South Carolina              
Administrative Law Court
Edgar A. Brown building 1205 Pendleton St., Suite 224 Columbia, SC 29201 Voice: (803) 734-0550

SC Administrative Law Court Decisions

CAPTION:
New South Associates, Inc. vs. SCDOT

AGENCY:
South Carolina Department of Transportation

PARTIES:
Petitioners:
New South Associates, Inc.

Respondents:
South Carolina Department of Transportation
 
DOCKET NUMBER:
07-ALJ-19-0440-CC

APPEARANCES:
For the Petitioner:
John J. Pringle, Jr., Esquire

For the Respondent:
Deborah B. Durden, Esquire
 

ORDERS:

FINAL ORDER AND DECISION

This matter comes before the Administrative Law Court (“ALC” or “Court”) pursuant to S.C. Code Ann. § 1-23-600(B) (2005 & Supp. 2007) and 25A S.C. Code Ann. Regs. 63-700 to 718 (Supp. 2007). New South Associates, Inc. (“New South”) challenges the decision by the South Carolina Department of Transportation (“Department”) regarding its denial of New South’s application for certification as a Disadvantaged Business Enterprise (“DBE”).

The Department is required to certify eligible firms for participation in the state DBE program pursuant to S.C. Code § 12-28-2930(B). The Department, as a recipient of federal funds, is also required to implement a DBE program in compliance with 49 C.F.R. Part 26. The DBE program allows eligible firms to compete for and receive portions of construction projects as subcontractors. Participation in the DBE program is limited to firms which are certified by the Department as a DBE, based upon the standards and procedures set forth in 25A S.C. Code Ann. Regs. 63-703 & 63-704 and 49 C.F.R. Part 26. To be certified as a DBE, a firm must be owned and controlled by one or more individuals who are either socially and economically disadvantaged ethnic minorities or females. See S.C. Code Ann. Regs. 63-703; 49 C.F.R. § 26.5.

In this case, the Department makes two general arguments, some of which contain arguments on more specific points. The first issue involves the contributions that three individuals (collectively referred to as “the disadvantaged individuals”) – Mary Beth Reed (“Reed”), Theresa Hamby (“Hamby”), and Natalie Adams (“Adam”) – made in order to acquire their ownership interests, and the related issue of whether the disadvantaged individuals share in the risks and profits of New South commensurate with their ownership interests.

Secondly, the Department contends that Joe W. Joseph (“Joseph”), a shareholder and employee of New South, controlled and/or controls New South. New South maintains that Joseph did not and does not control New South.

The Department further contends that a transfer of shares from Joseph to Reed should not be counted for purposes of Reed’s ownership interests in New South; however, because of its rulings herein, the Court does not need to reach the issue of ownership of these gifted shares.

Pursuant to notice to the parties, a hearing in this matter was held on March 4, 2008, at the offices of the ALC in Columbia, South Carolina. Both parties appeared at the hearing. Evidence was introduced and testimony was given. After carefully weighing all the evidence, the Court grants New South’s application for DBE certification.

STIPULATIONS

Stipulation of Exhibits

The parties stipulated to the following exhibits:

1. Application for DBE Certification of New South Associates, Inc.;

2. Resumes;

3. Promissory Notes;

4. Security Agreements;

5. Unanimous Written Consent February 2, 2007;

6. Amortization Schedule;

7. Loan Agreements;

8. SCDOT’s On-Site Inspection and Owner Interview Report;

9. Denial Letter of June 28, 2007;

10. Denial Letter of August 21, 2007;

11. Articles of Incorporation;

12. Corporate By-Laws and Amendments;

13. Corporate Stock Certificates and Stock Ledger;

14. Minutes of Stockholders and Board of Directors Meetings;

15. Georgia DBE Certification and WBENC Certificate; and,

16. New South Balance Sheets and Income Statements 2003-2006.

Further, New South offered its exhibit number one, which was accepted into the record:

1. Copies of paychecks for New South employees Reed, Hamby, and Adams.

Stipulation of Facts

Pursuant to ALC Rule 25(C), the parties submitted to the Court the following Stipulations of Fact:

