SBA No. 21101985 WL 48181January 11, 1985

SBA No. 2110 (S.B.A.), 1985 WL 48181
Small Business Administration (S.B.A.)
Office of Hearings and Appeals
[Size Appeal]
*1 Docket No. SIZ-84-11-19-224
*1 Solicitation No. CID-85-34-MJ

*1 Department of Health and Human Services

*1 Atlanta, Georgia

*1 January 11, 1985


Where an agreement, under which the alleged affiliate will purchase all the stock and assets of the subject firm, contains contingencies that must be met before the transfer of stock can occur (including due diligence requirements and state and federal regulatory approval) and prohibits the subject firm, other than in the ordinary course of business, from disposing of corporate property or incurring certain obligations without the consent of the alleged affiliate, during the pendancy the the sale, the two firms are affiliated based on both the alleged affiliate's actual negative power to control the subject firm through its veto power over certain corporate actions and the provisions of § 121.3(a)(iv) under which the sale and transfer of stock will be treated as though it had already occurred.
PHILLIPS, Administrative Judge, Presiding:
*1 This appeal is resolved in accordance with 15 U.S.C. 632 and the regulations published in 13 CFR Part 121, 48 Fed. Reg. 55832 and 49 Fed. Reg. 5024.
*1 1. Whether certain restrictions placed by the buyer upon the actions of the seller, during the pendancy of the sale of all the seller's stock and assets, constitute power of the buyer to control the seller during that period?
*1 2. Whether a stock purchase agreement should be given present effect, in accordance with § 121.3(a)(iv), if it contains several contingencies, including the requirement of federal and state regulatory approval?
*1 On November 7, 1984, the Atlanta Regional Office issued a determination finding Sonic Delivery Service Company (a division of Dependable Courier Service, Inc. and styled, on appeal, as Dependable Courier Service, Inc.) to be other than small under the $12.5 million average annual receipts (aar) size standard applicable to Solicitation No. CID-85-34-MJ, issued by the Department of Health and Human Services for pick-up and delivery services to its Centers for Disease Control in Atlanta, Georgia. The Regional Office determined that Sonic/Dependable (hereinafter referred to as Dependable) is affiliated with Courier Dispatch, Inc. (Courier), an admittedly large business, based on the existence, at the time of self-certification, of an executory agreement dated August 13, 1984, under which Courier is to purchase all of Dependable's stock. The Regional Office made this determination pursuant to § 121.3(a)(iv), under which stock purchase agreements ‘exercisable . . . within a relatively short time after a size determination’ are considered as having present affect, i.e. as if the stock transfer had already occurred.
*1 On November 16, 1984, Dependable filed a timely size appeal challenging the finding because it allegedly
*2 fails to take into account the particular terms of the contract for the sale of stock insofar as there are substantial contingencies beyond the control of either of the parties which render such contract uncertain of consumation at any time and certainly not within a ‘short time after a size determination’ with respect to the annual bid under consideration . . .. Among the conditions precedent to ‘closing’ was [sic] the satisfaction of numerous substantial ‘due diligence’ matters insisted upon by the purchasers; final review and approval by the purchaser of the accuracy of accounting information; and, the absence of any material change from August 13, 1984 until the eventual date of closing. (See Sec. 4 of contract of sale of stock, esp. 4.10, 4.14, 4.15, 4.18, 4.19, 4.21.) Furthermore, even after all of these conditions are satisfied, the agreement of purchase and sale of capital stock contemplates a complete escrow of the entire transaction for an indeterminate period of time pending approval of the sale by the public Service Commission of the State of Georgia and by the Interstate Commerce Commission. (See Secs. 1.6 and 22 of contract for sale of stock.)
*2 Dependable alleges that the restrictions placed upon it in order to maintain the status quo do not confer present control of the company upon Courier and that due diligence and other contingencies, most notably those relating to regulatory approval, create sufficient uncertainty of consumation to preclude treating the stock purchase agreement as having already occurred, as provided for in § 121.3(a)(iv).
*2 The solicitation contemplates a contract to be renewed at one year intervals. The contract for the first year was awarded to Dependable on October 12, 1984.
*2 Under the August 13, 1984 stock purchase agreement, which provides for the sale of all shares and assets of Dependable to Courier, several contingencies must be met before Courier assumes ownership of Dependable. During the pendancy of the sale, the agreement restricts Dependable's ability, except in the ordinary course of business, to alienate or encumber its assets, to amend or terminate existing lease agreements, to purchase equipment, to increase employee compensation, or to incur debts or obligations, without Courier's consent. See, Sections 2.12 and 2.13 of the agreement. Under the agreement, Courier is also accorded free access to, and inspection rights regarding, Dependable's property, assets, books, and financial records. See, Section 1.5 of the agreement. With respect to the issue of present control by virtue of Courier's veto and inspection rights, Dependable argues that
