CEO 93-32 -- October 14, 1993
CONFLICT OF INTEREST; VOTING/PARTICIPATION CONFLICT
EDUCATIONAL FACILITIES AUTHORITY MEMBER VOTING ON
AND PARTICIPATING IN MEASURES AFFECTING PERSON ORENTITY TO WHOM MEMBER SOLD STOCK
To: John Kraft, Member, Leon County Educational Facilities Authority (Tallahassee)
A voting/participation conflict did not exist under Section 112.3143, Florida Statutes, where a member of an educational facilities authority voted on or participated in measures concerning a residence hall project and the acquisition of townhouses owned by a businessman where the member, the businessman and his wife, and the businessman's company all held stock in the same company at the time of the votes/participation and where the businessman worked as a consultant to the backers of the residence hall project. The measures were not such that they would inure to the special private gain of the member personally; the particular facts of the situation were such that the businessman and his company were not "business associates" of the member; and gain to the backers of the residence hall project would not, per se, constitute gain to the backers' consultant.
In addition, a prohibited conflict of interest under Section 112.313(7)(a), Florida Statutes, did not exist under the contractual relationships of the member set forth in this opinion. CEO's 77-59, 77-142, 79-33, and 92-27 and In re WALTER STOTESBURY, 14 F.A.L.R. 1017 (Fla. Comm. on Ethics 1991) are referenced.
Did voting/participation conflicts of interest exist under Sections 112.3143(3)(a) and 112.3143(4), Florida Statutes, where you, a member of the Leon County Educational Facilities Authority, voted on or participated in measures affecting persons or a business entity to whom you had sold stock?
Your question is answered below as to each of the following measures:
A. October 1, 1990 consensus of Authority members to 'read and study documentation and visit townhouse project.'
B. October 8, 1990 resolution authorizing issuance of bonds not to exceed $3.5 million to finance acquisition of townhouses.
C. October 15, 1990 resolution approving form of trust agreement for closing the purchase of the townhouses.
D. December 27, 1990 resolution authorizing issuance of revenue bonds not to exceed $3.9 million for acquisition of townhouses.
E. March 18, 1991 resolution approving 1st supplement to trust agreement and granting a 62-day extension for closing on the townhouses.
F. April 29, 1991 initial inducement resolution for residence hall project.
G. May 20, 1991 resolution approving form of 2nd supplement to trust agreement and agreeing to a 60-day extension for closing on the townhouses.
H. June 10, 1991 resolution authorizing issuance of bonds not to exceed $3.1 million for acquisition of townhouses.
I. July 15, 1991 resolution authorizing issuance of bonds for residence hall project.
J. July 22, 1991 motion to approve an additional 90-day extension for closing on the townhouses.
K. July 22, 1991 resolution amending the July 15, 1991 resolution authorizing issuance of bonds for residence hall project.
L. July 24, 1991 initial execution of lease to the Authority; residence hall project transaction closes.
M. October 5, 1992 initial inducement resolution for businessman's reapplication to Authority to purchase townhouses.
N. October 12, 1992 resolution authorizing issuance of bonds not to exceed $4 million to purchase the townhouses.
O. November 2, 1992 vote to approve four recommendations by Authority's general counsel pertaining to oversight of residence hall project.
P. January 15, 1993 vote to approve additional $545,535.00 additional residence hall project cost at no cost to the Authority.
Q. April 19, 1993 resolution authorizing closing on townhouses.
R. April 30, 1993 closing of transaction on the 82 townhouse units.
S. August 13, 1993 resolution authorizing amendment to residence hall project trust agreement.
By your letter of inquiry, additional information provided by you to our staff in a subsequent letter, telephone conversations between you and our staff and between an attorney for the Authority and our staff, and a meeting between you, an attorney for the Authority, and our staff, we are advised that you serve as a member of the Leon County Educational Facilities Authority, having been appointed on July 17, 1990, and that the Authority was created by resolution of the Leon County Commission on July 17, 1990, pursuant to Chapter 243, Part II, Florida Statutes. You describe the Authority as an enabling body to review qualified, prescreened projects that would benefit public institutions of higher learning, and you advise that a project cannot be approved unless it will benefit students and will have a positive cash flow to retire the bonds issued by the Authority to finance the project. We are advised further that it is your position that you are a "public officer" as defined in Section 112.313(1), Florida Statutes.