1. Prior to 2006, Joe Joseph was an owner of New South Associates, Inc.;

2. Prior to 2006, Joe Joseph was a member of the Board of Directors that controlled New South Associates, Inc.;

3. Joe Joseph currently serves as Executive Vice President and Project

Manager for New South Associates;

4. The stock certificates for New South Associates stock are issued to the

following individuals with the number of shares issued to each individual designated in parentheses after each name:

a. Joe Joseph (149)

b. Mary Beth Reed (288)

c. Natalie Adams (123)

d. Theresa Hamby (60); and,

5. Mary Beth Reed, Natalie Adams and Theresa Hamby are women and

are presumed to be disadvantaged individuals under the DBE regulations.

FINDINGS OF FACT

Having observed the witnesses and exhibits presented at the hearing and closely passed upon their credibility, and taking into consideration the burden of persuasion by the parties, the Court makes the following Findings of Fact by a preponderance of the evidence:

1.                  New South was incorporated as a Georgia corporation on September 22, 1988. Its principal place of business is 6150 East Ponce de Leon Avenue, Stone Mountain, Georgia 30083. New South currently has 51 permanent employees; approximately 30 of its employees are females.

2.                  New South is a cultural resources management firm. It conducts studies and site reviews in archaeology, history, and architectural history for its clients. Its clients include federal agencies such as the Department of Energy, the Centers for Disease Control, and Army Corps. of Engineers, state agencies such as the Georgia and South Carolina Departments of Transportation, and numerous private companies.

3.                  New South was owned by 3 shareholders from its inception in 1998 until 2006: JMA Services, Inc. – a/k/a John Milner and Associates – (“JMA”), Joseph, and Thomas R. Wheaton (“Wheaton”). JMA did not actively participate in the management or operation of New South. Rather, it provided financial assistance and business advice to New South. New South was owned by non-disadvantaged individuals until January 30, 2006.

4.                  When New South was incorporated, JMA owned 102 shares, Joseph owned 99 shares, and Wheaton owned 99 shares. From July 2, 1991 until January 30, 2006, its shares were owned as follows:

a.                   306 shares by JMA (34% of its issued and outstanding shares);

b.                  297 shares by Joseph (33% of its issued and outstanding shares); and,

c.                   297 shares by Wheaton (33% of its issued and outstanding shares.

5.                  From 1988 until December 9, 2005, New South’s Board of Directors (“Board”) grew in size from a three-member board (consisting of Joseph, Wheaton, and Reed) to a seven-member board (consisting of Joseph, Wheaton, Reed, Hamby, Adams, Johannes Loubser (“Loubser”), and Hugh Matternes (“Matternes”)). Reed and Joseph are husband and wife.

6.                  From on or about December 9, 2005 until September, 2006, the Board consisted of the following: Reed, Adams, Hamby, Joseph, Loubser, Matternes, and Yulounda Ralls (“Ralls”), who replaced Wheaton. A majority of its members consisted of females.

7.                  Presently, the Board consists of Reed, Adams, Hamby, Joseph, Matternes, Ralls, and Chris Espenshade (“Espenshade”), who replaced Loubser in September, 2006.

8.                  As testified to at the hearing and as shown in various records of New South, its owners decided to provide for a succession plan for New South. Further, the Board (which contained at least 4 females in many of these discussions), realized that most of its younger employees were female and that any reorganization would need to include them based upon their lengthy past contributions, their management skills, and their expertise. Thus, the owners decided to reorganize its ownership structure into one which would be owned by these key female employees. They recognized that by so doing, the emerging firm would be able to qualify for and take advantage of those business opportunities afforded to business entities owned by women. On January 30, 2006, New South purchased 603 shares of New South stock owned by two of its three stockholders (Wheaton and JMA). On the same day, New South sold 323 shares of its stock to the disadvantaged individuals, as follows:

a. 140 shares to Reed;

b. 123 shares to Adams; and,

c. 60 shares to Hamby.

