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Opinion

Opinion EC-COI-89-1

Date: 01/11/1989
Organization: State Ethics Commission

A holding company created by the board of trustees of a state institution will be considered an instrumentality of a state agency for the purposes of 268A where the company was created to fulfill a governmental purpose and is substantially controlled by the state institution. 

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. 268A, 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, 

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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 specifically supplemented by other proposed changes in the Company Board's organizational 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

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