STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 6617

April 28, 1989

CONFLICT OF INTEREST:

Member of governing board of a state university-interest in contract with the university

State university-interest in contract between for-profit corporation partly owned by the university and the university

CONSTITUTIONAL LAW:

Const 1963, art 4, Sec. 10--interest of member of governing board of state university in contract with the university

PUBLIC OFFICERS AND EMPLOYEES

Member of governing board of state university-interest in contract with the university

The awarding of a contract for a construction project to a company owned by a member of the university's board of control would constitute a conflict of interest even though the company was the lowest bidder where renegotiation of the terms of the contract without further bids ensued because the bids exceeded the original budget.

Although a state university is not itself subject to the conflict of interest provisions of Const 1963, art 4, Sec. 10, and implementing MCL 15.301 et seq; MSA 4.1700(21) et seq, where it holds an ownership interest in a for-profit corporation which bids on a construction contract with the university, the officers and employees of the university are subject to and must strictly observe those provisions.

Michael J. Hodge

Legal Advisor to the Governor

116 West Allegan

Lansing, Michigan 48913

You have requested my opinion on two questions concerning possible conflicts of interest in the awarding of a proposed construction contract at Michigan Technological University.

In May, 1988, the State of Michigan, Department of Management and Budget, requested sealed bid proposals for general building, mechanical, and electric work for a mineral and materials engineering building at Michigan Technological University. The request for proposal was issued pursuant to a published notice in the Michigan Contractor and Builder Magazine and the Michigan Chronicle. The published notice did not bar any qualified person, firm, corporation or trust from bidding.

On July 27, 1988, the Department of Management and Budget determined the apparent lowest qualified bidder for the general building contract to be Champion, Inc./Gundlach, Inc., a joint venture consisting of two companies, Champion, Inc., and Gundlach, Inc., both of which are private for-profit corporations whose stock is not listed on a stock exchange.

A member of the board of control of Michigan Technological University owns a majority of shares in Champion, and also owns approximately 7% of the shares in Gundlach. The majority interest in Gundlach is owned by The Ventures Group, a for-profit corporation which, in turn, is wholly owned by Educational Support Institute (ESI). ESI is a nonprofit corporation established on a membership basis for the sole purpose of benefiting and supporting Michigan Technological University. The President of the University and each of the members of the University's Board of Control serve, by virtue of their offices, as members of ESI.

The Department of Management and Budget determined that the Champion/Gundlach joint venture was the lowest qualified bidder for one of the three major components of the project, based upon its bid of $11,944,000. However, the Department also determined that all bids were substantially in excess of the planned budget for the project. As a consequence, the awarding of the contract was delayed in order to permit revisions to the original proposal, reducing its scope in an effort to bring the total cost of the project within the available budget. These revisions were subsequently completed, and the Department of Management and Budget thereafter issued a bulletin formally revising the scope of the project. In response to that bulletin, Champion/Gundlach submitted a revised price quotation of $8,056,373, representing a reduction of their original bid by $3,887,627 or approximately 33%, an amount sufficient to bring this portion of the project within the available budget. The bulletin was provided only to the lowest qualified bidder for each of the project components; it was not made available to the other contractors who had originally submitted bids, nor were any such other contractors offered an opportunity to submit revised price quotations. It is now contemplated that a contract for project, as revised and modified by the bulletin, will be entered into with Champion/Gundlach, without the taking of new bids.

It is noted, at the outset, that you have requested an opinion only with respect to potential conflicts of interest that may arise from the proposed awarding of this construction company to Champion/Gundlach. You have not inquired, and no opinion is expressed, as to the authority of a state university to own and/or operate, through a nonprofit corporation, for-profit corporations. Likewise, you have not requested an opinion, and none is expressed, on the question of whether the joint venture agreement entered into between Champion and Gundlach may itself create a conflict of interest by virtue of the fact that the majority shareholder in Champion also serves, on behalf of the University, in the nonprofit corporation which owns, through the Ventures Group, the controlling interest in Gundlach.