At the time of your appointment, you advise, you owned shares in a public corporation (incorporated in the state of Delaware) that recycles asphalt roofing material and which has offered and sold stock to raise capital. In addition, you advise that you personally have been responsible for almost half of the corporation's total stock sales, with approximately 110 of the approximately 200 stock purchasers purchasing due to your contact with them. Currently, you advise, the corporation has approximately 750 shareholders with an estimated 4,680,000 shares outstanding; you own 84,512 shares of the corporation's common stock (an ownership position of 1.81%). You advise further that you owned 83,512 shares on January 6, 1993 and 71,512 shares on May 7, 1991.
Currently, you are "Director of Corporate Development" for the corporation and are in charge of its national sales program for a recycled pothole patching material, you relate. You advise that you are not now, nor have you ever been, an officer, principal, director, or board member of the corporation. From April 1989 until September 1991, you worked on a consulting basis with the corporation, involved with developing public relations material and national print media contacts, with recycling industry representation, with new site selection projects, and with raising capital through two private stock offerings conducted by the corporation, you advise. From September 1991 until the present, you have been a salaried employee of the corporation, with the exception of the period of time when the corporation engaged in an initial public stock offering from December 1, 1992 until March 15, 1993, during which time you were on official leave of absence from the corporation. During the leave of absence, you worked as a licensed stock broker for a securities underwriter for the purpose of selling public shares of the corporation's common stock in its initial public offering (IPO). Further, you advise, following the conclusion of the IPO you resigned from the underwriter and returned to your position at the corporation. You maintain that this hiatus from your position at the corporation was undertaken so that "there would be no conflict between an employee of the corporation and a procuring broker of record offering the corporation's shares in an IPO."
You relate that you had mentioned the corporation and its recycling activities to a businessman on several occasions in 1989 and 1990, that you contacted the businessman in March 1990 to inform him that the corporation would conduct a private stock offering at $2 per share, that you also contacted over 400 other people about this offering, that the offering concluded in June 1990, and that you raised $533,004 of the $860,000 total raised in stock sales from this offering. However, you relate, the businessman did not invest in the corporation at that time. In late 1990, you advise, the corporation commenced a second private stock offering at $3 per share, and you again contacted the businessman to see if he had an interest in participating in this stock offering. In addition, during the winter and spring of 1991, this offering continued (closing in June 1991), and on May 7, 1991, a company believed by you to be controlled by the businessman acquired 3,000 shares of the corporation's stock for $3 per share ($9,000), for which you received a $450 fee/commission from the corporation for this sale to the company, you advise. You raised $1,026,000 of the $2,400,000 total raised under this offering, you advise. Essentially, you relate, you worked for over six months to raise the $1,026,000, contacting more than 500 potential investors, with the individual investing $9,000 of the total $2,400,000. At the time of the purchase, you relate, the 3,000 shares of the 3,927,898 shares outstanding represented .076% of available stock of the corporation.
Subsequently, you advise, you contacted this same businessman regarding acquiring additional stock in the corporation pursuant to the public offering. On January 6, 1993, you advise, the businessman (jointly with his wife) purchased 1,000 shares of the corporation's common stock at $5 per share ($5,000 stock purchase), which represented .021% of the outstanding shares. You relate that the price paid for the additional shares was modest and that for your services in connection with this second sale of stock you were paid $140.00 by the underwriter. In addition, you advise that during this offering you sold 309,196 shares, raising $1,545,980, from which you received a total commission of $43,733. You advise that in both of these sales you acted as "the procuring broker."
Further, during the fall of 1990, the businessman (acting for business entities either wholly or partially owned or controlled by him) proposed to the Authority that it acquire 84 townhouse units owned by limited partnerships of which the businessman (individually or through business entities he controlled) was the general partner. The Authority considered the proposal and voted in favor of acquiring the units; however, difficulties in financing prevented the consummation of the acquisition of the units by the Authority. Later, you advise, the Authority voted to finance a private residence hall project, you voted in favor of the financing, the financing was consummated, and the Authority holds a long-term lease on the residence hall project. You advise that at the time of the votes regarding the residence hall project, the businessman served as a consultant to another individual who is a local developer, a corporation, and companies of the local developer, with respect to the proposal for the Authority to finance the project.