As a result of the reorganization, the outstanding shares of New South are now owned in the following amounts and percentages:

a.                   149 shares (24.032 %) by Joseph;

b.                  288 shares (46.4516 %) by Reed;[1]

c.                   123 shares (19.8387 %) by Adams; and,

d.                  60 shares (9.6777 %) by Hamby.

9.                  Prior to January 30, 2006, Joseph was the president and chief executive officer of New South and served as treasurer of its Board. Currently, Joseph is its executive vice president and project manager. He owns 149 shares of stock in New South, which is 24% of its outstanding shares.[2] Since January 30, 2006, his wife, Mary Beth Reed, is the owner of almost 46.5% of the company’s stock and serves as its president and chief executive officer. The disadvantaged individuals did not make any cash payment for the stock purchase on January 30, 2006. They purchased shares on that date by executing individual secured promissory notes payable to New South. The consideration in each promissory note equaled the value each paid for the stock she purchased. Pursuant to the provisions of the security agreements, a third party, John E. Robinson – an attorney with McClarty, Robinson & Van Voorhies, LLP – was named the escrow agent to hold the shares purchased in trust pending full payment by the purchasers. Each disadvantaged individual made a contribution of capital by executing the promissory notes and security agreements and made a contribution of expertise to the furtherance of the good will of New South.

10.              The terms of the promissory notes executed by each of the disadvantaged individuals are similar:

a.                   interest is paid by the individual to New South on the principal balance at

a rate of 7% per annum;

b.                  payments are made payable to New South for a term of fifteen (15) years

and the note will be paid in full on February 1, 2022;

c.                   New South is granted the right to accelerate payments in the event of

default in payment; and,

d.                  New South may recover attorney’s fees in the event the terms of the notes

are breached.

11.              Each note differs on the principal amounts owed and the required monthly payments:

a.                   Reed’s note is for the principal amount of $156,112.60, and requires

monthly payments in the amount of $1,403.18;

b.                  Adams’ note is for the principal amount of $137,156.07, and requires

monthly payments in the amount of $1,232.80; and,

c.                   Hamby’s note is for the principal amount of $66,905.40, and requires

monthly payments in the amount of $ 601.36.

12.              Each of the disadvantaged individuals makes bi-monthly payments on her respective note by means of a deduction from her paycheck at New South. These cash payments become an asset of the company which increases the value of the stock owned by each stockholder.

13.              On March 4, 2008, the disadvantaged individuals had made payments toward the principal and interest owed on their respective promissory notes as follows: $34,377.91 by Reed, $30,203.58 by Adams, and $14,733.32 by Hamby.

14.              Each of the disadvantaged individuals secured their promissory notes to New South by executing a security agreement in which they pledged as security their shares in New South. Further, the terms of the security agreements provided, that upon default in payments, New South had the right to take possession of the shares owned by the maker.

15.              Further, each disadvantaged individual executed personal guarantees in connection with their note and security agreement.

16.              New South has been certified by the Georgia Department of Transportation as a DBE.

17.              Reed is a female with a net worth of less than $750,000. She is the President of and Director of History for New South. Reed has been with New South since its inception in 1998. Her resume chronicles her substantial education and experience in the areas of history and anthropology. Reed’s current salary is $92,000 per year. She testified extensively about her involvement in New South and particularly concerning her duties and obligations since becoming an officer and shareholder. Reed testified that she sets the agenda for New South’s Board and that she places matters to the Board for its consideration. In addition to her duties as New South’s Director of History, Reed described her involvement in the preparation of and review of bid proposals and contracts, as well as other aspects of its business. The minutes of the Board’s meetings demonstrate Reed’s leadership, involvement, and participation in New South’s business affairs.

18.              Adams is a female with a net worth of less than $750,000. She is the Vice President of and Director of Archaeology for New South. She is the branch manager for its South Carolina office. Adams has been with New South since 1996. Her resume chronicles her substantial education and experience in the field of archaeology. Adams’ current salary is $77,000 per year. She described her duties and responsibilities with New South in her testimony and stated that they have increased since she became an officer and shareholder. The minutes of New South’s Board meetings describe Adams’ active participation in its business affairs.

