Goff Corporation, No. 3746 (March 25, 1993). Docket NO. SIZ-93-1-19-4 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. SIZE APPEAL OF: ) ) Goff Corporation ) ) Appellant ) Docket No. SIZ-93-1-19-4 ) Recertification Application ) 06-SD-93-007 ) Dallas Regional Office ) DIGEST Where the Appellant is an operating division of an incorporated concern which is owned and controlled by its parent concern, the Regional Office was correct in treating these concerns as affili ated and including all of their respective employees in the computation of the aggregate average number of employees of the Appellant and its affiliates pursuant to 13 CFR 121.407(a). DECISION February 25, 1993 COLE, Administrative Judge, Presiding: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. 632 et seq., and the regulations codified at 13 CFR Part 121. Issue Whether the Regional Office was in error in finding the Appellant, an operating division of a subsidiary concern, to be affiliated with the parent concern for purposes of computing the average number of employees of the Appellant and its affiliates. Facts The Office of Hearings and Appeals (OHA) in the Size Appeal of Goff Corporation, No. 3689, issued October 6, 1992, affirmed the August 11, 1992 size determination of the Dallas Regional Office which found Goff Corporation (Goff or Appellant) other than small under the 500-employee size standard. The size determination turned on Goff's failure to provide evidence to overcome allega tions that Goff was affiliated with a large foreign concern with a combined average number of employees exceeding the size standard. In sustaining the Regional Office, we noted that Goff could pursue its relief through the recertification process set forth at 13 CFR 121.1607. On November 23, 1992, the Dallas Regional Office received Goff's application for recertification. The Regional Office, in a deter mination dated December 14, 1992, denied Goff's request, noting, inter alia: This request [for recertification] was predicated on a size determination...holding Goff Corporation to be other than small through affiliation with George Fischer Foundry Systems, a subsidiary of George Fischer Corporation which, in turn, is a subsidiary of George Fisher AG/George Fischer Ltd., a Swiss corporation. Goff now identifies itself as a division of George Fischer Foundry Systems, Inc. Other known subsidiaries of George Fischer Corporation are George Fischer Signet and Signet Scientific. After citing the recertification regulation, which requires the applicant to submit, inter alia, "information sufficient to show a significant change in its ownership, management, contractual relations, or other factors bearing on its status as a small concern," the Regional Office considered the evidence and Goff's arguments, which it described as follows: Goff argues that its purchase by Fischer should not have changed its small business size standard since it is managed independently from George Fischer Ltd. (GF Ltd.) and without interference from the latter in their daily business and/or long term business planning and strategies. Goff then presents a series of arguments ...includ[ing]: (1) the fact the two companies have executed a set of Business Regulations which details the managerial relationship with the independence from GF Ltd.; (2) the fact that the Appellant is responsible for the performance of all contracts to which it is a party and is solely liable for its debts and obligations without recourse to any other entity, affiliated or otherwise; (3) the Appellant is in a different business from its affiliate and benefits from no support, technical or otherwise; and (4) decertification of the Appellant as a small business will condemn other companies to bankruptcy rather than rescue by other companies. Noting that Goff's new SBA Form 355, Application for Small Business Size Determination, only reflected the aggregate number of employees for itself and George Fischer Foundry Systems, Inc. (GFFS), a combined average of less than 500 employees, the Regional Office referred to a "Dun & Bradstreet Million Dollar Directory" for information respecting employment for George Fischer Corporation and certain of its affiliates. 1/ [Emphasis in original.] This resulted in a combined reported employment which exceeded 800 employees. Thus, the Regional Office concluded that, based upon the known affiliates, the aggregate number of employees exceeded the size standard. The Regional Office rejected Goff's arguments, noting that affi liation is judged by the presence of the power to control, stating, in pertinent part: ...As a wholly-owned subsidiary of GFFS, it is subject not only to the conditions imposed by that company, but also to those imposed by GF Ltd., the parent company. The fact that these companies have elected, for the current time, not to exercise that control is immaterial. [Citing the Size Appeal of Bruce-Terminix Company of San Antonio. Inc., No. 257 (1967)]. Continuing, the Regional Office noted the holding by the Size Appeals Board 2/ in the Size Appeal of Unicon Corporation, No. 1676 (April 5, 1983), that "where two companies are in different lines of business, they are nevertheless considered affiliated and their annual receipts aggregated where both are owned and controlled by the same company." Dismissing the Appellant's argument regarding the alleged effect such application of the rules would have on potential financial support or acquisitions of other financially depressed firms as "totally beyond the bounds of SBA's size regulations," the Regional Office asserted: Finally, as a division of GFFS, Goff is no longer a separate legal entity and can not claim independent status since an operating division is not a "concern" within the meaning of 13 CFR 121.402(e)(2). See Size Appeal of Barton ATC. Inc., No. 3548 (November 27, 1991) . Accordingly, the Regional Office concluded: Goff is clearly controlled within the meaning of 13 CFR 121.401(a)(2)(i) by the GFFS and GF, Ltd. Goff has failed to meet its responsibility to provide evidence to refute the reported Dun & Bradstreet figures which clearly show that the total employment for George Fisher AG and its subsidiaries exceed the applicable 500 employee size standard.... This determination was received by Goff on December 16, 1992, and an appeal, postmarked January 15, 1993, was filed with this Office. 