Syro Steel Company, No. 3800 (June 25, 1993) Docket No. SIZ-93-5-18-62 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. SIZE APPEAL OF: ) ) Syro Steel Company ) ) Appellant ) Docket No. SIZ-93-5-18-62 ) Solicitation No. ) F09603-92-R-7102 ) Department of the Air Force ) Headquarters Warner Robins ) Air Logistics Center (AFLC) ) Robins AFB, Georgia ) DIGEST The Regional office was not in error in treating an "Agreement and Plan of Merger," agreed to and approved by the Board of Directors of the Appellant, as an "agreement in principle" as contemplated in 13 CFR 121.401(f) and 121.904(b) where consummation of the merger is simply conditioned upon the approval of shareholders and customary regulatory authorities, and the other ancillary documents and actions of the parties reflect a serious intent and expectation that the merger will occur as agreed. DECISION June 25, 1993 COLE, Administrative Judge, Presiding: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. 631 et seq. and the regulations codified at 13 CFR Part 121. Issue Whether the Regional Office was in error in applying the "present effect" rule, 13 CPR 121.401(f) and 121.904(b), to a merger agreement entered into by the Appellant prior to self certification in which the Appellant was to merge with a large concern. Background On May 24, 1993, in the consolidated appeals of Marwais Steel Company and Engineered Air Systems, Inc., Docket Nos. SIZE-93-3- 24-34 and SIZE-93-3-29-35, respectively, the office of Hearings and Appeals (OHA) granted the motion of the Small Business Administration (SBA) to remand the proceeding to the SBA's Chicago Regional Office for further investigation and a new size determination respecting Syro Steel Company (Syro or Appellant). The Regional Office had, on March 12, 1993, determined Syro to be a small business concern within the size standard applicable to the captioned solicitation. 1/ The issue raised in the consolidated appeal was whether there was error on the part of the Regional Office in applying the "present effect" rule, as set forth at 13 CFR 121.401(f), to a merger agreement between Syro and an indisputably "large" concern, Trinity Industries, Inc. (Trinity). The SBA, alleging that new information had come to light bearing on Syro's size status, argued that the Regional Office should make a new size determination. This Office agreed. Facts On May 17, 1993, this Office received from Syro a "Formal Appeal of the remanded decision." The appeal states that in a May 14th telephone conversation with the Regional Office Size Specialist, John Noeth, Syro was advised that it had been found other than small. The appeal states, in part: ... In this brief conversation we were advised that the revised decision ... was based upon the contention that SYRO had withheld information. our appeal is based upon this wrongful information presented by the SBA in this matter. SYRO has not yet received a copy of the reported new size determination and therefore, we reserve the right to amend this Appeal. The Appellant then argues that there had been no effective merger between itself and Trinity as of the date of its self certification on August 11, 1992. The Appellant states, in pertinent part: (a) It is a fact that the 2 July 1992 document, entitled "Agreement of Merger" is not an accepted agreement, or agreement in principal [sic], in any manner or form under the laws of the State of Ohio. The legal recorded Certificate of Merger as required by the State of Ohio was filed 22 September 1992. The 2 July 1992 document is not a part of that legal record. The SBA was duly advised of the 2 July 1992 document in the cover letter, dated 26 Feb 1992, which transmitted the requested Form 355 to the Regional offices. The fact that the document existed was volunteered by SYRO to the SBA, not withheld. Alleging that the July 2nd "Agreement of Merger" is not recog- nized by other federal regulatory bodies 2/ as an agreement in principal, the date of the merger, or as having affected Syrols independence of operation, the Appellant continues: (e) The SBA's findings apparently do not take into account that the small business in question, started in 1946, did, in fact, continue as a totally independent, bona fide small business until 22 September 1992. This date and the recorded legal filings made in the name of SYRO Steel Company in the State of Ohio form the change in the independent operation of the business or any involvement by others in the operation of SYRO Steel Company. SYRO's internal legal records, available to the SBA without the need of any discovery motion, will clearly prove the self certification as a small business on 11 August 1992 was done in good faith by a long time small business. Facts The Regional Office's size determination, dated May 11, 1993, stated, in pertinent part: 3/ Syro submitted their bid on the subject solicitation on August 11, 1992. At that time, they stated that they were a small business concern. Their Form 355, dated February 26, 1993 ... stated that Syro employs a total of 471 