of coordinating joint ventures, because the location was prestigious and convenient to Dr. Murphy, and because Mr. Phelps obtained a very favorable lease. Appellant asserts it has offices nation-wide, with its main office in Chantilly, Virginia. Finally, Appellant asserts the Resolution Trust Corporation (RTC) has determined it is a Minority/Women Owned Business (MWOB), and this determination compels SBA to find it is controlled solely by Dr. Murphy, independent of ESI, and thus is a small business. II. DISCUSSION Appellant filed the instant appeal within 15 days of its receipt of the size determination, and it is thus timely. 13 C.F.R. Section 134.304(a)(1). The instant appeal is based upon a disingenuous misstatement of fact. Contrary to Appellant's assertions, and consistent with the Area Office's findings, the Agreement clearly provides: Murphy shall be authorized to manage the business and affairs of the Corporation on a day-to-day basis, provided, however, that the Corporation shall not, without the prior written approval of Phelps in his sole discretion: .... Agreement, Section 2.3, at 4 (emphasis supplied). The Agreement clearly requires that Mr. Phelps must expressly approve ten critically important actions before Appellant may act. Further, it does not require Mr. Phelps to refrain from unreasonably withholding his approval, as in many similar agreements. Rather, it is within his sole discretion whether to approve. Appellant offers no evidence, other than Dr. Murphy's bare assertions in her affidavit that Mr. Phelps has no real approval authority, to show why this express provision does not control here. The Agreement also requires Appellant to maintain its offices in same building as ESI, and to move its offices when ESI moves. In addition, it requires that Mr. Phelps negotiate Appellant's lease. Id., Section 2.4, at 5. Nothing in the record, beyond Dr. Murphy's bare assertions in her affidavit, shows Appellant has any offices other than those in the same building as ESI. Dr. Murphy's assertions in her affidavit are less than credible, since they contradict the clear provisions of the Agreement on the question of whether Appellant must obtain Mr. Phelps' approval. As to Appellant's argument about Mr. Phelps' status as a minority shareholder vis a vis other shareholders, this Office has long recognized that the power of one firm to control another is not dependent on majority ownership of the voting stock. Size Appeal of Mingus Constructors, Inc., No. 3115 (1989); Size Appeal of Savini Construction Company, No. 477 (1971), citing Rochester Telephone Corporation v. United States, 307 U.S. 125, 144-6 (1939).[2] A minority shareholder can be found to control a firm if the totality of the circumstances demonstrate other factors enhancing the minority shareholder's position, so that the autonomy of the corporation is compromised. Size Appeal of Olmec Toys, Inc., No. 4077 (1995); Size Appeal of PRWT Services, Inc., No. 3805 (1993). The precedents on which Appellant relies are inapposite, as all deal with minority shareholders who had no other means of exercising control over the challenged firm, such as the Agreement here, or other contractual relationships. In sum, this Agreement requires the minority shareholder's approval of any major action taken by Appellant. Mr. Phelps, the sole shareholder of ESI, has the power to exercise control over Appellant whether or not the specific situation requiring his approval ever has arisen. Appellant is thus affiliated with ESI, and is other than small.[3] III. CONCLUSION In view of the above analysis, the Area Office II size determination is AFFIRMED and the appeal is DENIED. This is the final decision of the Small Business Administration. See 13 C.F.R. Section 121.316(b). __________________________ CHRISTOPHER HOLLEMAN Administrative Judge [1] The original solicitation included the SIC code designation and Notice of set-aside, but did not include the size standard. Amendment 1 corrected this omission on June 12, 1996. [2] Savini was a decision of the Size Appeals Board. This Office has adopted the body of cases decided by the Size Appeals Board as valid precedent, pursuant to the rule of stare decisis. See Size Appeal of Mota Construction Co., Inc., No. 2061 (1984). [3] The fact that RTC recognizes Appellant as a MWOB is irrelevant here. This proceeding considers whether Appellant qualifies as small under the Small Business Act and the implementing regulations at 13 C.F.R. Part 121.