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.