CEO 99-13 -- October 27, 1999
CONFLICT OF INTEREST
WHOLLY OWNED SUBSIDIARY OF CORPORATION
IN WHICH CITY COUNCIL MEMBER OWNS
STOCK CONTRACTING WITH CITY
To: Mirella Murphy James, Senior Assistant City Attorney (City of St. Petersburg)
Because a shareholder in a company has a contractual relationship with that business entity, a City Councilman who owns 1,000 shares of stock in a large, publicly traded corporation has a contractual relationship with that corporation. However, because of the language used by the Legislature in defining what is a "business entity" and the ordinary legal relationships attendant to corporate obligations, and because the extraordinary circumstances involving holding companies in Commission opinions CEO 80-25 and CEO 91-24 are not present, the City Councilman does not have a contractual relationship with the corporation=s subsidiary which is Adoing business with@ the City Council, a separate "business entity" under the Code of Ethics from the large, publicly traded corporation. Thus, the City Councilman does not have an employment or contractual relationship with the corporate subsidiary that is prohibited by Section 112.313(7)(a).
Because of the large number of outstanding shares issued by the large, publicly traded corporation and the nominal amount of shares in the parent corporation owned by the City Councilman, the gain or loss, if any, in the value of his stock resulting from his voting on a matter concerning the City=s contract with the corporation=s subsidiary is so remote and speculative that it cannot be said to inure to the special private gain of the City Councilman. Therefore, the City Councilman is not prohibited by Section 112.3143(3), Florida Statutes, from voting on measures affecting the City=s contract with the corporation=s subsidiary.
Does a City=s contracting for the provision of services with a wholly owned subsidiary of a corporation in which a member of the City Council owns a nominal amount of stock create a prohibited conflict of interest for the City Council member?
Under the circumstances presented, your question is answered in the negative.
In your letter of inquiry, you advise that you are requesting this opinion on behalf of Robert Kersteen, a member of the City of St. Petersburg City Council. You advise that Mr. Kersteen was employed by GTE Corporation for approximately 35 years. Just prior to his leaving his employment on April 22, 1999, you advise, Mr. Kersteen elected to receive his pension benefits in a lump sum distribution. A distribution of the lump sum benefits was made on or about July 1, 1999, you advise. Currently, the only relationship that the City Councilman has with the GTE Corporation, you write, is as an owner of less than 1,000 shares of stock in the company. You advise that the 1,000 shares of stock represents a nominal percentage of shares issued by GTE.
You advise further that at its July 1, 1999 meeting, the City Council voted to award a contract to GTE Wireless, a wholly owned subsidiary of GTE. GTE, you write, is a separate and distinct corporate entity from GTE Wireless, with operations independent of its ownership of GTE Wireless stock. Awarding the contract to GTE Wireless was the action that a City Council subcommittee, which previously had met to consider the GTE Wireless contract proposal, had recommended that the City Council take. The subcommittee was chaired by the subject City Councilman, you advise. You also advise that no sealed competitive bid process was involved in the awarding of the subject contract.
In view of the above, you are concerned about whether the City Councilman=s ownership of less than 1,000 shares of GTE corporate stock creates either a voting conflict of interest with regard to matters pertaining to GTE Wireless that come before the City Council or a prohibited conflict of interest under Section 112.313(7)(a), Florida Statutes, by virtue of his contractual relationship with GTE.
Relevant to your inquiry are the following provisions of the Code of Ethics for Public Officers and Employees:
DOING BUSINESS WITH ONE'S AGENCY.--No employee of an agency acting in his or her official capacity as a purchasing agent, or public officer acting in his or her official capacity, shall either directly or indirectly purchase, rent, or lease any realty, goods, or services for his or her own agency from any business entity of which the officer or employee or the officer=s or employee=s spouse or child is an officer, partner, director, or proprietor or in which such officer or employee or the officer=s or employee=s spouse or child, or any combination of them, has a material interest. Nor shall a public officer or employee, acting in a private capacity, rent, lease, or sell any realty, goods, or services to the officer=s or employee=s own agency, if he or she is a state officer or employee, or to any political subdivision or any agency thereof, if he or she is serving as an officer or employee of that political subdivision. The foregoing shall not apply to district offices maintained by legislators when such offices are located in the legislator's place of business. This subsection shall not affect or be construed to prohibit contracts entered into prior to:
(a) October 1, 1975.
(b) Qualification for elective office.
(c) Appointment to public office.
(d) Beginning public employment.
[Sec. 112.313(3), F.S.]
