Consolidated Industries, Inc., No. 4235 (January 7, 1997)
Docket No. SIZ-96-9-4-65

                    UNITED STATES OF AMERICA

                  SMALL BUSINESS ADMINISTRATION

                 OFFICE OF HEARINGS AND APPEALS

                        WASHINGTON, D.C.

______________________________
                              )
SIZE APPEAL OF:               )
                              )
Consolidated Industries, Inc. )
                              )
     Appellant                )  Docket No. SIZ-96-9-4-65
                              )
Solicitation No.              )
DAAE07-95-R-R055              )
Department of the Army        )
______________________________)

                             DIGEST

An Option Agreement, whereby a large firm has the option to
purchase a small, challenged firm, subject to the exercise of two
conditions precedent that are under the control of the small
firm, will be given present effect if the preconditions are not
unusual, incapable of fulfillment, speculative, conjectural,
unenforceable under applicable State law, or so remote that
consummation of the agreement is highly unlikely.  If the
preconditions do not fall within these limited exceptions, the
two firms will be found affiliated as of the time of the
challenged firm's self-certification. 

                            DECISION

                         January 7, 1997

BLAZSIK, 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. Parts 121 and 134
(1996).

                              Issue

     Whether an Option Agreement, whereby a large firm has the
option to purchase all of the challenged firm's stock, subject to
certain conditions precedent which are in the control of the
small firm, can be accorded present effect and the firms found
affiliated.

                              Facts

     On May 16, 1995, the Contracting Officer for the Department
of the Army, Automotive and Armaments Command, Warren, Michigan,
issued this negotiated procurement as a small business set-aside
for "M2 Flatracks Palletized Loading System," and assigned it
Standard Industrial Classification code 3715 (Truck Trailers),
with a 500-employee size standard.[1]  Consolidated Industries,
Inc. (Consolidated or Appellant) submitted a proposal on July 12,
1995, in which it self-certified as a small business.  Because
the Contracting Officer later requested all offerors to
reevaluate their representations and certifications, Consolidated
resubmitted the same recertification on May 20, 1996.

     On August 12, 1996, the Area Director of the Small Business
Administration's (SBA) Atlanta Office of Government Contracting,
Area III (Area Office) requested the Area Office to perform a
size determination on Consolidated, the apparent low bidder.  The
request was the result of Consolidated's Certificate of
Competency application, which revealed it may be affiliated with
Ridge Instruments (Ridge), an undisputed large firm.  

     The Area Office file contained Consolidated's SBA Form 355,
showing Mr. Columbus Sanders as its President and sole owner. 
The SBA Form 355 also showed Consolidated has fewer than 500
employees.

     The Area Office file also contained several agreements
between Consolidated and Ridge.  In two loan agreements, dated
December 5, 1994, Ridge agreed to loan Consolidated $750,000 in
Phase 1 of the loan, and $405,000 in Phase 2 of the loan for
Consolidated's outstanding debts.  Other agreements dated the
same day between the parties include two Promissory Notes, a
Security Agreement, a Guaranty of the loans by Mr. and Mrs.
Sanders, an Option to Purchase granted to Ridge, a Stock Option
Agreement, and an Option Agreement, executed by Ms. Sharon
McMeans, Ridge's President, and Mr. Sanders.  

     The Area Office file also showed that, at the time of self
certification, Consolidated owed Ridge approximately $3 million. 
Consolidated also had numerous outstanding debts and obligations
to other companies.  It also showed that Mr. Sanders owns
property at 4015 Pulaski Pike, which is Consolidated's office and
manufacturing space.  

     Under the Option Agreement, Mr. and Mrs. Sanders granted Ms.
McMeans the option to purchase all of Consolidated's stock for a
specified price.  There are two conditions to Ms. McMeans'
exercise of the option:

     1. All obligations of [Mr. and Mrs. Sanders] (including
without limitation obligations under guaranties) with respect to
indebtedness or obligations of ICC shall have been released to
the reasonable satisfaction of such persons; and

     2. [Consolidated] shall have entered into a 10-year lease of
the facility located at 4015 Pulaski Pike, Huntsville, Alabama
for a monthly rental not in excess of $30,000.

     The Area Office issued its determination on August 22, 1996,
finding affiliation between Consolidated and Ridge.  The Area
Office relied on the regulation at 13 C.F.R. Section 121.103(d),
and gave present effect to the Option Agreement as of
Consolidated's  May 20, 1996 self-certification.[2]  The
regulation gives present effect to an agreement to merge or sell
stock and other instruments, whether such agreement is
"unconditional, conditional, or finalized but unexecuted."  The
Area Office found that, while the option to purchase had not yet
been exercised, it should be viewed as having present effect,
creating affiliation between the two companies.  Thus, the Area
Office concluded Consolidated is other than small under the
applicable size standard.

     Consolidated received the size determination on August 26,
1995, and filed an appeal with this Office postmarked September
3, 1996.