At the time you voted on the matters regarding the townhouse units, you advise, you did not have a personal knowledge of the legal entities which owned the units. However, you relate further, counsel to the Authority and the businessman made certain comments and representations to Authority members during the course of the Authority's consideration of the businessman's townhouse proposals to the Authority and, based upon those representations and reports, you understood that one or more limited partnerships owned the land, improvements, and personal property comprising the units and that the businessman (personally or via entities owned or controlled by him) served as the general partner of those limited partnerships. You also advise that it is your position that neither the businessman nor any of his entities were carrying on a business enterprise with you as set forth under the definition of "business associate," that the ownership of the corporation's stock by the businessman or by entities controlled by him constituted very minor equity positions in the corporation, that during the time period that the businessman was a shareholder (3,000 shares) in the corporation he was one of approximately 350 other stockholders in the corporation, and that he had but a .076% ownership position in the corporation, thus playing no role in management, operations, or business policy matters for the corporation. In addition, you advise that since March 5, 1993, the corporation has been publicly listed on the NASDAQ Exchange (Small Cap Section).
In the spring of 1993, the businessman again approached the Authority regarding 82 of the aforementioned townhouse units, the Authority voted to acquire the 82 units (with you voting for acquisition), and the Authority did acquire the units on April 30, 1993, you advise. There was never a written agreement between the Authority and the sellers of the 82 townhouse units, you relate. Rather, the sellers made a written application to the Authority outlining the proposed transaction, its financing structure, etc., and the Authority voted on April 19, 1993 to accept the application and close on the transaction, with the transaction closing on April 30, 1993.
Regarding the first townhouse units proposal, bonds were issued by the Authority but were refunded because the transaction did not close due to a failure to secure financing. For the second townhouse project, which closed, the limited partnerships were issued bonds by the Authority subordinate to Authority bonds issued to the senior lenders/lienholders on the project. For both townhouse projects, you advise, the businessman and/or his partnerships stood to gain from the Authority's acquisition of the units by being paid a cash purchase price.
In addition to voting, you advise, you took part in discussions of these projects (townhouse projects and residence hall project) at public meetings of the Authority. After the Authority took action on these projects, in your capacity as Chairman of the Authority you carried out the Authority's decisions by taking part in the closings. You relate that you had no communications with members of the Authority regarding either of these projects, except in public meetings of the Authority. In addition, you advise that you voted in favor of the projects and that your comments during discussions of these projects at Authority meetings were generally supportive of the projects and directed toward making the projects stronger from the Authority's standpoint.
Sections 112.3143(3)(a) and 112.3143(4), Florida Statutes, are the portions of the voting conflicts law applicable to your inquiry. Those sections provide:
(3)(a) No county, municipal, or other local public officer shall vote in his official capacity upon any measure which would inure to his special private gain; which he knows would inure to the special private gain of any principal by whom he is retained or to the parent organization or subsidiary of a corporate principal by which he is retained, other than an agency as defined in s. 112.312(2); or which he knows would inure to the special private gain 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 his interest in the matter from which he is abstaining from voting and, within 15 days after the vote occurs, disclose the nature of his 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.
(4) No appointed public officer shall participate in any matter which would inure to his special private gain; which he knows would inure to the special private gain of any principal by whom he is retained or to the parent organization or subsidiary of a corporate principal by which he is retained; or which he knows would inure to the special private gain of a relative or business associate of the public officer, without first disclosing the nature of his interest in the matter.
(a) Such disclosure, indicating the nature of the conflict, shall be made in a written memorandum filed with the person responsible for recording the minutes of the meeting, prior to the meeting in which consideration of the matter will take place, and shall be incorporated into the minutes. Any such memorandum shall become a public record upon filing, shall immediately be provided to the other members of the agency, and shall be read publicly at the next meeting held subsequent to the filing of this written memorandum.
