CONSOLIDATED INDUSTRIES, INC. APPELLANT

*1 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.

*1 This appeal is decided under the Small Business Act of 1958, 15 U.S.C. §§ 631 et seq., and 13 C.F.R. Parts 121 and 134 (1996).

*1 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.

*1 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.

*1 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.

*1 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.

*1 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.

*2 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.

*2 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:

*2 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. § 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.

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

*2 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.

*2 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.

*3 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.

*3 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. § 134.304(a)(1).

*3 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.

*3 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 § 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.

*3 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.

*3 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.

*3 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.

*4 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.

*4 In addition to the language of the Option Agreement, OHA precedent, i.e., the “present effect rule,” supports the enforceability of the Option Agreement.

*4 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. § 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.

*4 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.

*4 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.

*4 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).

*4 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.

*4 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.

*5 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.

*5 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.

*5 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.

*5 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.

*5 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.

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

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