                       Arguments on Appeal
 
     Appellant asserts the Option Agreement is unenforceable
under Alabama state law for lack of mutuality because there is an
absence of consideration moving from one party to the other. 
Specifically, Appellant asserts Mr. Sanders "controls whether or
not the conditions precedents are satisfied."  Consequently,
Ridge has no right to exercise its option to purchase unless
matters under Mr. Sanders' control are satisfied.  

     Appellant also asserts the Option Agreement is unenforceable
because of indefiniteness or uncertainty, relying on Smith v.
Chickamauga Cedar Co., 82 So.2d 200 (Ala. 1955).  There, a
contractor agreed with a lumber supplier to set up his
board-cutting equipment on her land and to cut logs as she
furnished them to him.  The contract did not state the quantity
of logs to be furnished and cut.  When the lumber supplier
stopped furnishing logs, the contractor sued for breach of
contract.  The Alabama Supreme Court, commented that "the law
does not favor, but leans against the destruction of contracts
because of uncertainty," held the log-cutting contract
unenforceable because the obligation of one party was indefinite.
82 So.2d at 202.

     Appellant further asserts the Option Agreement is
unenforceable because Mr. Sanders can avoid the occurrence of the
first precondition, release of the loan guarantee, by expressing
dissatisfaction with it.  Additionally, Mr. Sanders totally
controls the second precondition, whether Consolidated will enter
into a lease.

                           Discussion

     Since the appeal was filed and served within 15 days after
the date of service of the size determination, it is timely.  13
C.F.R. Section 134.304(a)(1).
 
     Appellant has the burden of proof to show error in the Area
Office's determination.  See Size Appeal of Rebmar, Inc., No.
4173 (1996).  However, Appellant has failed to do so because
Appellant's assertion that the Option Agreement is unenforceable
under Alabama state law because of lack of mutuality, is without
merit.[3]  Indeed, Appellant's argument is inconsistent with 
well-established Alabama state law.

     Specifically, an option agreement need not have separately-
stated consideration if it is part of a larger transaction.  Rice
v. Sinclair Refining Co., 56 So.2d 647 (Ala. 1952); 3 Corbin on
Contracts Section 11.10.  In Sinclair Refining, a lease contract
included a provision granting the lessee an option to purchase
the leased property for a certain sum, but the option provision
was supported only by "consideration herein named."  The Alabama
Supreme Court construed the option to purchase and the lease to
be "one whole and entire contract," and held the option agreement
enforceable.  56 So.2d. at 653.

     Similarly, in the instant case, the Option Agreement is part
of a much larger transaction between the parties.  Consolidated
and Ridge executed several other documents on the same date
concerning Consolidated's finances the Option Agreement was
executed.  Thus, since the Option Agreement was part of a much
larger transaction, which provides for an exchange of
consideration, there is no requirement under Alabama law that the
Option Agreement also explicitly provide for an exchange of
consideration.  In the Presiding Judge's view, an Alabama court
would likely find the Option Agreement enforceable consistent
with Sinclair Refining.

     There also is no merit to Appellant's assertion the Option
Agreement is unenforceable under Alabama law because it is
indefinite and uncertain.  Unlike the facts in Chickamauga,
supra, there is no uncertainty here as to the subject matter of
the instant Option Agreement or what constitutes performance by
both parties.  The terms of the Option Agreement unequivocally
state that on exercise of the option, the Sanders are to sell all
of their Consolidated stock to Ridge for a certain price.

     Moreover, there is no merit to Appellant's assertion the
Option Agreement is unenforceable because the Sanders can avoid
the occurrence of the first precondition, release of the loan
guarantee.  Good faith is an implied condition in a contract. 
Manufacturers' Finance Acceptance Co. v. Woods, 132 So.611 (Ala.
1930).  It is settled Alabama law that when the occurrence of a
condition requires a person's satisfaction, as here, and the
matter does not involve personal taste or fancy, dissatisfaction
must be in good faith, and not capricious.  "It must be actual,
not feigned; real, not merely a pretext to escape liability."
Electric Lighting Co. v. Elder, 21 So.983, 987-88 (Ala. 1897)
(payment contingent on satisfaction with work done).  Thus,
Appellant's assertion that the Sanders, not Ms. McMeans, control
the first condition, is misleading; it significantly overstates
the Sanders' degree of control.

     Regarding the second condition, the lease of the premises,
to the extent that the occurrence of that condition is within Mr.
Sanders' control as landlord, he also is constrained by the duty
of good faith not to act capriciously.

     In addition to the language of the Option Agreement, OHA
precedent, i.e., the "present effect rule," supports the
enforceability of the Option Agreement.
     
     The applicable affiliation regulation treats stock options,
convertible debentures, and agreements to merge (including
agreements in principle) as having present effect, "as though the
rights held thereunder had been exercised."  13 C.F.R. Section
121.401(f)(1995).  As a general rule, OHA has applied the rule in
a wide variety of factual situations.  It has declined to do so
only in limited situations.  

