SBA Affiliation Rules: Owner of One Share (of 120) Controlled Company

The owner of a 1/120th interest was presumed to control a company under the SBA’s affiliation rules.

You read that right.  In a recent size appeal decision, the SBA Office of Hearings and Appeals held that where 120 owners each held one share of stock in a company, all 120 were presumed to control the company for size purposes.

OHA’s decision in Size Appeal of Melton Sales & Service, Inc., SBA No. SIZ-5893 (2018) involved an Army solicitation seeking the remanufacture of Route Clearance Vehicle engines.  The Contracting Officer issued the solicitation as a small business set-aside under NAICS code 333618 (Other Engine Equipment Manufacturing), with a corresponding 1,500 employee size standard.

After reviewing competitive proposals, the Army informed offerors that MTP Drivetrain Service, LLC was the apparent successful offeror.  An unsuccessful competitor then filed a size protest challenging MTP’s small business status.  Among its allegations, the protester contended that MTP was affiliated with VIPAR Heavy Duty, Inc.

The SBA Area Office determined that Joe Niswanger held a 70% ownership interest in MTP.  His son, Rudy Niswanger, was MTP’s General Manager.  The Area Office concluded that Joe and Rudy Niswanger controlled MTP.

The Area Office then identified 24 other companies under the control of MTP and/or the Niswangers.  One of these companies was Joe Gear Holdings, LLC.

Joe Gear, in turn, owned a single share of stock in VIPAR.  In total, VIPAR had 120 shares outstanding, all held by different individuals or entities, and each entitled to one vote.  The Area Office determined that Joe Gear’s 1/120th share ratio “does not provide Joe Gear with the power to control VIPAR.”  The Area Office concluded that MTP was not affiliated with VIPAR.

After adding together the average employee counts of MTP and its affiliates, the Area Office found that MTP was a small business for purposes of the Army solicitation.

The original protester filed a size appeal with OHA.  The protester argued, in part, that the Area Office had erred by determining that MTP was not affiliated with VIPAR.

OHA wrote that, under the SBA’s “common ownership” affiliation rules, if two or more persons or entities “each owns, controls, or has the power to control less than 50 percent of a concern’s voting stock, and such minority holdings are equal or approximately equal in size, and the aggregate of those holdings is large compared with any other stock holding, SBA presumes that such person controls or has the power to control the concern whose size is at issue.”  The presumption “may be rebutted with evidence to the contrary, such as evidence demonstrating another party such as the Board of Directors and CEO or President controls the concern.”

Here, “it is undisputed that MTP is affiliated with Joe Gear through common ownership, and Joe Gear holds one of VIPAR’s 120 shares” of stock.  Therefore, “[w]hen considering MTP’s affiliation with VIPAR under the minority shareholder rule, the Area Office erred in concluding Joe Gear’s 1/120th interest does not provide Joe Gear with control or the power to control VIPAR.”

OHA acknowledged that the single share alone wasn’t enough for Joe Gear to make VIPAR take action, but explained that under the SBA’s affiliation rules, “individual control is immaterial, as multiple minority shareholders may control a subject concern even if they individually cannot.”  When multiple minority shareholders each hold equal or approximately equal interests, “in the absence of clear evidence demonstrating control or the power to control by another party, it is presumed that each minority shareholder has equal control over the subject concern, regardless of the size of the shareholder’s interests.”

In VIPAR’s case, “[t]he Area Office failed to establish MTP and Joe Gear had rebutted this presumption with evidence demonstrating another party controls or has the power to control VIPAR.”  Therefore, “Joe Gear must be presumed to control or have the power to control VIPAR under the multiple minority shareholder rule, and accordingly, MTP is affiliated with VIPAR.”

Fortunately for MTP, even adding VIPAR’s size to the mix didn’t change the ultimate result–MTP and its affiliates still fell below the 1,500-employee size standard.  OHA characterized the Area Office’s analysis of VIPAR as “harmless error,” and affirmed the size determination.

Some of the SBA’s affiliation rules are pretty darn intuitive, but others absolutely are not.  The typical businessperson probably wouldn’t think that holding 1 of 120 shares, all with equal voting power, would create control–but that’s how it works under the SBA’s multiple minority shareholder rule.

One final note: a separate rule applies to “widely traded” companies, like those you might hold in your investment or retirement portfolios.  Here, OHA found that this separate rule didn’t apply to VIPAR, because its shares were not publicly traded.