CONFLICTING EMPLOYMENT OR CONTRACTUAL RELATIONSHIP.--No public officer or employee of an agency shall have or hold any employment or contractual relationship with any business entity or any agency which is subject to the regulation of, or is doing business with, an agency of which he or she is an officer or employee . . . ; nor shall an officer or employee of an gency have or hold any employment or contractual relationship that will create a continuing or frequently recurring conflict between his or her private interests and the performance of his or her public duties or that would impede the full and faithful discharge of his or her public duties. [Sec. 112.313(7)(a), F.S.]
VOTING CONFLICTS.--No county, municipal, or other local public officer shall vote in an official capacity upon any measure which inures to his or her special private gain or loss; which he or she knows would inure to the special private gain or loss of any principal by whom the officer is retained or to the parent organization or subsidiary of a corporate principal by which he or she is retained, other than an agency as defined in s. 112.312(3); or which he or she knows would inure to the special private gain or loss of a relative or business associate of the public officer. Such public officer shall, prior to the vote being taken, publicly state to the assembly the nature of the officer=s interest in the matter from which he or she is abstaining from voting and, within 15 days after the vote occurs, disclose the nature of his or her interest as a public record in a memorandum filed with the person responsible for recording the minutes of the meeting, who shall incorporate the memorandum in the minutes. [Section 112.3143(3)(a), Florida Statutes.]
Section 112.313(3), Florida Statutes, prohibits the City Councilman from acting in his official capacity, as a public officer, to purchase, rent, or lease, any realty, goods or services for his agency, from a business entity of which he is an officer, partner, director, or proprietor, or in which he owns more than a five percent interest, and from selling or leasing any realty, goods, or services to his agency in his private capacity. One is deemed to be acting in his or her official capacity to purchase or lease goods, services, or realty when a body or board of which he or she is a member acts to purchase or lease such goods, services, or realty. See CEO 76 213 and CEO 95-13. One also is deemed to be "acting in a private capacity" to sell or lease goods, services, or realty to his or her agency or political subdivision when a corporation of which he or she is an officer or a director, or in which he or she owns a material interest, sells or leases to his or her agency. See, for example, CEO 82 51 and CEO 95-13. Because the Councilman is not an officer, partner, director, or proprietor of either GTE Corporation or GTE Wireless, and because the Councilman=s ownership of 1,000 shares of GTE Corporation stock represents approximately .0001 of either the shares outstanding or of all of the shares of common stock issued by GTE Corporation, which means that he does not own a material interest in either corporation, we find that Section 112.313(3) does not apply.
Section 112.313(7)(a), Florida Statutes, also prohibits the City Councilman from having a contractual relationship with a business entity if it is doing business with or is subject to the regulation of his agency, the City Council, or if it creates a continuing or frequently recurring conflict between his private interests and the performance of his public duties or an impediment to the full and faithful discharge of his public duties. For purposes of Section 112.313(7)(a), the phrase "conflict of interest" is defined in the Code of Ethics to mean "a situation in which regard for a private interest tends to lead to disregard of a public duty of interest." Section 112.312(8), Florida Statutes.
Referencing Douglas v. State Bank of Orlando, 82 So. 503 (Fla. 1919), 7 Fla. Jur. Corporations s. 24, and 18 Am. Jur. 2d Corporations ss. 84 and 85, and the cases cited therein, in CEO 79-16, we found that a prohibited conflict of interest would be created were a police officer to own shares of stock in a corporation which was a licensed pawn outlet subject to the regulation of his law enforcement agency. We noted there that a corporate charter constitutes a contract between a corporation and its stockholders. Thus, we found that a shareholder in a company has a contractual relationship with that business entity. See also CEO 80-11 and CEO 83-48. Therefore, we find that the City Councilman has a contractual relationship with the GTE Corporation by virtue of his owning 1,000 shares of stock in the corporation.
However, in many cases, the application of this statute boils down to (1) identifying the "business entity" with which the official has an employment or contractual relationship and (2) to identifying the "business entity" that is doing business with the governmental agency, in order to determine whether the official's employment or contractual relationship is with the same "business entity" that is doing business with his or her agency. The Legislature has provided the following definition of "business entity," in Section 112.312(5), Florida Statutes:
'Business entity' means any corporation, partnership, limited partnership, proprietorship, firm, enterprise, franchise, association, self-employed individual, or trust, whether fictitiously named or not, doing business in this state.