people, under the applicable size standard .... The size determination is affected by a merger between Syro and Trinity Industries. The special meeting of Syro stockholders was held on September 21, 1992, at which time they authorized the merger with Trinity; the merger took place the following day .... * * * * * ... Syro had executed an Agreement to Merge with Trinity on July 2, 1992 ... before Syrols self- certification ... [and] ... had already executed the following documents relating to the merger: 1. Articles of Incorporation of Trinity Acquisition Company (dated May 15, 1992 and filed May 18, 1992); 2. Agreement and Plan of Merger among Trinity Industries, Inc., Trinity Acquisition, Inc., and Syro (dated July 2, 1992); 3. Agreement of Merger between Trinity Acquisition Company and Syro (dated July 2, 1992); 4. S-4 Registration Statement for Trinity Industries, Inc. (filed July 9, 1992 with the S.E.C.); and 5. First Amendment to Agreement and Plan of Merger (dated August 1, 1992). Noting the regulatory provisions of 13 CFR 121.904, including that, size status is determined as of the date of a firm's self certification, in this case August 11, 1992, the Regional Office concluded, in pertinent part, as follows: ... [T]here can be no question but that Syro was not small at the time of its self-certification because of pre-existing agreements. The regulations are clear: completed transactions are not necessary. "Agreements in principle" and "other business arrangements" affecting "possible future affiliation" are sufficient and "are considered executed as of the date of the certification." 13 C.F.R. 121.904(b) (italics added). CONCLUSION: Based on the above evidence, Syro Steel Company, Inc. is determined to be other than a small business concern for the purpose of this procurement. On May 27, 1993, this Office received what the Appellant termed as an amendment to its Notice of Appeal. The Appellant asserts, inter alia: (1) This Appeal seeks to immediately review the exercise of wrongful authority by the SBA to move to become a Party .... (2) This Appeal seeks to review the Motion to Remand .... (3) This Appeal seeks to review the rights of the combined two (2) adverse parties, both of which have been timely protested to the Contracting Officer [as to their size status]. (4) This Appeal seeks to review the basis of the language and findings ... that OHA had found in favor of the combined appellants of the original size determina- tion. To our knowledge no ruling was made by the OHA and no notice of any ruling was sent to Syro. This statement and others ... are without merit .... (5) This Appeal shall serve as the formal communication to request a copy of the findings document prepared by the Region V Legal Staff .... [4/] (6) This Appeal seeks to review the overall procedures of the SBA with regard to (1) taking action on protest(s) from companies not in a position to be before the SBA and, (2) to seek a review into what has the appearance of an injustice to Syro as well as a cover up of inefficiencies and inadequate procedures within the Administration .... (7) This Appeal seeks to review the materials presented by others which may have created a false preponderance of evidence and a confusion of importance of various documents. [5/] It is the Appellants [sic] position that the SBA's charter in size determinations is to confirm the small business independent action and independent business control with regard to the solicitation ... The three documents which actually involved Syro were Document "c", dated 2 July 1992, Document "e", dated 1 August 1992 and Document "g", dated 22 August 1993 which was affected after the self certification, executed August 11, 1992 .... Syro did not advise Trinity of, nor identify to Trinity, any business activity in which it was involved prior to 22 September 1992 and, the records will indicate, Syro maintained absolute, independent control as a small business until September 22, 1992. [6/] Marwais Steel Company (Marwais), an offeror and Protestant in the remanded proceeding, filed a statement in opposition to Syrols appeal on June 16, 1993. Marwais argues that the Appellant has not borne its burden of proof in establishing that the Regional office was wrong in applying the "present effect" rule in this case. Furthermore, Marwais responds to each of the issues that the Appellant seeks to have reviewed on appeal, including the Appellant's argument that Syro was not subject to the control of Trinity before September 22, 1992. An additional filing was made by the Appellant after the close of the record and was not considered. 