*2 [n]o part of the agreement of sale or the subsidiary agreements related thereto gives the purchaser the right to direct, conduct or control the affairs of [Dependable], with the sole exception that the parties have agreed that the business of [Dependable] will be conducted in ordinary course. The ordinary course of the business was established long ago and, we submit, the requirement that the business be continued in this fashion does not suggest potential or actual control by the purchaser.
*3 While it is understandable that, having negotiated a stock purchase, a buyer will wish to impose conditions for maintaining the status quo during the pendency of the acquisition, such conditions cannot be said to reserve to the seller that degree of independence necessary to negating a finding of affiliation. The seller is not entirely free to conduct its business as it chooses; that, in fact, is the purpose of such restrictions. Since Courier has the power to prevent or modify the enumerated corporate acts by exercising its veto power in the interest of maintaining the status quo, it has at least the negative power to control Dependable. This constitutes a basis, separate and independent from the rule in § 121.3(a)(iv), for finding the two firms to be affiliated.
*3 In addition to its arguments concerning Courier's inability to control Dependable, Dependable argues that contingencies contained in the sale contract, and not satisfied as of September 12, 1984, the date of self-certification, render ultimate transfer of the stock uncertain as of that date, and thus preclude giving present effect to the agreement and treating both firms as if the stock transfer had already occurred. Acceptance of such a proposition would substantially undermine the rule in § 121.3(a)(iv), however, since, as Dependable concedes, such contingencies (including regulatory approval) are common in stock purchase agreements. Prior cases have held that agreements that are ‘wholly executory’ and in which ‘no consideration has changed hands' will nevertheless be given present effect. In Size Appeal of Allied Materials Corporation, No. 1240 (1979), the Size Appeals Board stated as follows with respect to such contingencies:
*3 Board precedents have indicated that formalities not yet completed such as approval of stockholders, approval of regulatory agencies, and satisfaction as to warranties and representations will not be viewed as negating power to control.
*3 Dependable concedes that the conditions precedent to execution of the agreement, such as certain due diligence reguirements and approval by Courier's Board of Directors, have been met, and that closing and escrow of the transfer took place on October 17, 1984. Given the decision in Allied Materials, Dependable's argument that the applicability of § 121.3(a)(iv) is negated because of the likelihood that the requirement of regulatory approval of the sale will delay the transfer, and the possibility that it may prevent it entirely, is also without merit. Thus, Dependable and Courier are affiliated under § 121.3(a)(iv) because of the parent-subsidiary relationship effected by the stock purchase agreement.a1
*3 Dependable and Courier are affiliated based on both Courier's negative power to control Dependable through restrictions contained in the stock purchase agreement and the rule in § 121.3(a)(iv) that stock purchase agreements ‘exercisable at the time or within a relatively short time after a size determination . . . are treated as though the rights held thereunder had been exercised’ and the transfer of ownership accomplished. Dependable concedes that inclusion of Courier's annual receipts will prevent its qualifying under the $12.5 million aar size standard. Thus, Dependable is other than small under that size standard.
*4 Based on the record herein certified, the determination of the Regional Office finding Dependable to be affiliated with Courier and to be other than small under the $12.5 million aar size standard is affirmed.
*4 This constitutes the final decision of the Small Business Administration. See, § 121.11(t), (u), and (v).
*4 Jane E. Phillips (Presiding)
*4 Administrative Judge
*4 Joseph K. Riotto (Concurring)
*4 Administrative Judge
*4 Benjamin G. Usher (Concurring)
*4 Administrative Judge


Dependable argues that the term ‘short time’ in § 121.3(a)(iv) should be construed in the light of the length of the procurement contract at issue and that the term should be limited in this case to ‘several weeks or months' because the solicitation calls for annual bids. Even if accepted, this contention would not alter the result in this case because a major portion of the contingencies were met, the contract was executed, and the transfer escrowed, a month after self certification (leaving only the requirement of regulatory approval unmet) and because affiliation would nevertheless still exist based on Courier's negative power to control Dependable through veto powers conferred on Courier in the stock purchase agreement.
SBA No. 2110 (S.B.A.), 1985 WL 48181
End of Document