January 11, 1989

 

FACTS:


The Board of Trustees of a state institution passed a resolution
to assist in establishing a holding company (the Company) for a
system of non-profit and for-profit entities which would help
produce revenues for the state institution. The Board of the
Company would be selected by the institution's Board of Trustees,
and would include four (4) institution or subsidiary trustees and
two (2) persons specifically identified by their institution
positions. The Commission, in EC-COI-84-147, indicated that board
members of the Company would be considered state employees within
the meaning of G.L. c. 268A.

The Board of Trustees now proposed to adopt the following
changes in its organizational structure:

1. Eliminate the company bylaw provision that empowers the
chairman of the Board of Trustees to select Company directors,
instead empower the members of the Company (same persons who serve
as Company directors) to elect the directors;

2. Eliminate the Company bylaws requirement that the vice
chairman of the Board of Trustees serve, ex-officio, as chairman
of the Company Board of Directors; instead empower Company
directors to elect Company Board chairman by vote of two-thirds of
all voting directors;

3. Eliminate the Company bylaw requirement that four members of
the Company Board of Directors must also be members of the state
institution's Board of Trustees;

4. Add a Company bylaw requirement that state institution
affiliated persons will always comprise at least one-third of the
Company voting directors, but may never comprise one-half or more
of the Company voting directors;

5. Amend the Company bylaw to allow all corporate actions to be
taken by the vote of a majority of the Company's voting directors
present at any meeting at which a quorum exists, except for actions
to initiate any new program that impacts certain activities of the
state institution or to amend the Company bylaws, which would
require a vote of two-thirds of all voting directors.

6. Effect, upon implementation of the proposed Company bylaw
requirements, actual changes in the composition of the Company
board in order to comply with the new restrictions on board
composition described in paragraph 4 above.
The Company would not change its corporate purposes.
 


QUESTION:


If the organizational changes listed above were adopted, would
the Company continue to constitute a state agency for the purposes
of G.L. c. 268A?
 


ANSWER:


Yes.
 


DISCUSSION:


A state agency is defined by the conflict of interest law as
"any department of a state government including the executive,
legislative or judicial, and all councils thereof and thereunder,
and any division, board, bureau, commission, institution, tribunal
or other instrumentality within such department and any independent
state authority, district, commission, instrumentality or agency,
but not an agency of a county, city or town." G.L c. 268jA, s.1(p).

In our 1984 opinion, EC-COI-84-147, we found that Company
constituted a state instrumentality based on the cumulative effect
of its finding that: (1) "the impetus for the formation of the
Company came from" the Board of Trustees, (2) the Company performs
a governmental function by seeking out and developing new sources
of revenue subject to the state institution's control and, (3) that
both the selection process and composition of the Company's Board
of Trustees were state dominated.

The organizational changes the Board of Trustees proposes to
adopt would affect only the third of these factors, but you have
asked us to consider all three of these factors in light of these
proposed organizational changes and in light of Commission
precedent since 1984. Our analysis of all three factors follows.


a. Creation


We decline to revise our conclusion, found in EC-COI-84-147,
that the impetus for the formation of the holding company came from
the members of the state institution Board, who are state
employees, in the form of a resolution to assist in the
establishment of a holding company to help produce revenues for the
institution. Governmental creation is appropriately found where
a state agency, on its own initiative,

Page 224

resolves to form a non-profit corporation to further its
legislatively mandated functions. See EC-COI-88-24. Since 1954,
we made it explicit that the status of an entity created in this
manner is distinct from one created, for example, pursuant to
contract, see EC-COI-88-19, or private will, see EC-COI-84-65.


b. Governmental Function


Similarly, we decline to alter our conclusion, found in EC-COI-
84-147
, that the holding company performs an essentially
governmental function. [The underlying function of searching out
new revenue producers for the institution is a government function
because this part of the state entity is included within a state
institution.] The Legislature has delegated to the Board of
Trustees the responsibility for financing an managing the state
institution, which includes this entity. Efforts to protect
the financial viability of this entity are required by this statutory
responsibility. An obligation imposed by legislative authority,
such as this one, to advance the public purpose behind the
development of new sources of revenue is within the domain of state
responsibility. See EC-COI-88-19. The fact that no statute or
regulation specifically requires the creation of the holding
company irrelevant so long as the holding company assists in the
performance of a function that is statutorily mandated. See EC-COI-
84-66
. The statutory mandate to raise money is dear.

The holding company will participate in decisions regarding the
searching out of new revenue producers for this entity and it is
exactly this participation in the state institution's statutory
responsibility to protect the financial viability of this entity
which distinguishes the holding company from those entities which
serve as outside resources to an agency but which are not delegated
any authority by the agency they are associated with. See, e.g.,
EC-COI-85-6;83-21
. The holding company is an entity which is
assisting in the work product of a state agency. See EC-COI-86-4.
In short, part of the statutorily defined work product of the Board
of Trustees includes responsibility for financing and managing this
entity and the Company was created out of a desire to fulfill this
statutory mandate. See EC-COI-88-24.[1]


c. Governmental Control Exercisable Over the Company


In concluding that sufficient government control was exercisable
over the Company, this Commission in EC-COI-84-147 looked to the
state-dominated selection process and composition of the Company's
Board of Trustees. Although the organizational changes the Company
has proposed would lessen the amount of state control over the
selection and composition of the company's Board of Trustees, the
degree of control to be retained, as specfically supplemented by
other proposed changes in the Company Board's organinational
structure, creates a Board where the state institution affiliated
members will always number between one-third and one-half of those
serving and where that one-third to one-half has control, through
the requirement of a two-thirds vote of all voting directors, over
any attempts to initiate any new program that impacts the teaching
or research activities of the state institution facility or to
amend the Company by-laws. Thus, these organizational changes
propose not to alter control over precisely those matters that
represent the holding company's participation in an essentially
governmental function.

Just as we have previously found the fact that a majority of an
entity's board of trustees are public officials or employees is not
conclusive evidence that an entity is public, see, e.g., EC-COI-
84-65
, we have also previously found that the fact that a majority
of an entity's board of trustees must be selected from the Private
sector is not conclusive evidence that an entity not public, see
EC-COI-83-74
. On these facts, the amount of government control
over matters involving the activities of this state entity would
be substantial - a fact not apparent from a cursory look at the
nations of the total composition of the Board.

Upon consideration of the impetus for creation, governmental
purpose, and the substantial amount of governmental control
involved, we conclude that the Company would continue to be a state
agency were the proposed organizational changes to be adopted and
that the application of G.L.c. 268A to the Company Board members
and the Board of Trustees of the state institution would continue
to be as outlined in EC-COI-84-147.

---------------

[1] Even were we to find that, on balance, the Company does not
perform functions that are inherently governmental in nature, the
governmental origin of and governmental control over this entity
would render it a state agency for the purposes of G.L. c. 268A,
s.1(p).

 

End Of Decision