Therefore, the question presented here is whether, in the context of GTE Corporation and its subsidiary corporation, GTE Wireless, the language "any corporation . . . doing business in this state" means that each separate parent or subsidiary corporation constitutes an individual "business entity," or means that GTE Corporation and its various subsidiaries together constitute one "business entity," so that if the City Councilman has a contractual relationship with GTE Corporation he thereby has that same relationship with each of its subsidiaries, including GTE Wireless.
We have rendered several opinions interpreting this definition and the prohibition of Section 112.313(7)(a) in the context of parent and subsidiary corporations. In CEO 78-20 (question 3), for example, we stated:
As each corporation in this state constitutes a separate business entity under this definition, for purposes of the Code of Ethics, we perceive a distinction between the engineering firm and its wholly owned subsidiary, the management company [that was managing the liquidation of a partnership in which the school board member was a limited partner]. Thus, the management company with which you do have a contractual relationship is not the business entity which would be doing business with the school board if the board were to retain the services of the engineering firm.
A year later, we referred to this opinion in concluding that a senior vice-president of a trust company that was a wholly owned subsidiary of a banking corporation had an employment or contractual relationship with the trust company and not with the parent organization. See CEO 79-55.
The following year, in CEO 80-25, we were confronted with a situation where a county commissioner was an officer and stockholder in a corporation that was merely a holding company that owned only the stock of a subsidiary corporation, although it was anticipated that the corporation would hold other assets in the future. The wholly owned subsidiary was seeking to contract with the county, so the question for our determination was whether the commissioner had a contractual relationship with the subsidiary corporation. We concluded that he did by virtue of his ownership interest in the parent company that served merely as a holding company over the wholly owned subsidiary. We noted,
[o]rdinarily, a corporation may own part or all of the stock of another corporation, and each is treated as a separate legal entity.
While recognizing that in CEO 78-20 we had distinguished the engineering firm and its wholly owned subsidiary as separate business entities, we observed that the subject commissioner was an owner of a corporation which, at the time, served merely as a holding company holding only one asset--the stock of the subsidiary corporation--and the parent corporation, as a holding company, was empowered to dictate the policies of its single, wholly owned subsidiary. We indicated that we were not attempting to "pierce the corporate veil" in order to impose financial liabilities upon corporate shareholders, but, rather, we were determining the ethical responsibilities of public officers and employees under a conflict of interest statute:
We agree that this [the corporate] form has a legitimate function within the economic sphere, but we do believe that a public officer or employee should not be able to disregard his ethical responsibilities and the public's trust simply by changing the business form under which he operates or in which he invests.
Although there clearly is language in CEO 80-25 that indicates that we no longer would observe the corporate form or distinguish between parent and subsidiary entities in deciding what is a "business entity," a line of subsequent opinions rendered by us did not take this approach, but instead continued to distinguish interrelated corporations as separate business entities. For example, in CEO 80-89, we again distinguished between parent and subsidiary corporations in concluding that a county housing finance authority member was not prohibited from serving as a loan officer and a vice president of a bank that was a subsidiary of a second bank that also owned a third bank that had entered into a trust indenture with the authority. In CEO 82-78, we concluded that a mayor could be employed as a salesman for a corporation, where the owner of the corporation was a partner in a limited partnership that held the cable television franchise granted by the mayor's city. And in CEO 83-11, in response to concerns expressed by school board advisory committee members who were employed by large firms or corporations consisting of subsidiaries which might have been doing business with the school district, we again noted that we previously had treated each corporate subsidiary as a separate business entity in applying the Code of Ethics. In CEO 85-31, we referred to this line of opinions in concluding that a housing finance authority member was not prohibited from being a broker employed in the local office of a national brokerage firm which through an extensive succession of subsidiary corporations and partnerships, proposed to become a sixty percent general partner in a limited partnership that was seeking authority approval for bonds to finance a housing project. Thereafter, in CEO 86-12, we referred to CEO 80-89 and CEO 82-78 in concluding that a mosquito district commissioner was not prohibited from serving as the president of a Florida insurance corporation or from owning an insurance agency that was a wholly owned subsidiary of the corporation, where a second subsidiary of the corporation was an insurance agency which wrote the general liability and property damage insurance policies for the district. We observed that there was no indication that the insurance corporation was simply a holding company and did not engage in any business other than managing its subsidiaries. We also observed that the Florida insurance corporation in turn was owned by a national, publicly held insurance company.