19.              Hamby is a female with a net worth of less than $750,000. She is the Vice President for Express Projects and the Treasurer of New South. Hamby has been with New South since 1989. Her resume chronicles her substantial education and experience in the areas of anthropology and historic preservation. Hamby’s current salary is $55,000. In her testimony, she described her duties with New South and stated that they have increased since she became an officer and shareholder. The minutes of New South’s Board meetings describe Hamby’s active participation in its business affairs.

20.              Reed, Adams, and Hamby gave testimony concerning their knowledge of New South’s business as a cultural resource management firm. Each demonstrated familiarity with its operations, its relationships with its clients and customers, and its day-to-day operations.

21.              On or about March 23, 2007, New South applied to the Department for certification as a DBE. Alex Nelson (“Nelson”), currently employed with the Department of Transportation, was project manager for the Department’s DBE Program at that time.

22.              After the Department concluded its investigation, it denied New South’s request for DBE certification by letter dated August 21, 2007.

CONCLUSIONS OF LAW
Based on the foregoing Findings of Fact, I conclude the following as a matter of law:

Jurisdiction and Background

1.                  This Court has subject matter jurisdiction in this case pursuant to S.C. Code § 1-23-600(B) and 25A S.C. Code Ann. Regs. 63-704(K).

2.                  The Department is required to certify eligible firms to participate in the South Carolina DBE program pursuant to S.C. Code Ann. § 12-28-2930(B).

3.                  As a recipient of federal highway funds, the Department is required to implement a DBE program in compliance with 49 C.F.R. Part 26. The Department has promulgated regulations to implement both the state and federal DBE programs in South Carolina. See 25A S.C. Code Ann. Regs. 63-700 et seq. (Supp. 2007). Pursuant to regulations, the Department adopted the standards for certifying DBEs which are set forth in 49 C.F.R. Part 26. 25A S.C. Code Ann. Regs. 63-702(A) and 63-703(A) (Supp. 2007).

Burden of Proof

4.                  The determination of whether individuals or firms have met their burden of demonstrating group membership, ownership, control, and economic disadvantage must be made by considering all the facts in the record viewed as a whole. 49 C.F.R. § 26.61(b).

5.                  A firm seeking certification as a DBE has the burden of demonstrating, by the preponderance of the evidence, that it meets the requirements of 49 C.F.R. Part 26 concerning group membership or individual disadvantage, business size, ownership, and control. 49 C.F.R. § 26.61(b).

6.                  The Department does not contest that New South meets the requirements for business size. New South qualifies as a “small business” because its annual gross receipts do not exceed the limitation set out in the federal regulations. See 49 C.F.R. § 26.65; 13 C.F.R. § 121.201.

7.                  The Department denied certification to New South based upon concerns about its ownership and control. It contends that the disadvantaged individuals neither own New South in accordance with the ownership standards set forth in 25A S.C. Code Ann. Regs. 63-701(E) and 49 C.F.R. § 26.69 nor do they control New South as required by those standards set forth in 25A S.C. Code Ann. Regs. 63-701(E) and 49 C.F.R. § 26.71. New South, however, contends that it meets the requirements of the regulations concerning ownership and control.

8.                  The Department contends that the disadvantaged individuals do not own New South because they did not make a real and substantial financial contribution when they acquired their stock ownership in it. Further, it contends that the method by which the disadvantaged individuals obtained their ownership interests did not demonstrate that they assumed or acquired any risk as mandated in the DBE rules.

Real and Substantial Financial Contribution toward Ownership

9. The first issue presented is whether the amounts payable to New South by the disadvantaged individuals (pursuant to their secured promissory notes) represent “real and substantial” capital contributions pursuant to 49 C.F.R. § 26.69(e).

