STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

RGM PRECISION MACHINE, INC., )

)

Petitioner, )

)

vs. ) Case No. 98-3771

)

DEPARTMENT OF LABOR AND ) EMPLOYMENT SECURITY, DIVISION ) OF MINORITY BUSINESS ADVOCACY ) AND ASSISTANCE, )

)

Respondent. )

)

RECOMMENDED ORDER

Robert E. Meale, Administrative Law Judge of the Division of Administrative Hearings, conducted the final hearing in Clearwater, Florida, on December 17, 1998.

APPEARANCES

For Petitioner: Darlene Maki

Qualified Representative RGM Precision Machine, Inc. 18923 Titus Road

Hudson, Florida 34667

For Respondent: Joseph L. Shields

Senior Attorney Department of Labor and

Employment Security

2012 Capital Circle, Southeast Hartman Building, Suite 307 Tallahassee, Florida 32399-2189

STATEMENT OF THE ISSUE

The issue is whether Petitioner is entitled to certification as a minority business enterprise.

PRELIMINARY STATEMENT

By application dated February 6, 1998, Petitioner requested certification as a minority business enterprise. By letter dated July 31, 1998, Respondent denied the request.

At the hearing, Petitioner called one witness and offered into evidence seven exhibits. Respondent called one witness and offered into evidence nine exhibits. All exhibits were admitted.

The parties did not order a transcript.

FINDINGS OF FACT

1. By application dated February 6, 1998, Petitioner requested certification as a minority business enterprise. Respondent received the application on May 20, 1998, and denied the application on July 31, 1998.

2. In denying the application, Respondent cited several reasons, including various rules, for why it was denying Petitioner's request for minority business certification. The letter cites Rules 38A-20.001(8) (statutory definition of "minority business enterprise") and (15) (lack of real control); and 38A-20.005(2) (ownership tests) and (3)(a) (control subject to restrictions), (b) (determining quorum of board of directors),

   (c) (minorities must be sufficiently capable and responsible to maintain control), and (d) (control may not be distributed among non-minority family members so that minority lacks dominant responsibility for management and daily operations, including purchase of inventory and equipment and financial control).

3. Respondent does not dispute that Darlene S. Maki is a minority--i.e, female--and that Petitioner is a "small business concern."

4. The application discloses that Petitioner is a Florida corporation in business as a machine shop. The application discloses that the only minority associated with the corporation is Ms. Maki, who at all times has owned 51 percent of the stock and serves as the president and treasurer.

5. Initially, Mr. Maki's husband owned 14 percent of the shares; Mr. Rodhe owned 12.5 percent of the shares; Ms. Maki's other son, Michael Gritton, owned 12.5 percent of the shares; and Ronald Maki owned 10 percent of the shares.

6. The application states that the initial board of directors consisted of three persons: Ms. Maki; her husband, Mark Maki; and one of Ms. Maki's sons, Randy L. Rodhe. In fact, the original board of directors consisted of Ms. Maki, her husband, her two sons, and Ronald Maki, the brother of Ms. Maki's husband. Petitioner is a family-owned and -operated business.

7. Originally, Ms. Maki's husband served as vice-president, and Mr. Rodhe as secretary.

8. The owners have had varying degrees of involvement in the corporation, ranging from Ms. Maki, who has been most involved, to Ronald Maki, whose involvement has been limited to his initial investment of $25,000. The only other persons to contribute cash for their shares were Ms. Maki and her husband.

9. According to the application, Ms. Maki contributed

   
   

   $18,500, and her husband contributed $8000. The application understates their cash contributions.

10. Individually, Ms. Maki contributed $32,000 in cash, which she raised by liquidating her Section 401(k) plan ($20,000) and bonds ($12,000). Individually, Ms. Maki's husband contributed $8000 in cash. Jointly, Ms. Maki and her husband contributed another $60,000 in cash, consisting of $30,000 in loan proceeds from a mortgage on their jointly owned home and

    $30,000 in charges on their joint credit cards.

    
    

11. Prior to incorporating Petitioner in August 1997,

    
    

    Ms. Maki, who is 56 years old, had 20 years' experience working in a machine shop operating noncomputerized drill presses. She also worked five years as an assistant vice-president of a bank, supervising mortgage loan operations. Although Ms. Maki does not know how to operate the newer computer-assisted machines, her background would permit her to learn to do so with minimal training.