7/ The record discloses that the documents cited by the Regional Office, each of which predates the Appellant's self certifica- tion, pertain to the merger. The Agreement and Plan of Merger among Trinity Industries, Inc. (Trinity), Trinity Acquisition, Inc. (the wholly owned subsidiary of Trinity), and Syro Steel Company," (Agreement and Plan of Merger) executed July 2, 1992, recites that the proposed merger is deemed to be in the best interests of each, and has been approved by the Boards of Directors of each, subject to terms and conditions set forth therein. (Agreement and Plan of Merger, page 1). Subject to shareholder approval and necessary regulatory approval, the Agreement and Plan of Merger constituted a legal, valid and binding agreement. (Id. at page 9). Furthermore, the Appellant agreed therein that, from July 2, 1992 and until "closing" it would, "except as otherwise set forth in [the] Agreement or to the extent that Trinity otherwise consent[s] in writing," that it would: carry on its business in the ordinary and customary course its best efforts to y course, preserve and protect its business, properties, assets, present business organization, employees, relationships with customers, suppliers and others in order to preserve its goodwill and business; use its best efforts to comply promptly with legal requirements respecting the merger and in obtaining all necessary consents, authorizations and approvals of regulatory authorities; give Trinity full access prior to "closing" to all of its business, operations, facilities, personnel, properties, books, contracts, commitments and records; and promptly advise Trinity of any material adverse change. (Id. at pp. 23-24). Other covenants by the Appellant (referred to in the Agreement and Plan of Merger as the "Company") included causing a meeting of the shareholders for the purpose of approving the merger, and recommending, through its Board of Directors, consistent with fiduciary duties, approval of the transaction. (Id. at page 26). The Form S-4 Registration Statement filed by Trinity with the Securities and Exchange Commission on July 9, 1992, 83 pages of which are in this record, consists of a detailed, comprehensive statement and disclosure respecting the merger, including descriptions of the Appellant's business operations and financial condition, "Summary of the Merger Agreement," proforma financial statements, analysis of tax aspects, expert and legal opinions. (Form S-4, Table of Contents, page 3). The directors of the Appellant are reflected as owning over 42 percent of the outstanding Class B voting shares and seven percent of the Class A nonvoting shares. (Form S-4, page 43). The sample letter to the Appellant's shareholders, inviting them to the Special Meeting of Shareholders, tentatively set for "August[_], 1992," to vote on the proposed merger recites, inter alia, that the directors have considered the terms and conditions of the proposed merger and believe it is in the best interests of the Appellant and the shareholders, and that, " ... after careful consideration... [the directors] ... authorized and approved the Merger Agreement. The directors also recommend that the shareholders "vote FOR the approval of the Merger Agreement," indicating approval will require the affirmative vote of a majority of each class of outstanding shares of record. (Id. at page 6 of the photocopied exhibit). Among the directors and shareholders of the Appellant listed in the Registration Statement is Carl S. Ablon. According to the copy of Attachment F to Marwais, original notice of appeal (also designated "Exhibit 28.311), consisting of a letter dated March 12, 1992, from W. Ray Wallace (described in the Form S-4 as the President and CEO of Trinity) to Carl Ablon, Mr. Ablon is to receive from Trinity a 112% fee on the consummation of the Syro acquisition." Discussion Pursuant to 13 CFR 121.1701(a), the only matter under consider- ation in this proceeding is the size determination made by the Chicago Regional Office on May 11, 1993. Moreover, the sole issue here is whether the Regional Office erred in applying the "present effect" rule to agreements to merge between the Appel- lant, Trinity, and Trinity Acquisition which pre-existed the Appellant's self certification as a small business concern. Accordingly, other questions posed by the Appellant are either not pertinent to the material issue here, 8/ or are outside of the jurisdiction of this office. 9/ The regulations governing resolution of the material issue state in pertinent part: (a) Except for applicants for Certificates of Competency (COC) relating to unrestricted procurements, the size status of a concern (including its affiliates) is determined as of the date of its written self- certification as a small business. The concern shall certify that it is a small business for the purpose of performing a particular contract at the time it submits its initial offer which includes price to the procuring agency for that contract .... (b) Agreements to merge, including agreements in principle, stock options, convertible securities and other business arrangements affecting possible future affiliation of the concern with another concern or change of control of the concern are considered executed as of the date of the certification. (See S121.401(f).) (13 CFR 121.904 (a) and (b)). The reference 121.401(f) provides: Affiliation arising under stock options, convertible debentures, and agreements to merge. Stock options, convertible debentures, and agreements to merge (including agreements in principle) are generally considered to have a present effect on the power to control the concern. Therefore, in making a size determination, such options, debentures, and agreements are generally treated as though the rights held thereunder had been exercised .... Example 3. If company "All has entered into an agreement to merge with company "B" in the future, the situation is treated as though the merger has taken place. Our review of the listed documents relied upon by the Regional Office, provisions of which are noted above, persuades us that the Regional Office was correct in giving "present effect" to the above described agreements to merge. 