49 C.F.R § 26.69(e) provides that “[t]he contributions of capital or expertise by the socially and economically disadvantaged owners to acquire their ownership interests must be real and substantial. Examples of insufficient contributions include a promise to contribute capital, an unsecured note payable to the firm or an owner who is not a disadvantaged individual, or mere participation in a firm’s activities as an employee. Debt instruments from financial institutions that lend funds in the normal course of business do not render a firm ineligible, even if the debtor’s ownership interest is security for the loan. Also, 49 C.F.R. § 26.69(c) provides that “[t]he firm’s ownership by socially and economically disadvantaged individuals must be real, substantial, and continuing, going beyond pro forma ownership of the firm as reflected in ownership documents. The disadvantaged owners must enjoy the customary incidents of ownership, and share in the risks and profits commensurate with their ownership interests, as demonstrated by the substance, not merely the form, of arrangements.”

As a threshold matter, the price paid by each of the disadvantaged individuals for the shares of stock they purchased, as enumerated in their secured notes and security agreements, was real and substantial. The amounts paid were not nominal---they were based upon the actual value of the stock in New South. Further, the amounts paid to New South for the stock did not consist of mere promises to pay. The disadvantaged individuals signed notes and secured them with collateral (security agreements using a third party/escrow agent who held their stock until the amount owed to New South would be paid in full). The disadvantaged individuals cannot pledge their stock or sell it until they satisfy the notes; only at that time will the stock be released to them and they will have clear title to the shares. This secured transaction is not dissimilar to one with a financial institution where the asset (either real or personal) that is pledged as collateral for payment of an amount borrowed is released from the lien only when the balance owed on the outstanding indebtedness is paid in full. Thus, although the “loans” for the stock purchases were not made by a financial institution, the formalities and legalities apparent in these transaction are just as apparent and legal. These promissory notes are valid legal obligations by their makers which require them to make payments to New South pursuant to an amortization schedule (which includes the amount to be applied to reduction in principal and the amount to be applied for interest). The notes contain acceleration clauses which authorize New South to declare immediately due and payable the unpaid principal and the accrued, unpaid interest if the disadvantaged individual fail to make payments on her note when due; such a failure would cause the disadvantaged individual to lose all her interest in the stock held as collateral and it would, upon default, become an asset of New South and become treasury stock. Although the Department asserted that the notes and security agreements are dissimilar to those made with financial institutions because they require down payments, the Court finds this position totally lacking in merit, without any basis, and absolutely contrary to the practices of financial institutions. Further, the Court finds that the regulation does not support this assertion. Accordingly, the Court concludes that the disadvantaged individuals made real and substantial payments for their stock purchases in New South.

The disadvantaged individuals, although they are the owners of a majority of the shares of stock in New South, have made payments, as delineated in the amortization schedules, on the amounts owed for the stock purchases through bi-monthly deductions from their salaries with New South. Further, the Court concludes that each disadvantaged individual has put at risk the substantial amounts she has paid toward principal reduction if she were to default on her note.

The Department contends that the “succession” whereby the disadvantaged individuals became shareholders in New South was not legitimate. However, it offered nothing to demonstrate that the disadvantaged individuals were not qualified to become shareholders in New South, given their education, experience, and tenure with New South. Furthermore, when the succession plan was executed in January 2006, the Board was consisted of a majority of females. These three females were legitimate individuals and well qualified – based upon their ages, work history and experiences, education and management skills – to purchase shares of stock in New South. It is significant that the disadvantaged individuals have demonstrated a long-term commitment to New South through their many years of employment there and through their “ownership” of the vast expertise in the services provided by New South. Reed has been with New South for 20 years, Adams for 12 years, and Hamby for 19 years. Their interests are intertwined with the interests of New South and each has a vast degree of expertise in the various facets of the company’s mission. Their years of day-to-day business and management experience and expertise through their years of employment helped make New South profitable and a “going concern.” The Court concludes that the promissory notes and obligations herein together with all their terms and provisions (which it finds legally valid), the consistent payments to New South by the disadvantaged individuals as required by the notes, the risk of the disadvantaged individuals upon default in payment of the amounts owed, the length of service given by the disadvantaged individuals to New South, the expertise of the disadvantaged individuals in those primary services which constitute the mission and diverse cultures of New South, and their continuing commitment to New South’s success, demonstrate that their contributions are “real and substantial.”