12. However, due to a progressively debilitating disease that struck her in 1989, Ms. Maki is confined to a wheelchair and lacks feeling in her hands. Thus, she cannot efficiently operate the older manual machines or newer computer-assisted machines used in machine shops.

13. Ms. Maki's husband lacks any experience in machining tools. He has worked over 25 years as an automobile mechanic.

    His brother has no experience in machining tools; he is in the construction business in Miami.

14. Ms. Maki's sons have considerable experience in machining tools, including training and 14 and 20 years' experience in using the newer, more complicated computer-assisted equipment, which Petitioner owns. They received their stock in return for their agreement to work for wages well below what they could have earned elsewhere.

15. Given the minimal cash flow and concerns about jeopardizing her Social Security disability payments, Ms. Maki did not withdraw money from Petitioner. However, her husband received a salary of an undisclosed amount until September 1998. Her sons also received a salary, but only about $100 weekly, mostly to cover their expenses.

16. In May 1998, Mr. Rodhe terminated his involvement with Petitioner. At that time, he transferred his stock to Petitioner, apparently without any payment to him. The effect of this transfer was to increase Ms. Maki's percentage ownership of Petitioner.

17. At the time of Mr. Rodhe's departure, his brother replaced him as secretary, and the board of directors were reduced to four members. These are the present officers and directors of Petitioner.

18. Pursuant to the articles of incorporation, the board of directors directs the affairs of Petitioner. Nothing in the

    articles of incorporation overrides the provisions of Section 607.0824(1), Florida Statutes, which provides that a majority of directors constitute a quorum, or Section 607.0808(1), Florida Statutes, which provides that the shareholders may remove directors without cause.

19. Ms. Maki and her husband are each authorized signatories of checks drawn on Petitioner's checking account. Each check requires only one signature. However, Mr. Maki does not typically sign the checks, consistent with his relatively little involvement with Petitioner. Someone at the bank suggested to Ms. Maki that Petitioner should authorize her husband to sign checks in case anything happened to Ms. Maki.

20. Ms. Maki and her husband are the guarantors on a lease for a major piece of equipment used by Petitioner. In a later lease, the lender allowed only Ms. Maki to sign as a guarantor.

21. Business has slowly been building. In July 1998, Petitioner hired a machinist and purchased another machine.

22. When confronting a major decision, such as purchasing a new machine, Ms. Maki presents the issue to the board of directors, which then makes the decision. Ms. Maki solely handles hiring, firing, payroll, purchasing material, bidding, and scheduling jobs. She is present at the shop every workday from 7:30 AM to 4:30 PM and supervises all of the activities in the shop.

    CONCLUSIONS OF LAW

23. The Division of Administrative Hearings has jurisdiction over the subject matter. Section 120.57(1), Florida Statutes. (All references to Sections are to Florida Statutes. All references to Rules are to the Florida Administrative Code.)

24. Section 287.0943 authorizes Petitioner to grant or deny requests for certification as minority business enterprises.

25. Section 288.703(2) defines a "minority business enterprise" as a "small business concern" domiciled in Florida that is owned at least 51 percent by minority persons. Section 288.703(3)(e) defines a minority person to include an "American woman." Respondent has not challenged whether Petitioner is a "small business concern" or whether Ms. Maki is an "American woman," so the sole question is whether Petitioner is a "minority business enterprise."

26. Rule 38A-20.005(2) provides:

    
    

    An applicant business must satisfy paragraphs (a), (b), (c), (d) and (e) below in order to be considered 51 percent owned by minority persons. The ownership exercised by minority persons shall be real, substantial, and continuing, and shall go beyond mere pro forma ownership of the firm, as reflected in its ownership documents.

27. Rule 38A-20.005(2)(a) requires minority ownership of at least 51 percent, and Ms. Maki has proved that.

28. Rule 38A-20.005(2)(b) provides:

The minority owners must demonstrate that they share income, earnings, and any other benefits from the business concern which are accorded to any other owner. The minority owners' share of income, earnings and

benefits shall be commensurate with the percentage of their ownership in the business concern, including, but not limited to, salaries, draws, bonuses, commissions, insurance coverage, proceeds from business investments and properties, and profit- sharing, and other benefits.

1. In this case, Ms. Maki has not enjoyed income in proportion to her stock ownership. Her sons, who worked for reduced salaries, nonetheless received salaries while Ms. Maki did not. Also, her husband, who performed considerably less work for Petitioner than did Ms. Maki, also received a salary for a while.