3/ The Appellant states, in pertinent part: ...The Administration's characterization that Goff is precluded from status as a Small Business based solely on its ownership ties with GF, Ltd and GFFS is unfair, narrow- sighted and illogical. Goff admits that it is owned by GFFS and that GFFS has the capacity to control Goff. It is also conceded that GFFS' decision not to exercise that power is irrelevant to the determination of whether Goff is an "affiliate" as that term is defined in the regulations governing Small Business contracting. The thrust of this appeal deals with the reality of Goff's relationship with GFFS and the other affiliates, and totality of the circumstances of this situation. GF, Ltd. owns GFFS, and is nothing more than a holding company. GF, Ltd. partakes in no way with the operation, management or governance of GFFS or any of its other companies. Likewise, GFFS owns Goff. GFFS's role is limited to consultation only on some specific acts as provided in the management regulations between Goff and GFFS. It is likewise clear that GFFS and Goff exist and operate totally independently of each other. Emphasis in original. Citing Steven v. Roscoe Turner Aeronautical Corporation, 324 F.2d 157 (7th Cir. 1963), respecting "factors in determining whether a subsidiary is a 'mere instrumentality' of its parent," the Appellant contends that Goff and GFFS should not be considered a single entity. Furthermore, asserts the Appellant, SBA regulations require that, in evaluating affiliation, consideration be given "to all appropriate factors 'including...common management, and contractual relationships."' Emphasis and ellipsis in original. In support of its point, the Appellant argues, in pertinent part: The acquisition of Goff was financed by way of an arms length, interest-bearing loan from GFFS' parent company, George Fischer Ltd. (GF Ltd.), located in Schaffhausen, Switzerland. GFFS and Goff are each managed independently from GF Ltd. and without interference in their daily business and/or long term business planning and strategies. Appellant's managerial relationship with and independence from GF Ltd. is governed and secured by a written set of Business Regulations which outline, by way of example and not limitation, the various acts which Appellant's manage ment can undertake without prior approval...[Appellant's Exhibit A]. As stated in the sworn affidavits of Messrs. Pedicini and Prucha, attached herewith as Exhibits B and C respectively, Appellant is responsible for the performance of all contracts to which it is a party and is solely liable for its debts and obligations without recourse to any other entity.... As stated...Mr. Prucha does consult with Mr. Pedicini on certain matters. However, even if this aspect of Goff's status is deemed to affect its independence as a small business entity, decertification would not be warranted in light of the fact that Goff and GFFS combined employ less than 500 people. Goff is in a different business from GFFS, and benefits from no support, technical or otherwise, in the performance of its contracts, including the SBA contracts. Likewise, Goff does not benefit from any indemnification for liability or obligation arising from the conduct of its business.... The Appellant maintains that Goff was not established to circum- vent the small business set-aside policy, but was acquired by GFFS through an asset purchase as a result of Goff's financial difficulties in 1989-90, and states: "In summary, the acquisition did not affect Appellant's management and conduct of its business in any manner that should warrant its decertification as a small business entity." The record on appeal is ambiguous respecting the identity and/or relationship between George Fischer Corporation and George Fischer Ltd. (which we take to be "GF Ltd."). On the one hand, the Regional Office refers to George Fischer Corporation in its determination as the parent of GFFS, as do the financial state ments for GFFS, submitted by the Appellant to the Regional Office. These state that GFFS is a subsidiary of George Fischer Corporation, and that George Fischer Corporation owns 99 percent of the common stock of GFFS. Yet, elsewhere, the Regional Office refers to GFFS as being owned by GF Ltd., as does the Appellant. The Appellant's "Exhibit A," which consists of a portion (two pages) of the aforementioned "Business Regulations," appears to run between George Fischer Ltd., of Schaffhausen, Switzerland and GFFS. Our review thereof, as well as the other exhibits submitted by the Appellant, revealed no express evidence of the legal relationship between George Fischer Ltd. and GFFS. In any event, however, the record, including Appellant's Exhibit A, discloses no abdication of the power to control customarily inherent in stock ownership, whether by George Fischer Corporation or by George Fischer Ltd. Despite this ambiguity, the Appellant does not appear to dispute, nor could it on this record without contradicting its own evidence, the assertions of the Regional Office in the size determination respecting Appellant's relationship to GFFS, the parent-subsidiary relationship between George Fischer Corporation and GFFS, or the respective numbers of employees cited by the Regional Office for each of these entities. Discussion The above record leads us to the same conclusions reached by the Regional Office in this case. There seems to be no dispute respecting the two dispositive facts, namely: (1) that the Appellant is a division of GFFS which, in turn, is wholly owned by George Fischer Corporation, and (2) that the aggregate number of employees of George Fischer Corporation and its affiliates, including GFFS and the Appellant, exceeds the 500-employee size standard. The pertinent regulation, 13 CFR 121.401, provides: (a) General rule. (1) Except as otherwise noted, size deter minations