(b) In the event that disclosure has not been made prior to the meeting or that any conflict is unknown prior to the meeting, the disclosure shall be made orally at the meeting when it becomes known that a conflict exists. A written memorandum disclosing the nature of the conflict shall then be filed within 15 days after the oral disclosure with the person responsible for recording the minutes of the meeting and shall be incorporated into the minutes of the meeting at which the oral disclosure was made. Any such memorandum shall become a public record upon filing, shall immediately be provided to the other members of the agency, and shall be read publicly at the next meeting held subsequent to the filing of this written memorandum.
(c) For purposes of this subsection, the term 'participate' means any attempt to influence the decision by oral or written communication, whether made by the officer or at his direction.
"Business associate" is defined by Section 112.312(4), Florida Statutes, to mean
any person or entity engaged in or carrying on a business enterprise with a public officer, public employee, or candidate as a partner, joint venturer, corporate shareholder where the shares of such corporation are not listed on any national or regional stock exchange, or coowner of property.
These prohibitions concern voting and participation by local public officers regarding measures which would inure to the special private gain of the officer or to the special private gain of certain enumerated persons or entities. Gain to parent organizations or subsidiaries of corporate principals, relatives, or "business associates" was not within the scope of these prohibitions until October 1, 1991, the effective date of Chapter 91-85, Laws of Florida.
From the scenario set forth in this opinion, we do not find that any of the measures set forth above would have inured to your own special private gain. Further, from that scenario, we do not find that any of the persons or entities to whom gain would have inured from the measures were your "principal" or "relative" within the meaning of the prohibitions. Therefore, we must determine whether any of the measures inured to the special private gain of any "business associates" of yours and, in so doing, we must analyze the meaning of the term "business associate."
To begin with, we find that your voting on or participating in the measures set out in "A" through "L" above were not violative of either prohibition because the votes or participation, as represented by you, occurred prior to October 1, 1991 (the effective date of the law which added "business associate" to the prohibitions).
We find that the October 5, 1992 initial inducement resolution for the businessman's reapplication to the Authority to purchase his townhouses (measure "M"), the October 12, 1992 resolution authorizing issuance of bonds not to exceed $4 million to purchase the townhouses (measure "N"), and the April 19, 1993 resolution authorizing closing on the townhouses (measure "Q") are measures which would have inured to the special private gain of the businessman and, therefore, that you would have been prohibited from voting on these measures and would have been subject to the declaration and filing requirements of Section 112.3143(3)(a) were the businessman a "business associate" of yours at the time of the votes.
We have not previously had occasion to address the meaning of the term "business associate" in the context of an advisory opinion. The change in the statute to incorporate "business associate" was prompted by our decisions concluding that the prior statute did not apply where the measure under consideration inured to the gain of one closely associated in business with the officer, such as a partner. See, for example, CEO 77-59, CEO 77-142, and CEO 79-33. While partners, joint venturers, and, to a lesser extent, corporate shareholders in unlisted companies and coowners of property often may be presumptively or implicitly engaged in or carrying on a business enterprise with one another such that they are "business associates," we do not find that to be the case under your scenario--a situation in which you owned a very small percentage of the stock and the businessman who stood to gain from your votes owned a very small percentage of the stock in a relatively large corporation having hundreds of shareholders and millions of dollars in stock sales and which, shortly after the stock sales to the businessman, became listed on a stock exchange. In essence, although during part of the relevant time period both you and the businessman each owned shares of stock in the same unlisted corporation, the circumstances do not indicate that the two of you were engaged in or carrying on a business enterprise together; rather, you both simply had invested in the same company.
As to the November 2, 1992 vote to approve four recommendations by Authority's general counsel pertaining to oversight of the residence hall project (measure "O"), the January 15, 1993 vote to approve additional $545,535.00 additional residence hall project cost at no cost to the Authority (measure "P"), and the August 13, 1993 resolution authorizing amendment to residence hall project trust agreement (measure "S"), we do not find that any of those measures would have inured to the special private gain of the businessman, were he a business associate of yours or not. Gain to the backers of the residence hall project would not, per se, amount to gain to one working as their consultant. However, such a vote is of a type that might have been prohibited if the consultant's situation were such that, for example, his compensation were tied to the outcome of the vote and you knew this at the time of the vote.