Your first question may be stated as follows:

Const 1963, art 4, Sec. 10, provides:

This provision marked a significant departure from the policy embodied in Michigan's prior constitution. The predecessor provision, contained in Const 1908, art 5, Sec. 25, prohibited state officers from having any interest in certain contracts with the State. As is noted in OAG, 1983-1984, No 6211, p 246, 248 (March 21, 1984), the new provision:

Const 1963, art 4, Sec. 10, was implemented by 1968 PA 318; MCL 15.301 et seq; MSA 4.1700(21) et seq. In that act, the Legislature explicated both the term "state officer" and the term "substantial conflict of interest" as used in Const 1963, art 4, Sec. 10.

In section 3 of the act, MCL 15.303(a); MSA 4.1700(23)(a), the Legislature defined the term "state officer," in pertinent part, as follows:

The statutory definition of "state officer" was reviewed in OAG, 1973-1974, No 4799 p 116, 119 (February 1, 1974). That opinion concluded that the legislative definition of the term "state officer" as set forth in MCL 15.303(a); MSA 4.1700(23)(a), was "much more restricted than that contemplated by the constitution" and, was, therefore, unconstitutional.

Unquestionably, a member of the Board of Control of Michigan Technological University is a "state officer" within the meaning of const 1963, art 4, Sec. 10. Michigan Technological University, formerly known as Michigan College of Science and Technology, is named as an institution of higher education in Const 1963, art 8, Sec. 4. The Board of Control of the University is established by MCL 390.352; MSA 15.1312, which vests in that Board of all of the powers "customarily exercised by the governing board of a college or university," including the power to grant baccalaureate degrees and to control the property and general affairs of the University. See also, Const 1963; art 8, Sec. 6. Thus, a member of the Board of Control of Michigan Technological University plainly possesses all of the attributes of a "state officer" and is subject to the provisions of Const 1963, art 4, Sec. 10.

It is necessary, therefore, to address the question of whether the awarding of the proposed construction contract would create an impermissible conflict of interest, i.e., one that is "substantial" within the meaning of Const 1963, art 4, Sec. 10.

In 1968 PA 318, supra, implementing Const 1963, art 4, Sec. 10, the Legislature provided a definition of the term "interested" as used in that constitutional provision. Unlike the legislative definition of the term "state officer," supra, which was determined to be unconstitutionally restrictive, the legislative definition of the term "substantial" was found to "represent a fair effort to explicate rather than restrict the terms of the constitution." OAG, 1973-1974, No 4799, supra, at p 119.

MCL 15.304; MSA 4.1700(24), provides:

A review of the facts which have been provided indicates that the board member in question would have several distinct interests in the proposed contract. In addition to his "public" interest, on behalf of the University, by virtue of his membership on the University's Board of Control, the board member would have three separate sources of interest in the contractor's side of the proposed construction project: (1) a private pecuniary interest as the majority shareholder in Champion; (2) a private pecuniary interest as a minority shareholder in Gundlach; and (3) a quasi-public pecuniary interest in Gundlach, by virtue of his membership, as an officer of the University, in ESI, the University-affiliated nonprofit corporation which owns, through The Ventures Group, the controlling interest in Gundlach.

The board member's interests in the contract as a shareholder in Champion and Gundlach are clearly pecuniary in nature. It is equally apparent, given the nature and scope of the proposed construction project, that those interests are substantial within the meaning of Const 1963, art 4, Sec. 10, and MCL 15.304; MSA 4.1700(24).

Nor may it be concluded that the interests involved here fall within any of the enumerated exceptions listed in the statute. Specifically, the extent of the board member's holdings in the two companies prevent the application of subdivision (a) thereof, inasmuch as the board member owns in excess of 1% of the shares of each company, neither of which is listed on the stock exchange. Subdivision (b), although permitting an unlimited percentage of ownership, is inapplicable where, as here, the contract is "with or authorized by the department or agency ... with which the state officer is connected." (Emphasis supplied.) The contract will not be between political entities, nor does it involve utility services, eliminating subdivisions (c) and (e).

