Gary R. Pannone, Esq. Managing Principal Pannone, Lopes, Devereaux & O’Gara, LLC Johnston
Samantha M. Vasques, Esq. Associate Pannone, Lopes, Devereaux & O’Gara, LLC Johnston
Rhode Island's Minority Business Enterprise program offers important opportunities to minority and women-owned business enterprises (MBEs1) to participate in state-funded public construction programs and projects, as well as in state purchases of goods and services.2 Undoubtedly, the program's goal is a laudable one. And to achieve it, careful attention must be paid to whether an MBE is truly owned and controlled by a minority or woman, rather than merely in name only. A line of cases from the courts of this state highlights a countervailing policy concern: potential interference with the ability of new business owners to obtain MBE certification where they have received substantial support, mentorship, and experience from individuals who are not women or minorities. That is not to say that all such mentorship is problematic or affects a business's ability to obtain MBE certification. However, in at least one context, the difficulty of balancing these concerns—sham ownership versus support and sponsorship—is readily apparent: that of married women striking out on their own and seeking women's business enterprise (WBE) certification.
Before tackling that line of cases, it is helpful to understand the context of the MBE program. The program began with a 1983 executive order by then-Governor J. Joseph Garrahy,3 followed by legislation enacted by the General Assembly in 1986 that built the program's statutory framework? The law declared as its purpose 4to carry out the state's policy of supporting the fullest possible participation of firms owned and controlled by minorities and women (MBEs) in state-funded and state-directed public construction programs and projects and in state purchases of goods and services."5 In other words, the program would create opportunities for minority and women-owned businesses to become meaningfully involved in state procurements.
The MBE statute also provided for the establishment of rules and regulations to set "standards which shall determine whether a construction project is covered by this chapter, compliance formulas, procedures for implementation, and procedures for enforcement" consistent with parallel federal regulations for MBEs.6 Those rules and regulations, known as the Rules, Regulations, Procedures and Criteria Governing Certification and Decertification of MBE Enterprises (Rules), outline the criteria for a business to become certified as an MBE.7 The process for certification is fairly straightforward on its face: Once an application for MBE certification is submitted, it is reviewed and evaluated by a Department of Administration (DOA) staff member, who may conduct a site visit in reviewing the application.8 Then, the DOA staff member will prepare a report on the application to the Assistant Administrator of the Minority Business Enterprise Compliance Office (MBECO) and the Associate Director of the Office of Diversity, Equity, and Opportunity (ODEO) of the DOA?9 Together, the Assistant Administrator and Associate Director will decide whether to certify the applicant as an MBE. If their decision is that the applicant does not meet the criteria (or their decision is not unanimous), the applicant may seek review by way of a hearing before the Certification Review Committee (CRC)?10 At the hearing, the applicant may present evidence in support of its application, and afterward, the CRC notifies the applicant by certified mail of its decision, which includes findings of fact and conclusions of law and is administratively final11
But what criteria are used throughout this process by the DOA staff members, the Assistant Administrator and Associate Director, and ultimately, the CRC? The answer lies in the statutory definition of an MBE, as set forth in the program's enabling legislation. An MBE is a "small business concern ... owned and controlled by one or more minorities or women," meaning that the business is at least fifty-one (51%) owned by minorities or women, and that the management and daily business operations are controlled by one or more minorities or women?12 In other words, ownership and control of a business by minorities or by women are two of the key requirements that must be fulfilled before a business can have any hope of becoming certified as an MBE. Substantial investment, discussed later, is the third requirement.
A better understanding of these criteria is necessary to assess their application in the context of married women starting businesses and later seek- i ng WBE certification. Beginning with “ownership,” the meaning of this requirement is readily apparent from the statute, though the Rules provide a finer gloss, including the prohibition on any agreements that could result in less than fifty-one percent (51%) ownership of the business by minorities or women, and the demand that minority and/or women owners “substantially share in all the risks assumed” by the business.13 Similarly, whether there is “control” is better understood by reference to the Rules. To demonstrate that they have control over the day-to-day management of the business, and the policy-making mechanisms of the business, minority and female owners applying for MBE certification must establish that they meet all six of the following criteria, specifically that they: “a. Have the power to direct or cause the directions of the purchase of goods, equipment, business inventory and services needed in the day-to-day operation of the business;
b. Have the authority to hire and fire employees, including those to whom management authority is delegated;
c. Are an authorized signatory on all corporate accounts – checking, savings, and other financial accounts;
d. Have a thorough knowledge of the financial structure of the business and authority to determine all financial affairs;
e. Have the capability, knowledge and experience required to make decisions regarding the particular type of work engaged in by the MBE; and
f. Have displayed independence and initiative in seeking and negotiating contracts, accepting and rejecting bids and in conducting all major aspects of the business.”14
At the same time, the following conditions create an irrefutable presumption that the minority or women owners do not have control of the business seeking MBE certification (the MBE applicant): where the owners of the business are current employees of a non-minority business which has a significant ownership interest in the MBE applicant; the directors/management of the MBE applicant are substantially the same as an affiliated non-minority firm; the MBE applicant is a wholly-owned subsidiary of a non-minority firm; or the MBE applicant has an extremely dependent relationship on a non-minority firm or individual.15
Last, the Rules layer on a third criterion: that women or minorities invest a substantial amount of money, capital, equipment, or property in the business.16 Importantly, contributing personal or professional services is not enough, though the Rules note such contributions will “receive consideration” in the certification process, “in conjunction with other tangible forms of investment.”17 Likewise, where a significant portion of the MBE applicant’s equity is financed by a loan or gift from a non-minority business with a significant interest in the MBE applicant, there is an irrefutable presumption that the minority or women owners have not made a substantial investment in the business.
Taken together, the requirements of ownership, control, and investment are the keys to obtaining MBE certification. From reviewing the extensive showing that minority and women business owners must make to meet those requirements, it is apparent that the MBE program is designed to avoid situations of sham ownership, where the MBE-certified company is controlled behind the scenes by a non-minority business. As noted in one o f the Rhode Island Superior Court decisions discussed below, “[t]he concern for an alleged MBE/WBE company’s dependency on a non-minority business is that the non-minority business is essentially using the potential minority status of the dependent company to capitalize on the benefits of the MBE/WBE program.18
But what precisely is the line between an MBE that is improperly dependent on a non-minority business, and one that has benefitted from sponsorship and training, and is now ready for an independent venture? Although the Rhode Island Supreme Court has yet to directly address this issue...