In addition, we do not view the April 30, 1993 closing of the transaction on the 82 townhouse units (measure "R") to have been prohibited by either statute because participation in a closing by a body's chairman on behalf of the body did not amount to a "vote" within the meaning of Section 112.3143(3)(a) and did not amount to "participation" within the meaning of Section 112.3143(4), because the issue of whether to close or not (the substantive measure) had already been decided by the body and, thus, it was not a decision of the body remaining to be influenced.
Accordingly, we find that you were not prohibited by Section 112.3143, Florida Statutes, from voting on or participating in the measures enumerated above.
Were you in violation of any other provisions of the Code of Ethics for Public Officers and Employees due to your circumstances as set forth under the scenario above?
Section 112.313(7)(a), Florida Statutes, appears to be the only additional provision of the Code of Ethics which needs to be addressed by us under your scenario. It provides:
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 is an officer or employee . . .; nor shall an officer or employee of an agency have or hold any employment or contractual relationship that will create a continuing or frequently recurring conflict between his private interests and the performance of his public duties, or that would impede the full and faithful discharge of his public duties.
Under the first clause of Section 112.313(7)(a), we must examine whether any of your contractual relationships or employments were with a business entity which was subject to the regulation of, or which was doing business with, the Authority--your public agency. It is obvious from your scenario that neither the recycling corporation nor the underwriter with which you temporarily were employed were subject to the regulation of, or were doing business with, the Authority. Regarding your sale of stock of the corporation to the businessman or to entities owned or controlled by him, while your "primary" contractual relationship may have been with the corporation or with the underwriter, we find that you also had a contractual relationship with the buyers of the stock. See In re WALTER STOTESBURY, 14 F.A.L.R. 1017 (Fla. Comm. on Ethics 1991), affirmed without opinion as Stotesbury v. State Commission on Ethics, 597 So. 2d 294 (Fla. 1st DCA 1992), a matter in which we found that a bond fund broker/airport authority member who sold interests in a bond fund to an individual who controlled a corporation that was regulated by and did business with the airport authority had a contractual relationship with the buyer of the shares of the bond fund by virtue of his provision of investment services. However, even though you had a contractual relationship with the businessman's company which purchased stock from you and even though it appears that this contractual relationship overlapped the period when the Authority was seeking to close on the townhouses, the company which purchased stock through you was not selling the townhouses to the Authority; the business entities selling the townhouses to the Authority were the limited partnerships. Further, we find that your stock sale to the businessman and his wife did not constitute a contractual relationship violative of the first clause of Section 112.313(7)(a) because the limited partnerships, rather than the businessman and his wife, were doing business with the Authority.
Regarding the second clause of Section 112.313(7)(a), we do not find that you were in violation of it by virtue of your circumstances as set forth in the above scenario. Under the second clause, which can be triggered by any employment or contractual relationship and is therefore not limited to employment or contractual relationships with business entities regulated by or doing business with a public officer's agency, we examine a public officer's public duties together with his private interests to determine whether the two are separate and distinct or whether they coincide to create a situation which tempts dishonor. In making this determination, we have, in past opinions, recognized that a conflict under the second clause may not be present where only a small portion of a public officer's private income is derived from the questioned employment or contractual relationship. See CEO 92-27 and our opinions cited therein. Similarly, in accordance with our precedent, we find that your income from the stock sales to the businessman's entity and to the individual and his wife ($450 and $140, respectively) was so little in relation to your total income for the years in question ($142,100--1991 and $105,000--1993, respectively) that you would not have been tempted to compromise the performance of your public duties in favor of two of the persons or entities to whom you had sold stock. In reaching this finding, we distinguish another of our findings in Stotesbury, supra. In Stotesbury, unlike your situation, the airport authority member/bond fund broker was paid a significantly greater commission ($1,500) on an investment of $100,000 and his regulatory role regarding the fixed-base operator corporation (the bond fund sale which generated him the commission was made to the owner of the corporation) was of much greater duration and intensity than your regulatory role on the Authority regarding the businessman and his entity to whom you sold stock.
This question is answered accordingly.