Nor, finally, does the proposed contract fall within the exception created by subdivision (d), exempting certain contracts awarded to the lowest qualified bidder. That exception is expressly made inapplicable to "amendments or renegotiations of a contract." This exclusion of amendments and renegotiations raises some doubt as to whether the exception for lowest qualified bidders may ever be appropriately applied to major construction contracts such as that contemplated here. It is a common expectation in such contracts, because of the nature of the work and the sometimes large number of unknowns at the time of bidding, that the contract may have to be amended at various times after it is entered into in order to accomodate unexpected problems that arise during the course of construction. If such a contract is awarded to a state officer as the low bidder, such adjustments and accommodations may be precluded by virtue of MCL 15.304(d); MSA 4.1700(24)(d), to the detriment of the public.

It is, however, unnecessary to resolve this question here. According to the information which has been supplied in connection with your inquiry, it appears that, after the submission of bids for this project, it became necessary to substantially revise the scope of the project in order to bring the project within its original budget. As a consequence of these revisions to the project, Champion/Gundlach has been permitted to submit a revised price quotation, reducing its original bid by $3,887,627. Under these circumstances, it must be concluded that the proposed contract is being amended or renegotiated and does not fall within the exception described in MCL 15.304(d); MSA 4.1700(24)(d).

It is my opinion, therefore, that the awarding of a contract for a construction project at a state university to a company owned by a member of the university's board of control would constitute a conflict of interest when, although the company is determined to be the lowest qualified bidder, it becomes necessary to reduce the scope of the project prior to the final awarding of the contract and to renegotiate the terms of the contract without taking further bids.

Although you have inquired only about the application of the conflict of interest laws, it should be noted that a member of the Board of Governors of Michigan Technological University, as a state officer appointed by the Governor, also constitutes a "public officer" for purposes of 1973 PA 196, MCL 15.341 et seq; MSA 4.1700(71) et seq, which prescribes standards of conduct for such officers and identifies certain conduct and activities which, if engaged in, are deemed unethical. MCL 15.342; MSA 4.1700(72) provides, in pertinent part:

The act also creates a Board of Ethics, MCL 15.343(1); MSA 4.1700(73)(1), and empowers that Board to issue advisory opinions, upon the request of either the officer or the appointing authority, concerning the application of the act to particular facts and circumstances. MCL 15.345(e); MSA 4.1700(75)(e).

It is not possible to determine, based upon the facts provided in connection with your request, whether any actions on the part of the officer in question conflict with the provisions of MCL 15.342; MSA 4.1700(72). It may be presumed that the board member is familiar with the provisions of the act and has conducted himself in accordance with its requirements. Nevertheless, given the complexity of the business relationships that appear to be involved in the various for-profit corporations affiliated with the University through ESI, the officer in question, and any others who may be similarly situated, must give careful consideration to the provisions of MCL 15.342; MSA 4.1700(42), and should seek an advisory opinion from the Board of Ethics.

Your second question concerns a possible conflict of interest on the part of the University itself and may be stated as follows:

Const 1963, art 4, Sec. 10 and its implementing legislation, 1968 PA 318, supra, "constitute the sole law with respect to conflicts of interest involving legislators and state officers in contracts with the state or its political subdivisions. OAG, 1983-1984, No 6211, supra, at p 253. Both are applicable, by their express terms, only to members of the Legislature and state officers. No reference is made with respect to conflicts of interest on the part of public bodies or corporations in which public bodies may either directly or indirectly own an interest.

The Legislature has, by means of 1968 PA 317, MCL 15.321 et seq; MSA 4.1700(51) et seq, prohibited certain conflicts of interest on the part of public servants in addition to those who are within the provisions of Const 1963, art 4, Sec. 10, and its implementing legislation. 1968 PA 317, however, likewise is applicable only to public servants and makes no reference to conflicts of interest on the part of either public or private corporate entities.

Therefore, in answer to your second question, it is my opinion that the awarding of a contract for a construction project at a university to the lowest qualified bidder does not constitute a conflict of interest solely by virtue of the fact that the university itself possesses a direct or indirect ownership interest in the company receiving the contract. In so concluding, however, it must be emphasized that, while the University's own institutional interests have not been made subject to the laws pertaining to conflicts of interest, those laws most certainly do apply to the individual officers and employees of the University who are officers, directors, shareholders, or who are otherwise interested in for-profit corporations affiliated with the university. These laws must be strictly observed.

Frank J. Kelley

Attorney General