Then, in CEO 86-36, due to a city utilities commission member=s receipt of a pension from a large, publicly held corporation with which he was employed for 40 years, as well as his ownership of stock in the corporation, we found that a contractual relationship existed between the member and the corporation, which was doing business with the utilities commission through its sale of electrical items to the commission. We noted that if it were a corporate subsidiary that was doing business with the utilities commission, rather than its parent corporation, the member would not have a contractual relationship with a business entity doing business with his agency, because we previously had treated each corporate subsidiary as a separate Abusiness entity@ in applying the Code of Ethics. See also CEO 90-28 (pension board trustee serving as director of bank owned by parent corporation (a holding company), where another subsidiary corporation had contracted to provide investment services with the pension board); CEO 92-9 (city paramedics and EMT's could work part-time for an ambulance service subsidiary of a holding company owning a hospital); and CEO 93-11 (city commissioner was not prohibited from being employed by a corporation that, through a subsidiary corporation, owned 80% of the city's cable television franchisee).
CEO 80-25 has been cited by us as direct precedent only in one other case where a public official had an ownership interest in a parent company that was a "holding company." In that opinion, CEO 91-24, we concluded that the State Comptroller would have a contractual relationship with the bank holding companies in which he inherited shares of stock, as well as a contractual relationship with the corporate banking subsidiaries of each company. Because those subsidiaries were regulated by the Comptroller, we found that the Comptroller's continued ownership of the stock would place him in a position where he had a contractual relationship with business entities subject to the regulation of his agency, in violation of Section 112.313(7)(a).
On the other hand, in CEO 86-2 (question 3), we advised that a management company owned by a city council member could contract for the management of a hotel with a partnership which had renovated the hotel with industrial revenue bond financing from the city. There, we specifically distinguished CEO 80-25 on the ground that "the management company apparently would not be formed in order to allow the subject council member to have an ownership interest in the partnership which was renovating the hotel."
As we have already indicated, the other requirement of Section 112.313(7)(a) is that the business entity be "doing business with" the official's agency, that is, that the business entity be doing business with the City in this case. We previously have interpreted this phrase as follows:
We generally have advised that a business entity is doing business with an agency where the parties have entered into a lease, contract, or other type of legal arrangement under which one party would have a cause of action against the other in the event of a default or breach. [CEO 86-2].
In the absence of circumstances enabling the "corporate veil" to be pierced, the liability of one corporation under its leases, contracts, or other types of legal arrangement is limited to the corporation and does not extend to its stockholders. Under the circumstances present here, it appears that the obligations of GTE Wireless to the City would be considered to be those of GTE Wireless and not those of the GTE Corporation, which apparently was not a signatory to any contract between GTE Wireless and the City. Similarly, the GTE Corporation would not appear to have a cause of action against the City if there were a default on the City=s obligations under the contract.
Except under unusual circumstances, contractual relationships with a corporation result in liabilities only for that corporation and not for the shareholders of the corporation, whether the shareholders are individuals or other corporations. Similarly, because corporations are formed to limit liability, a "doing business" relationship with a corporation ordinarily would be with the corporation, as an entity, and not with the shareholders of the corporation. Therefore, we find that by phrasing the prohibition of Section 112.313(7)(a) in terms of a "business entity," an "employment or contractual relationship" with the business entity, and a "doing business" relationship between the business entity and the governmental agency, the Legislature intended under ordinary circumstances to limit an official=s relationships directly with a corporation and not with the stockholder(s) of that corporation, even if the stockholder is a parent corporation. Our opinions accord with this view.
The extraordinary circumstances confronted by us in CEO 80-25 and CEO 91-24 involved public officials' ownership of holding companies that in turn owned subsidiary corporations that would have been either doing business with or would have been regulated by the officials' agencies. In contrast, here, while the GTE Corporation, as one of the largest telecommunications companies in the world offering local and wireless services in 29 states, long-distance services and Internet access in all 50 states, government defense communications systems and equipment, directories and telecommunications-based information services, and aircraft-passenger telecommunications, through its many business units located throughout the United States, with operations that also extend throughout the world, may appear to fit the legal definition of a Aholding company,@ it is not clear that it confines its activities to just owning stock in and supervising management of other companies, unlike the holding companies involved in CEO 80-25 and CEO 91-24. Furthermore, GTE Corporation appears to be an active corporation--not merely a passive holding company--and there is no possibility here that the City Councilman has sought to avoid his ethical obligations by simply changing the business form under which he invests or GTE Corporation operates.