     For example, OHA declined to apply the present effect rule
where the conditions were "unusual, incapable of fulfillment,
speculative, or conjectural."  Size Appeal of Horizons
Technology, Inc., No. 3591 (1992); Size Appeal of SRS
Technologies, No. 3180 (1989).  In Horizons, OHA declined to
apply the present effect rule to an option to convert non-voting
preferred stock into voting common stock based on the market 

value of the stock at the time of the conversion.  OHA held that
"assessing the present effect of the option is so conjectural as
to render any conclusions therefrom arbitrary by nature."  Id.,
at 19. 

     In SRS Technologies, OHA held the present effect rule did
not apply to a provision of a stock purchase agreement which
would pass control of the challenged firm's holding company to a
20 percent shareholder on the sole condition the holding
company's net worth decreased by $20 million, because the
condition precedent was "clearly speculative and conjectural
(although not necessarily unusual, and certainly not incapable of
fulfillment)." Id., at 10.

     In addition, OHA declined to apply the present effect rule
where the possibility that the rights would be exercised was
extremely remote, or the probability the transaction would be
consummated was low.  See Size Appeal of Airdrome Parts Company,
No. 3922 (1994).    
  
     Here, review of the facts and the applicable case law
demonstrates the present effect rule applies because neither of
the two preconditions in the Option Agreement falls within any of
the two exceptions in the case law noted above.

     Appellant asserts the first condition in the Option
Agreement, release of the Sanders' guaranty, is completely within
the control of Mr. Sanders, because the Sanders can avoid the
occurrence of the first precondition by expressing
dissatisfaction with it.  Under Alabama case law, as noted above,
the court likely would not permit the Sanders to reject
capriciously a legally sufficient release of the guaranty because
it was "unsatisfactory" to them.  Electric Lighting Co. v. Elder,
at 988.  Appellant, who has the burden of proof, has not
presented any facts or argument to demonstrate this condition is
unusual, incapable of fulfillment, speculative, conjectural, or
unenforceable under Alabama state law.

     Similarly, Appellant has not shown the second condition,
relating to the lease, is unusual, incapable of fulfillment,
speculative, or conjectural.  While the record does not contain
the lease at issue, other documents show Mr. Sanders owns the
facility at 4015 Pulaski and it has been Appellant's office and
manufacturing space since 1985.  

     Nor has Appellant shown that either condition is so remote
that it is highly unlikely to be exercised.  Thus, Appellant has
failed to show any of the exceptions applies to the application
of the present effect rule.

     Finally, the Presiding Judge finds the Option Agreement
enforceable because the parties clearly intended it to be so. 
First, they voluntarily entered into the Option Agreement. 
Second, there is no record evidence that either party disputes
the validity of the Option Agreement, and there appears to be
every expectation they intend to implement it eventually.

     Rather, Appellant's argument suggests that it is trying to
create ambiguity where there is none, in order to benefit from
either eventuality.  One the one hand, Appellant's financially
weak condition makes it highly desirable that Ridge, a large
firm, acquire Appellant.  Conversely, because Sanders controls
the conditions precedent under the Option Agreement Appellant, as
a small business, can continue to bid on small business
set-asides until Sanders exercises the conditions precedent. 
Thus, if Appellant cannot win sufficient new business under small
business set asides to strengthen its financial position, the
Option Agreement permits it to obtain the financial advantage of
merging with Ridge.

     Based upon the above discussion, the Presiding Judge
concludes the Option Agreement is an enforceable contract under
Alabama state law, because it does not come within any of the
exceptions to the present effect rule.  Accordingly, the Option
Agreement will be accorded present effect as of the date of
Appellant's self certification on May 20, 1996, rendering
Appellant affiliated with Ridge as of that date.  Therefore,
Appellant is other than small.

                           Conclusion

     The Presiding Judge AFFIRMS the Area Office's determination,
and DENIES the appeal.

     This is the Small Business Administration's final decision. 
See 13 C.F.R. Section 134.316(b).

                              _______________________________
                              Gloria E. Blazsik 
                              Administrative Judge

[1] The Small Business Administration has revised its size
substantive and procedural regulations, effective March 1, 1996. 
13 C.F.R. Parts 121 and 134 (1996).  Since the instant
solicitation was issued prior to the effective date of the new
regulations, the prior regulations in effect at that time apply
for substantive purposes.  13 C.F.R. Part 121 (1995).  For appeal
purposes, the revised regulations apply.
[2] The Area Office applied the revised regulations in assessing
Consolidated's size status, although the previous regulations
apply.  13 C.F.R. Section 121.401(f) (1995).  Nonetheless,
because the prior regulation and the revised regulation
concerning the principal issue here are virtually identical, the
Area Office's application of the wrong regulation is not material
error.
[3] Since Section 7 of the Option Agreement states the parties
have expressly agreed that Alabama state law governs this
contract, the Presiding Judge has applied that law to these
facts.