Environmental Energy Associates, Inc., No. MSB-535 (December 14, 1995)
Docket No. MSBE-95-9-29-20

                    UNITED STATES OF AMERICA

                  SMALL BUSINESS ADMINISTRATION

                 OFFICE OF HEARINGS AND APPEALS

                        WASHINGTON, D.C.

______________________________
                              )
IN THE MATTER OF:             )
                              )  Docket No. MSBE-95-9-29-20
Environmental Energy          )
Associates, Inc.              )
______________________________)

                           APPEARANCES

For the Petitioner:                For the Agency:

Balu Kamat                         John T. Spotila, Esq.
Environmental Energy               General Counsel
  Associates, Inc.                 Audrey H. Liebross, Esq.
560 Columbia Ave.                  Agency Representative
Ridgefield, NJ 07657-1944          Small Business Administration
                                   409 Third Street, SW
                                   Washington, DC 20416

                             DIGEST

A provision in the bylaws of an 8(a) applicant firm which
requires that two Directors who are "members of a legally
recognized minority" are necessary to establish a quorum is not
effective to ensure that there is disadvantaged control of the
firm's Board of Directors.  Disadvantaged control is control by
individuals determined by the SBA to be socially and economically
disadvantaged.  13 C.F.R. Section 124.104.

Owners who are required to manage and control a firm applying for
admission into the 8(a) program must be United States citizens
and determined by the SBA to be socially and economically
disadvantaged.  Claiming to be a member of a "legally recognized
minority" does not satisfy this requirement.

To be in control, the socially and economically disadvantaged
individuals must control the Board of Directors of the applicant
firm in "actual numbers of voting directors."  13 C.F.R. Section
124.104(b).

Nondisadvantaged individuals may be found to control or have the
power to control a firm if they control the voting Board of
Directors either directly through majority voting membership, or
indirectly, if the bylaws allow nondisadvantaged individuals to
block any action proposed by the disadvantaged individuals
through negative control.  An equal number of disadvantaged and
nondisadvantaged voting directors could create negative control.

     
                         FINAL DECISION

                        December 14, 1995

ARKOW, Administrative Law Judge:

     Petitioner Environmental Energy Associates, Inc. (EEA)
challenges a decision of the Respondent U.S. Small Business
Administration (SBA) denying it entry into the 8(a) program[1]
because the individual upon whom eligibility is based, Mr. Balu
Kamat, does not control EEA or its Board of Directors.  EEA
claims that decision is arbitrary, capricious, and contrary to
law because it established that Mr. Kamat controls EEA and its
Board of Directors.  I disagree.

                          Jurisdiction

     Jurisdiction on appeal is properly based on 15 U.S.C.
Section 637(a)(9) and 13 C.F.R. Parts 124 and 134.  The appeal
was timely filed under 13 C.F.R. Sections 124.210(b) and
134.11(a)(7).

                              Issue

     Whether the action of the SBA denying EEA entry into the
8(a) program is arbitrary, capricious, or contrary to law. 
15 U.S.C. Section 637(a)(9)(C), 13 C.F.R. Section 124.210(h)(1).

                              Facts

     On December 21, 1994, EEA applied for admission into the
8(a) program.  The basis for the application is that EEA is owned
and controlled by Balu Kamat, a socially and economically
disadvantaged individual.  Mr. Kamat, an American citizen of
Indian descent, is presumed to be socially disadvantaged because
he is a "Subcontinent Asian American."[2]  The SBA denied the
application on May 19, 1995.  EEA requested the SBA reconsider
its decision on June 21, 1995 and submitted additional evidence
with its request.  On August 14, 1995, the SBA denied EEA's
reconsideration request and EEA filed an appeal of that denial on
September 29, 1995.

     The SBA found that EEA was unable to demonstrate that
Mr. Balu Kamat, the individual upon whom eligibility is based,
controlled EEA and its Board of Directors.  Specifically, the SBA
stated:

     You, the individual upon whom eligibility is based, do
     not control the applicant concern since you do not
     control its Board of Directors.

     You provided an amendment to the concern's by-laws
     which established the number of Directors at four (4). 
     Your son, Mihir Kamat, was elected as a disadvantaged
     Director.  The amendment also provides that three (3)
     Directors shall establish a quorum and two (2) of the
     Directors must be "members of a legally recognized
     minority."

     Although you have provided documentation to allow us to
     evaluate your son's personal eligibility as one of the
     firm's disadvantaged Directors, the statement "members
     of a legally recognized minority" does not satisfy the
     Code of Federal Regulations, Sections 124.105 and
     124.106 governing the social and economic disadvantage
     status of an 8(a) applicant.  Consequently, the
     applicant concern has two (2) Board members who are not
     determined by the SBA to be socially and economically
     disadvantaged and two (2) who have been determined to 
     be disadvantaged.  Since the amendment to the bylaws
     does not specifically name which three (3) Directors
     will establish a quorum, nondisadvantaged Directors
     have the ability to control the Board and can out vote
     [sic] you two to one.

     Reconsideration Denial Letter at 1-2.

                     Position of the Parties

     EEA contends in its appeal that Mr. Kamat controls the firm
and its Board of Directors.  It reasons that if the current Board
should decide a matter with which Mr. Kamat disagrees, as the
majority shareholder, he can call a special meeting of the Board
of Directors, remove any Director who opposes him, without cause,
and appoint Directors who will not oppose him.  EEA also contends
that its bylaws provide for a quorum with at least two "members
of a legally-recognized minority" out of a four-person Board. 
Thus, EEA claims, the SBA's conclusion is contrary to law.