Accordingly, because of the language used by the Legislature in defining what is a "business entity" and the ordinary legal relationships attendant to corporate obligations, and because the extraordinary circumstances involving the holding companies in opinions CEO 80-25 and CEO 91-24 are not present here, we are of the opinion that the City Councilman does not have a contractual relationship with GTE Wireless, which is doing business with the City Council. We find that the City Councilman has a contractual relationship with GTE Corporation, that GTE Wireless is a separate "business entity" under the Code of Ethics from GTE Corporation, that GTE Wireless, rather than the GTE Corporation, is "doing business with" the City, and that the City Councilman does not have an employment or contractual relationship with GTE Wireless that is prohibited by Section 112.313(7)(a).
Would a voting conflict of interest be created were a member of a City Council, who owns a nominal amount of stock in a corporation whose subsidiary has entered into a contract with the City for the provision of services, to vote on matters relating to the City=s contract with the subsidiary?
Under the circumstances presented, your question is answered in the negative.
Section 112.3143(3), Florida Statutes, prohibits local public officers from voting in certain situations, including when the matter before them inures to either their special private gain or loss or to the special private gain or loss of a principal by whom they are retained. In several opinions, we have suggested that a voting conflict could be created where the interests of individual clients are so intertwined with those of a corporation, such as where the individual is the sole owner of the corporation--that a measure which inured to the gain of the corporation would also inure to the gain of the individual. See CEO 98-15, CEO 97-4, and CEO 91-20, Question 3. On the other hand, we also have advised that where the effect of the vote was remote and speculative and did not involve clearly identified, tangible economic interests, no voting conflict was created. See CEO 97-4.
In our view, the City Councilman was not and is not prohibited from voting on matters relating to the contract between the City and GTE Wireless. Because of the large number of outstanding shares issued by the GTE Corporation and the nominal amount of shares in the parent corporation owned by the City Councilman, the gain or loss, if any, in the value of his stock resulting from the City=s contract with GTE Corporation=s subsidiary is so remote and so speculative that we cannot say that it inures to the special private gain of the City Councilman.
Accordingly, we find that under the circumstances presented, the City Councilman is not prohibited by Section 112.3143(3), Florida Statutes, from voting on measures affecting the City=s contract with GTE Wireless.
ORDERED by the State of Florida Commission on Ethics meeting in public session on October 21, 1999 and RENDERED this 27th day of October, 1999.
Peter M. Dunbar
1The GTE Corporation (AGTE@) Internet web site (www.gte.com)indicates that GTE is made up of many business units located throughout the United States, with operations that extend throughout the world. At least four (4) of its units (GTE Data Services, GTE Leasing, GTE Telecommunication Services, and GTE Wireless) are incorporated in Florida. It offers local and wireless service in 29 states and long-distance and Internet access in all 50 states. It also provides government defense communications systems and equipment, directories and telecommunications-based information services, and aircraft-passenger telecommunications.
2The GTE Corporation Internet web site (www.gte.com)indicates that there are 976,287,000 shares of stock outstanding. One of its ACondensed Consolidated Balance Sheets@ also indicates that 997,807,758 shares of common stock have been issued by the company.
3The term Amaterial interest@ is defined at Section 112.312((15), Florida Statutes, to mean Adirect or indirect ownership of more than 5 percent of the total assets or capitol stock of any business entity. . .@
4We noted in CEO 80-25 that a "holding company" has been defined as:
A company that confines its activities to owning stock in, and supervising management of, other companies. A holding company usually owns a controlling interest in (more than 50 percent of the voting stock) the companies whose stock it holds. A corporation that controls the voting power of other individual corporations for the purpose of united action. [Black's Law Dictionary (5th Rev. ed. 1979), p. 658.]
[A] supercorporation which owns or at least controls such a dominant interest in one or more other corporations that it is enabled to dictate their policies through voting power, or which is in position to control or materially to influence the management of one or more companies by virtue, in part at least, of its ownership of securities in the other company or companies. [18 Am. Jur. 2d Corporations s. 12.]
Furthermore, in North American Co. v. Securities and Exchange Commission, 66 S. Ct. 785 (1946), while considering the constitutionality of a provision in the Public Utility Holding Company Act of 1935, the U.S. Supreme Court noted:
The dominant characteristic of a holding company is the ownership of securities by which it is possible to control or substantially to influence the policies and management of one or more operating companies in a particular field of enterprise. To be sure, other devices may be utilized to effectuate control, such as voting trusts, interlocking directors and officers, the control of proxies, management contracts and the like. But the concentrated ownership of voting securities is the prime method of achieving control, constituting a more fundamental part of holding companies than of other types of business. [Id., at p. 794.]
However, we ultimately found no prohibited conflict existed as long as the conditions of the exemption contained in Section 112.313(12)(b), Florida Statutes, were met.