2. Ms. Maki declined a salary because she feared that she would jeopardize her disability income. The rule makes no exception for this purpose, so Petitioner has failed to satisfy this requirement.

31. Rule 38A-20.005(2)(c) states:

The minority owners must demonstrate that they share in all the risks assumed by the business firm. Such sharing of business risks shall be demonstrated through the minority owners' primary role in decision- making, and negotiation and execution of related transaction documents either as individuals or as officers of the business. The minority owners' sharing in business risks shall be commensurate with their percentage of ownership, including but not limited to, start-up costs and contributions, acquisition of additional ownership interests, third-party agreements, bonding applications, and other liabilities. Start- up contributions may be space, cash, equipment, real estate, inventory or services estimated at fair market value. All contributions of capital by the minority owners must be real and substantial. . . .

1. Ms. Maki has satisfied the requirements of Rule

   
   

   38A-20.005(2)(c). She individually contributed $32,000 to her husband's $8000. She owns between three and four times the amount of stock that her husband owns. Her initial cash contribution is proportionate to her stock ownership. Although her husband co-guaranteed one equipment lease, she sole guaranteed another equipment lease, and nothing in the record suggests that her exposure on these contingent liabilities is disproportionate to her stock ownership.

   33. Rule 38A-20.005(3)(a)-(d) provides:

   
   

   1. An applicant must establish that the minority owners possess the authority to control and exercise dominant control over the management and daily operations of the business.

      
      

      1. The discretion of the minority owners shall not be subject to any formal or informal restrictions (including, but not limited to, by-law provisions, purchase agreements, employment agreements, partnership agreements, trust agreements or voting rights, whether cumulative or otherwise), which would vary or usurp managerial discretion customary in the industry.

         
         

      2. If the applicant business is a corporation and the business affairs of the corporation are managed under the direction of a board of directors as provided by the articles of incorporation or bylaws of the corporation or Section 607.0824, Florida Statutes, the articles of incorporation or bylaws must explicitly clarify the number of the board of directors for establishing a quorum, or it will be deemed by this office that a quorum of the board of directors consists of a majority of the number of

         directors presented by the articles of incorporation or the bylaws.

         
         

      3. The minority owners must exercise sufficient management and technical responsibilities and capabilities to maintain control of the business. If the owners of the business who are not minority persons are disproportionately responsible for the operations of the business, then the business is not controlled by minority owners.

         
         

      4. The control exercised by the minority owners shall be real, substantial and continuing. In instances where the applicant business is found to be a family-operated business, with duties, responsibilities and decision-making occurring either jointly and mutually among owners and principals, or severally along managerial and operational lines between minority owners and non- minority owners or principals, the minority owners shall not be considered as controlling the business. Where the minority owners substantiate that the assumption of duties is not based on their lack of knowledge or capability to independently make decisions regarding the business' management and day- to-day operations, but on their execution of delegation of duties the minority owners' demonstration of control may not be affected. The minority owners shall establish that they have dominant responsibility for the management and daily operations of the business as follows:

         1. The minority owners shall control

            the purchase of goods, equipment, business inventory and services needed in the day-to- day operation of the business. The minority owners' control of purchasing shall be evidence of their knowledge of products, brands, manufacturers, types of equipment and products and their uses, etc., rather than merely reflective of the minority owners' ministerial execution of the ordering/acquisition of goods.

         2. The minority owners shall control the hiring, firing and supervision of all employees, and the setting of employment policies, wages, benefits and other

            employment conditions. In instances where minority owners have delegated the hiring and firing of employees, the minority owners shall demonstrate that their knowledge and capability is sufficient to evaluate the employees' performance in the given industry.

         3. The minority owners shall have knowledge and control of all financial affairs of the business. The ability of any non-minority owner or employee to sign checks and enter into financial transactions on behalf of the business shall be considered in determining financial control. The minority owners shall expressly control the investments, loans to/from stockholders, bonding, payment of general business loans, payroll, and establishment of lines of credit.