     The SBA argues in its answer that there are two problems
with the way the Board of Directors is constituted.  First, if
all four Directors are present at a meeting, then the two
disadvantaged Directors could not outvote the two nondisadvan-
taged Directors.  The two nondisadvantaged Directors, however,
could exercise negative control over the Board of Directors by
blocking proposals of the disadvantaged Directors. 

     Second, a provision in the bylaws provides that a quorum of
the Board of Directors "shall be three (3) Directors, at least
two of whom shall be members of a legally recognized minority." 
Appeal Petition at 6.  This permits a quorum with "legally
recognized minority" members who are not necessarily socially and
economically disadvantaged individuals, as required by
13 C.F.R. Section 124.104(b).  

                           Discussion

     The only substantive issue to be resolved in this matter is
whether the SBA properly concluded that Mr. Kamat did not control
EEA or its Board of Directors.

     For a firm to be eligible for admission into the 8(a)
program it must, among other requirements, be managed and
controlled by owners who have been determined by the SBA to be
socially and economically disadvantaged.  13 C.F.R. Section
124.104.  Such a determination is made through the 8(a)
application and evaluation process.  See also the definition of
"disadvantaged individual" in 13 C.F.R. Section 124.100.  This
requirement is not necessarily met by individuals who are members
of a legally recognized minority.  

     For example, Mrs. Kamat is a Subcontinent Asian but is not a
U.S. citizen.  Thus, while she is a member of a legally
recognized minority she cannot be considered disadvantaged and
eligible for the 8(a) program because she is not a citizen.  See
13 C.F.R. Section 124.103.  Other examples include individuals
who are socially but not economically disadvantaged and
individuals who have already participated in and exited the 8(a)
program.  13 C.F.R. Sections 124.106 & 124.108(c).  Accordingly,
the provision in the bylaws of EEA, which requires that two
Directors who are "members of a legally recognized minority" are
necessary to establish a quorum, is not effective to ensure that
there is disadvantaged control of the EEA Board of Directors. 
See Facts, supra.

     To be in control, the socially and economically
disadvantaged individuals must control the Board of Directors of
the applicant firm in "actual numbers of voting directors." 
13 C.F.R. Section 124.104(b).  By way of illustration, Section
124.104(d)(1) suggests that nondisadvantaged individuals may be
found to control or have the power to control a firm if they
control the voting Board of Directors either directly through
majority voting membership, or indirectly, if the bylaws allow
nondisadvantaged individuals to block any action proposed by the
disadvantaged individuals through negative control.  Thus, "an
equal number of disadvantaged and nondisadvantaged voting
directors could create negative control."  Id.  

     The SBA, therefore, was correct when it advised EEA, that
because it has two Board members who have been determined to be
disadvantaged and two who have not been determined to be
disadvantaged, nondisadvantaged individuals exercise negative
control over EEA's Board of Directors.  The SBA was also correct
in advising EEA that appointing nondisadvantaged individuals who
are members of a legally recognized minority does not avoid the
problem of nondisadvantaged control of the Board of Directors.

     EEA was correct when it concluded that Mr. Kamat can
ultimately control the Board of Directors because he is the
majority shareholder and has the power to reconstitute the Board
to assure his control is absolute.  But, as decided in earlier
decisions:

     [I]t matters not at all what the disadvantaged owner is
     able to do at some future time to gain control of the
     applicant firm; "[i]t is the situation that existed at
     the time [when the application was finally decided]
     that is pertinent."  See Matter of L.C. Associates,
     Inc., No. 370 (April 9, 1991).

     Matter of Premier Abatement Technologies Corporation, SBA
No. 468 (1994).  Accordingly, the SBA was correct in concluding
that Mr. Kamat did not control the Board of Directors of EEA as
required by 13 C.F.R. Section 124.104(b).[3]

                           Conclusion

     Respondent's August 14, 1995 determination denying 8(a)
program entry to Petitioner, Environmental Energy Associates,
Inc. is NOT ARBITRARY, CAPRICIOUS, OR CONTRARY TO LAW.  See
15 U.S.C. Section 637(a)(9)(C), 13 C.F.R. Section 124.210(h)(1).

     This is the final decision of the Small Business
Administration and is binding upon all parties, including those
within the employ of the Agency.  15 U.S.C. Section 637(a)(9)(D),
13 C.F.R. Sections 124.210(i), 134.32(a)(4).

                                   ______________________________
                                   Richard S. Arkow
                                   Administrative Law Judge

____________________
 [1] Small Business Act of 1958, Section 8(a), 15 U.S.C. Section
637(a) and 13 C.F.R. Part 124.  "The 8(a) Program is intended to
be used exclusively for business development purposes to help
small businesses owned and controlled by socially and
economically disadvantaged individuals. . . ."  13 C.F.R. Section
124.1(a).

 [2] See 13 C.F.R. Section 105(b).

 [3] Counsel for the SBA suggests that the issue of control of
the Board of Directors can be easily resolved to permit a
conclusion that Mr. Kamat or other socially and economically
disadvantaged individuals control the Board.  If so, EEA may
reapply for admission into the 8(a) program 12 months after date
of this decision if it remedies this problem and otherwise
continues to meet 8(a) eligibility criteria.