10/ The "Agreement and Plan of Merger" is, to our mind, an "agreement in principle" as contemplated in 13 CFR 121.401(f) and 121.904(b). The other cited documents reflect the seriousness of intent and expectation that the merger will occur as agreed. We reject the notion that the approval of shareholders and customary regulatory authorities made this transaction so conjectural and speculative as to render application of the "present effect" rule unjust or unreasonable. The officers and directors of the Appellant had made significant commitments towards the success of the merger, as evidenced by their representations in the agreement itself, those permitted as part of the Form S-4 statement, and the obvious commitment of money and effort in moving the merger process forward. The Appellant asserts its absolute independence from Trinity between the July 2, 1992 agreement to merge and the September 22, 1992 consummation through filing with the appropriate regulatory authorities. The obligations undertaken by the Appellant in entering into the subject agreement, some of which were noted above, have the effect, however, of diminishing that independence of operation. We find the Appellant's assertion unpersuasive. To ignore the merger agreement here, which was consummated as contemplated shortly after the Appellant's self certification as small, would clearly defeat the intention of the cited regulation and result in benefits flowing to Trinity in contravention of the purposes of the set-aside program. Compare Size Appeal of Bishop Pipeline Corporation, No. 3422 (1991); Size Appeal of Underwood Industries, Inc., No. 3053 (1989). Consequently, we find that the Regional office was not in error in considering the Appellant to be affiliated with Trinity and, thus, to be other than small at the time of Appellant's self certification. Conclusion For the reason stated above, the size determination of the Chicago Regional Office is AFFIRMED; the appeal is DENIED. This constitutes the final decision of the Small Business Administration. See 13 CFR 121.1720(a), (b), and (c). ______________________________ Michael S. Cole (Presiding) Administrative Judge ______________________________ Gloria E. Blazsik (Concurring) Administrative Judge ______________________________ G. Stephen Wright (Concurring) Administrative Judge _______________ 1/ The applicable Standard industrial Classification (SIC) code is 3448, with a size standard of 500 or lesser employees. 2/ The Securities and Exchange Commission, the U.S. Federal Trade Commission, and the U.S. Internal Revenue Service. 3/ The size determination included assertions respecting the basis of the earlier determination and characterized the Appellant as less than forthcoming with pertinent informa- tion. These assertions, and the Appellant's responses thereto, have been omitted as unnecessary distractions due to their irrelevance to the substantive issue here. 4/ This was considered a Freedom of Information Act request, to which a response was forwarded to the Appellant following our receipt of the Regional Office file which contained the requested document. 5/ The record does not reflect that the documents relied upon by the Regional office were not also supplied to the Appellant. 6/ The Appellant requests "... a sworn oral hearing with the President of Syro and its project management employees" to establish its independence from Trinity. The relevant issue here, together with the evidence of record, deprives this request of the regulatory prerequisites set forth at 13 CPR 121.1714(a) and, consequently, the request is denied. 7/ The record closed June 17, 1993, pursuant to the "Notice" from this Office dated June 2, 1993. 8/ Such as review of: SBA's right of intervention, the motion to remand, and the "rights of the combined two (2) adverse parties," each of which matters should have been addressed in the prior consolidated proceeding; and whether the Regional Office misstated the result of the consolidated appeals or has mischaracterized the Appellant's actions in disclosing pertinent information in the initial size investigation. 9/ Such as review of the "overall procedures of the SBA" or their alleged "inefficiencies and inadequa[cies]." 10/ It is undisputed that such treatment results in the Appellant exceeding the applicable size standard.