September 11, 1991

FACTS:

Page 354

The Company is a non-profit, tax exempt holding company which
was created subsequent to a resolution passed by the trustees of
a state institution. The Company is comprised of four subsidiary
non-profit entities. The Company derives most of its income from
its programs, from its start-up loans and from fundraising. At
present, around three-fourths of the Company's indebtedness
consists of commercial bank loans and around one fourth is from
state institution

Page 355

loans. The current Board of Directors has nine voting members and
two, ex-officio non-voting members. Three of the nine voting
directors and one of the two ex-officio members are individuals
associated with the state institution.

The Commission has twice determined, prior to this opinion
request, that the Company is a state instrumentality, subject to
the conflict of interest law, G.L. c. 268A. See, EC-COI-84-147;
89-1. In EC-COI-84-14
7, the Commission based its jurisdictional
conclusion on facts that: (1) the Company was created pursuant to
a resolution passed by the trustees of the state institution; (2)
the Company performed a governmental function in searching means
to raise revenues for the state institution to comply with that
entity's legislative mandate to finance, manage and protect the
economic viability of the institution; and (3) the Company was
subject to substantial state control because the selection process
and the composition of its board was dominated by directors with
government (state) affiliations.

The sequel opinion, EC-COI-89-1, presented similar facts in
addition to certain proposed changes to the Company's
organizational structure. In particular, the proposed changes
related to the voting requirements of certain board actions and a
requirement that a minimum of one-third but less than one half of
the Company's voting directors be individuals affiliated with the
state institution. In evaluating the facts of 89-1, the Commission
found the stimulus for the creation of the Company and its mandate
to raise funds remained governmental in nature - similar to the
conclusions found in 84-147. And, inasmuch as the proposed
Company's organizational changes still resulted in substantial
control by state-affiliated directors, the sum of these factors
rendered the Company a public entity for the purposes of c. 268A.

The Company presently requests this opinion on changed facts.
The Company has amended its by-laws regarding a provision
pertaining to the number and qualifications of the Board of
Directors.[1] [Text of the amended version with footnote deleted]

Of significance to this opinion is the fact that the new
by-law changes the size of the Board of Directors and alters the
requirement that a minimum number of voting directors be state
institution-affiliated individuals. In the new by-law, one third
or less of the voting directors may be state-affiliated.


QUESTION:


Whether, in view of the above organizational changes to its
by-laws, would the Company continue to be a state agency for the
purposes of the conflict of interest law, G.L. c. 268A?



ANSWER:


No.


DISCUSSION:


Prior to this opinion, the Ethics Commission concluded on two
occasions that the Company was a "state agency" under the conflict
of interest law, G.L. c. 268A, s.1(p).[2] See, EC-COI-84-147; 89-1.
In those opinions, the jurisdictional status of the Company was
evaluated in light of criteria drawn from established Commission
precedent.

The Commission has consistently stated that the application
of the conflict law cannot be conditioned solely on an entity's
organizational status. EC-COI-88-19 (organization's corporate
structure is not sufficient to exempt it from definition of a
municipal agency); EC-COI-88-24; In the Matter of Louis L. Logan,
1981 SEC 40, 45. See also, EC-COI-84-147 (the Company's non-profit
corporate structure did not exempt it from being a state entity
under the conflict law).

Therefore, the Company must be examined under the four factors
the Commission has developed to determine whether an organization
is a public entity under c. 268A. These factors are:

(1) the means by which the entity was created (e.g.,
legislative or administrative action);

(2) the entity's performance of some essentially governmental
function;

(3) whether the entity receives and/or expends public funds;
and

(4) the extent of control and supervision exercised by
government officials or agencies over the entity. See, EC-COI-
88-2; 85-22; 84-65
.

The Commission recently applied these four factors in two
opinions. In EC-COI-90-3, the Commission found a non-profit
foundation organized to support a state college was a state entity
for the purposes of c. 268A. The Commission determined that the
foundation was: (i) created to further the legislative purpose of
a state college; (ii) performing a governmental function in raising
revenues to support a state institution; (iii) using state
resources and funds for its operation; and (iv) subject to
potential and actual control by state affiliated board members.