Risk of Ownership

10. The second issue the Court will consider is whether the disadvantaged individuals have complied with the requirements of 49 C.F.R. § 26.69(c) and 49 C. F. R. § 26.71 (d) which involves the enjoyment of the customary incidents of ownership, sharing the risks and profits commensurate with their ownership interests and, the power to direct and cause the direction of the management and policies of the firm and to make day-to-day decisions as well as long term decisions on matters of management, policy and operations.

It is clear that the disadvantaged individuals share in the profits and risks of New South commensurate with their ownership interests. Each personally guaranteed a number of New South’s debts which subject the disadvantaged individuals to greater risk than entailed by their actual ownership interest. In the event that New South files for bankruptcy, these individuals will be responsible for the debts of New South pursuant to the personal guarantees. However, it is clear from the record that the disadvantaged individuals, as shown by their financial and business contributions, are determined that New South will not face bankruptcy or other financial crisis, and their actions follow their commitment to New South. Thus, their interests are clearly aligned with those of New South. In addition, the disadvantaged individuals share in the profits of New South commensurate with their ownership interests. Their salaries have increased since they became shareholders and are more commensurate with their ownership interests.

Control

11. Finally, the Department posits that the disadvantaged individuals do not control New South as required by applicable regulations. It contends that Joseph formerly controlled New South and that he continues to exercise a significant degree of control, albeit informally. 49 C.F.R. § 26.71(1) provides that: “Where a firm was formerly owned and/or controlled by a non-disadvantaged individual (whether or not an immediate family member), ownership and/or control were transferred to a socially and economically disadvantaged individual, and the non-disadvantaged individual remains involved with the firm in any capacity, the disadvantaged individual now owning the firm must demonstrate to you, by clear and convincing evidence, that: (1) The transfer of ownership and/or control to the disadvantaged individual was made for reasons other than obtaining certification as a DBE; and (2) The disadvantaged individual actually controls the management, policy, and operations of the firm, notwithstanding the continuing participation of a non-disadvantaged individual who formerly owned and/or controlled the firm.”

Joseph did not “control” New South either before or after the disadvantaged individuals acquired their shares of stock in the company. He has never owned more than 33% of the stock of New South, either before or after the stock purchases by the disadvantaged individuals. Although he was its president and chief operating officer, Joseph was one of a number of members of the Board; there is no evidence he controlled its members. His position as president of New South was given to him pursuant to authority delegated by the Board. JMA and Wheaton, the two other initial shareholders, owned more than 50 % of the stock in New South and Joseph needed their votes to institute any policy for New South. He acted solely in his position as a manager.

The disadvantaged individuals must show that they possess the power to direct or cause the direction of the management and policies of New South and that they make its day-to-day decisions as well as long-term decisions on matters of management, policy and operations. Further, they are required to show that they have an overall understanding of, and managerial and technical competence and experience directly related to, the type of business in which the firm is engaged and the firm’s operations. Also, a disadvantaged individual must hold the highest officer position in the company, and disadvantaged individuals must control the Board of Directors. 49 C.F.R. § 26.71(d) (1) & (2). In this case, the evidence shows that Reed holds the position of president of New South, which is its highest office. Further, it is clear that four of the seven members of its Board are females. There is no question that the disadvantaged individuals possess an overall understanding of the technical as well as the managerial aspects of New South and are capable of and direct its day-to-day operations as well as make its long term decisions concerning the company’s operations.