shall include the applicant concern and all its domestic and foreign affiliates. Moreover, all affiliates, regardless of whether organized for profit, must be included. (2) Except as otherwise provided in this section, concerns are affiliates of each other when either directly or indirectly (i) one concern controls or has the power to control the other, or (ii) a third party or parties controls or has the power to control both, or (iii) an "identity of interest" between or among parties exists such that affiliation may be found. (3) In determining whether affiliation exists, consideration shall be given to all appropriate factors, including common ownership, common management, and contractual relationships. * * * * * * * (c) Nature of Control in Determining Affiliation. (1) Every business concern is considered to have one or more parties who directly or indirectly control or have the power to control it. Control may be affirmative or negative and it is immaterial whether it is exercised so long as the power to control exists. * * * * * * * (2) Control can arise through stock ownership; occupancy of director, officer or key employee positions; contractual or other business relations; or combinations of these and other factors. * * * * * * * (e) Affiliation Through Stock Ownership. (1) A person is presumed to control or have the power to control a concern if he or she owns or controls or has the power to control 50 percent or more of its voting stock. Furthermore, where the size standard involves the average number of employees of a concern, 13 CFR 121.407 provides, in pertinent part: (a) Number of employees means the average employment of the concern, including the employees of its domestic and foreign affiliates, based upon employment during each of the pay periods for the preceding 12 calendar months. Emphasis in original. The critical issue, here, is where does the power to control rest. The Regional Office points out, and the record supports, that George Fischer Corporation owns the con trolling interest in GFFS; and that the Appellant, as an operat ing division, is merely an integral part of GFFS. Based upon the above regulations, it is clear that the Appellant is affiliated with George Fischer Corporation, whose undisputed number of em ployees, alone, exceeds the 500-employee size standard at issue. The Appellant, however, urges us to consider the management rela tionship between itself and GF Ltd. and GFFS, and directs our at tention to its Exhibit A, the "Business Regulations" between GF Ltd. and GFFS. The Appellant contends that these "Business Regulations" provide the Appellant with management "independence." This circumstance, however, does not alter the fact of George Fischer Corporation's ownership and the power of control attendant therewith. As noted from our review of Exhibit A, the same is true of George Fischer Ltd., regardless of its actual relationship to GFFS. The Regional Office is correct in observing that these "Business Regulations" do not bind the future management relationship of the parties. In citing 13 CFR 121.401(b)(3) and calling upon this Office to consider "all appropriate factors," the Appellant left out reference to the very factor which Ls appropriate here, namely, that of "common ownership." Thus, we find the Appellant's argument, and the evidence offered in its support, to be impertinent to the dispositive issue in this case. Similarly, the Appellant's reliance upon Steven v. Roscoe Turner Aeronautical Corporation, supra, is misplaced. That case dealt with piercing the corporate veil of a subsidiary corporation in order to hold the parent corporation liable for the acts of the subsidiary, on the ground that the subsidiary was a "mere instru mentality" of the parent. The case does not address the power to control through stock ownership, which is the regulatory standard applicable here. Consequently, we find the Appellant's cited authority to be inapposite and its argument on this point to be without relevance, here. Lastly, we agree with the Regional Office that the Appellant's argument respecting an alleged adverse effect upon potential assistance to small business concerns is without merit. As implied by the Regional Office, the Appellant is arguing policy, which falls outside the Regional Office's jurisdiction. Clear regulatory provisions and case precedent may not be ignored by the Regional Office in order to accommodate the Appellant's situation in this case. In light of the foregoing record, we agree with the Regional Office that the Appellant has failed to present relevant evidence of a change of circumstances warranting the requested recetification, as required by 13 CFR 121.1607(a). Moreover, we conclude that the Appellant has not met its burden of proof in this appeal. See 13 CFR 121.1707. Conclusion For the reasons stated above, the Regional Office's determination is AFFIRMED; the appeal is DENIED. This is the final decision of the Small Business Administration in this proceeding. See 13 CFR 121.1720(a), (b), and (c). ___________________________________ Michael S. Cole (Presiding) Administrative Judge ___________________________________ Gloria E. Blazsik (Concurring) Administrative Judge ___________________________________ Elwin H. White (Concurring) Administrative Judge _______________ 1/ The Dun & Bradstreet directory lists employment figures for George Fischer Signet and Signet Scientific Company, and their reported parent company, George Fischer Corporation, which, in turn, is reported to be a subsidiary of George Fisher AG. 2/ The decisions of the Size Appeals Board have been adopted as precedent by the Office of Hearings and Appeals. See Size Appeal of Genie Services, No. 1857 (December 23, 1983). 3/ Pursuant to 13 CFR 121.1607(c), the denial of an application for recertification is deemed a formal size determi nation and is appealable to this Office in accordance with the provisions of 121.1701 through 121.1722. Consequently, this appeal is "timely," because postmarked not later than 30 calendar days after the date of receipt of the adverse, determination. See 13 CFR 121.1705(a)(1).