In EC-COI-90-7, the Commission reviewed the status of a state
agency's retirement fund board. The Commission concluded that the
board was: (i) a governmentally created entity springing from the
trust agreement between a state agency and a union under the broad
legislative authority accorded to that state agency; (ii) created
to conduct a public function - the administration of pensions for
state employees; (iii) significantly funded from or on behalf of
a state agency; and (iv) governed by a board of directors composed
of a plurality of officials from the state agency and who were
accountable to that state agency.

Page 356

Presently, we reconsider the Company's status under c. 268A
in view of recent changes made to its bylaws. In our view, the
impetus for the creation of the nonprofit holding company remains
governmental in nature inasmuch as the creation of the corporation,
as described in 84-147 and 89-1, came about because of the
resolution passed by the board of trustees of the state
institution. See, EC-COI-88-24; 89-24. We would note, however, that
with the passage of time, and compositional changes in the
corporation, the so called "impetus" factor diminishes in
significance.

With respect to the second factor, while the function of the
holding company has been clarified by the April 5, 1989
resolution passed by its Board of Directors, it does not alter our conclusions
drawn in 89-1. The resolution states that the Company is a separate
entity operating solely as a non-profit corporation and not under
the umbrella of the state institution. The resolution does not
change the nature of the holding company's corporate purpose (to
promote the purposes of the state institution), nor change the
statutory language which gives the state institution's board of
trustees responsibility for protecting the financial viability of
the state institution.

The Company's financing is derived from both private and
public funds. While start-up funds for the Company originally came
from the state institution, current Company financing is largely
derived from commercial bank loans which do not involve the state
institution. Based upon this fact, we conclude that the third
Commission factor (whether the entity receives and/or expends
public funds) would be met minimally, if at all.

While the four Commission jurisdiction factors are relevant,
the pivotal question presented in this reconsideration is whether
state-affiliated institution members will retain control over the
Company's operations under the current corporate by-laws. We
conclude that the present organizational changes to the Company's
by-laws significantly alter the nature and extent of governmental
control exercisable over that entity. These changes lead us to a
different result under the fourth jurisdictional factor inasmuch
as governmentally affiliated board members are not now assured a
position of control over the Company's actions.

Our conclusion is based on the fact that the board of
directors may now be made up of a minimum of eight and a maximum
of eleven voting members. Of those voting directors,
state-affiliated directors[3] may comprise one-third or less of the
total number of voting directors. This by-law provision
significantly impacts both the corporate organizational structure
and its functional operation. First, there is no requirement that
a minimum number of state-affiliated individuals serve as
directors. Second, the ceiling placed on the number of
state-affiliated voting directors is one-third or less of the total
number of voting directors. State-affiliated voting directors thus
would have reduced control, both actual and potential, over board
decisions. The current by-law reduces the possibility of state
employees' voting as a significant block to the Board's action and
in their potential domination of a quorum of any particular board
meeting.

We conclude the current Company's by-law effectuates more than
mere compositional changes in the board of directors. EC-COI-84-
64; 88-19
. The potential for control of the Company by state
employees is nearly eliminated since all board actions must be made
by a majority of voting directors constituting a valid quorum. See,
EC-COI-90-3
.

In weighing all the factors as applied to the Company, above,
we conclude given the lack of public funding currently available
to the Company, and the lack of public control, the Company is now
properly deemed to be a private, non-public entity falling outside
of the jurisdiction of c. 268A.[4]

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

[1] The Amendment was adopted by the Board of Directors on
March 22, 1991.

[2] "State agency," 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. 268A, s.1(p).

[3] "State affiliated" directors as defined in Footnote 2
above.

[4] The possibility exists that a Company Board consisting of
nine voting members could have three state affiliated voting
directors, all of whom are counted as part of a five-member quorum.
The three state-affiliated directors would then comprise more than
one-half of that particular quorum. We conclude that this potential
scenario does not reach the threshold of continuing or substantial
governmental control or supervision exercised by the public
employees as evidenced in opinions EC-COI-90-3 and 90-7. The type
of governmental control over the Company in this instance must be
more than a fortuitous circumstance. If, however, the Commission
were to review facts or circumstances pointing to a continued
pattern of domination or control by state affiliated directors,
this jurisdictional conclusion may not apply.

End Of Decision