Joseph, a non-disadvantaged individual, does continue to serve on the Board and does function as an officer of the company. However, he does not exercise any control in its operation and management. After observing and listening to the testimony of the disadvantaged individuals concerning their management skills and those needed to operate the many functions of this company, it is clear to this Court that they operate this company. The president exercises her authority for day-to-day duties as New South’s chief operating officer and includes the Board in decision-making and policy-making when appropriate and required. The Court notes that DBE regulations do not prohibit Joseph from participating in the activities of New South as a shareholder and officer. 49 C.F.R. § 26.71(e) provides that “[i]ndividuals who are not socially and economically disadvantaged may be involved in a DBE firm as owners, managers, employees, stockholders, officers, and/or directors. Such individuals must not, however, possess or exercise the power to control the firm, or be disproportionately responsible for the operation of the firm.” The DBE regulations further specifically allow the Board to delegate authority to other employees. 49 C.F.R. § 26.71(f) provides that: “The socially and economically disadvantaged owners of the firm may delegate various areas of the management, policymaking, or daily operations of the firm to other participants in the firm, regardless of whether these participants are socially and economically disadvantaged individuals. Such delegations of authority must be revocable, and the socially and economically disadvantaged owners must retain the power to hire and fire any person to whom such authority is delegated. The managerial role of the socially and economically disadvantaged owners in the firm’s overall affairs must be such that the recipient can reasonably conclude that the socially and economically disadvantaged owners actually exercise control over the firm's operations, management, and policy.”

The Board of New South retains the power to hire and fire all its employees. That Board is dominated by females. Further, the minutes from Board meetings demonstrate and the evidence during the trial adduces that the Board exercises control over New South’s operations, management, and policy. There is no evidence that any individual possesses or exercises the power to control New South or that any individual is disproportionately responsible for its operation(s). Joseph neither controls New South nor has the Board delegated any authority or responsibility to him to control it. Any authority that may have been delegated to him by the Board in the past has been withdrawn. Further, his designated responsibilities as an executive vice president and a project manager do not provide to him any authority to control New South. It is clear from the record that Joseph’s role is well-defined and limited to the area of administration. As an example, Reed testified that she signs all contracts on behalf of New South, not her husband. Additionally, the minutes from meetings of New South’s Board demonstrate, in great detail, that Joseph does not actually control New South or exercise disproportionate responsibility for the operation of New South. It is clear that Joseph, just as any board member, may make recommendations, which must be approved by the Board. Further, minutes of various meetings of the Board reflect participation by all Board members and do not demonstrate any disproportionate participation by Joseph.

The Court finds that the Petitioner has met its burden in showing that the disadvantaged individuals have complied with the requirements of 49 C.F.R. § 26.69(c) and 49 C. F. R. § 26.71 (d). The disadvantaged individuals enjoy the customary incidents of ownership in their company and share in its risks and profits commensurate with their ownership interests. Further, they have the power to direct and cause the direction of the management and policies of New South and to make its day to day as well as long term decisions on matters of management, policy and operations. In addition, the Court finds that Petitioner has shown, by clear and convincing evidence, that the transfer of ownership and control of New South to the disadvantaged individuals was made for reasons other than obtaining certification as a DBE and, that they control the management, policy, and operations of the firm and possess the power to direct and cause the direction of the management and policies of the firm, notwithstanding the continuing participation of Joseph, a non-disadvantaged individual.

Accordingly, the Court finds and concludes that the disadvantaged individuals exhibit the control over New South required for it to be certified as a DBE.

ORDER

Based upon the foregoing Findings of Fact and Conclusions of Law,

IT IS HEREBY ORDERED that the Department must forthwith grant the application of New South Associates, Inc. for certification as a Disadvantaged Business Enterprise.

AND IT IS SO ORDERED.

______________________________

Marvin F. Kittrell

Chief Administrative Law Judge

April 8, 2008

Columbia, South Carolina



[1] Reed obtained 140 shares by purchase on January 30, 2006, and her husband gifted to her 148 shares. The Department argues that Reed did not provide any contribution of capital or expertise for the 148 shares her husband gifted to her. However, the Department acknowledges that the disadvantaged individuals own, pursuant to their stock purchases on January 30, 2006, more than 50% of the outstanding stock in New South.

[2] Joseph owns 31.56 % of the total shares of stock in New South (472), excluding the 148 shares he gifted to his wife, and the disadvantaged individuals own the remainder of the shares (68.47 %).


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