         4. The minority owners shall have managerial capability, knowledge, training, education and experience required to make decisions regarding the operations of the business. In determining the applicant business' eligibility, [Respondent] will review the prior employment and educational backgrounds of the minority owners, the professional skills, training and/or licenses required for the given industry, the previous and existing managerial relationship between and among all owners, especially those who are familially related, and the timing and purpose of management changes. If the minority owners have delegated management and technical responsibility to others, the minority owners must substantiate that they have caused the direction of the management and the technical responsibilities of the business. When the applicant business provides services which require that the business and/or its professional qualifier be licensed, the minority owner shall hold the requisite license issued by the State of Florida or local licensing entity. The minority license holder need not be the controlling owner of the business, but must hold an ownership interest.

         5. The minority owners shall display

            independence and initiative in seeking and negotiating contracts, accepting and rejecting bids and in conducting all major

            aspects of the business in regard to any and all bidding and contracting. In instances where the minority owners do not directly seek or negotiate contracts, prepare estimates, or coordinate with contracting officials, but claim to approve or reject bids and contractual agreements, the minority owners shall demonstrate that they have the knowledge and expertise to independently make contractual decisions.

         6. The minority owners shall substantiate personal direction and actual involvement with all major aspects of the applicant business. The major aspects shall be defined as those tasks essential to accomplish all objectives and operations related to those services or commodities for which the applicant business requests certification.

1. Rule 38A-20.001(15) defines "control' as to

   
   

   direct with primacy or cause the direction of all phases of the management and daily operations of the business, including, but not limited to, standard management practices and principles such as policy development, establishment of personnel reporting lines and operational procedures, problem solving, etc.

2. Respondent wrongly contends that the mere presence of a majority of non-minority directors on the board precludes satisfaction of the requirements of this rule. Rule

   38A-20.005(3)(b) provides only that, in most circumstances, a majority of the board will constitute a quorum; this rule does not provide that, if a majority of the board are not minorities, this fact alone means that non-minorities are not in control of the corporation. Respondent may wish to promulgate such a rule, but, until it does, Respondent must contend with the facts that the owners of a majority of the shares may remove any board

   member without cause, and, if minorities own a majority of the shares, then minorities indirectly control the board, even though non-minorities constitute a majority of the board.

3. Absent a rule providing that a majority of non- minorities on the board precludes minority control of a corporation whose shares are controlled by minorities, the question emerges as to who is controlling the corporation.

4. In this case, Ms. Maki is more in control of Petitioner than any other individual, but she is not sufficiently in control to satisfy the requirements of the rule. Even though Ms. Maki could, and perhaps already has, removed board members, she takes important acquisitions to the board for approval. She makes the presentation to the board, but a board controlled by non- minorities decides whether to purchase major pieces of equipment and, in this manner, exercises considerable control over the future of Petitioner. Nothing in the record suggests that Ms. Maki would remove directors in the event that they did not follow her recommendations; to the contrary, the inference is more likely that she yields to their decisions, even though she could remove them.

5. Thus, due to her failure to take income in proportion to her ownership while non-minorities are or have taken income from Petitioner and due to the extent to which the board, which is not minority controlled, exercises its discretion in major

equipment purchases, Petitioner has failed to prove that it is entitled to certification as a minority business enterprise.

RECOMMENDATION

It is

RECOMMENDED that the Minority Business Advocacy and Assistance Office enter a final order denying Petitioner's application for certification as a minority business enterprise.

DONE AND ENTERED this 25th day of January, 1999, in Tallahassee, Leon County, Florida.

ROBERT E. MEALE

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850) 488-9675 SUNCOM 278-9675

Fax Filing (850) 921-6847 www.doah.state.fl.us

Filed with the Clerk of the Division of Administrative Hearings this 25th day of January, 1999.

COPIES FURNISHED:

Darlene Maki

Qualified Representative RGM Precision Machine, Inc. 18923 Titus Road

Hudson, Florida 34667

Joseph L. Shields Senior Attorney Department of Labor and

Employment Security

2012 Capital Circle, Southeast Hartman Building, Suite 307

Tallahassee, Florida 32399-2189

Mary B. Hooks Secretary

Department of Labor and Employment Security

303 Hartman Building

2012 Capital Circle, Southeast Tallahassee, Florida 32399-2152

Edward A. Dion General Counsel

Department of Labor and Employment Security

307 Hartman Building

2012 Capital Circle, Southeast Tallahassee, Florida 32399-2152

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15 days from the date of this recommended order. Any exceptions to this recommended order must be filed with the agency that will issue the final order in this case.

Docket for Case No: 98-003771

Orders for Case No: 98-003771