Federal Court Interprets SDVOSB “Unconditional Ownership” Less Strictly Than SBA

The Court of Federal Claims recently issued an opinion that defines “unconditional ownership” of an SDVOSB in a more relaxed manner than the SBA, creating a split of authority on the issue.

The Court, rejecting SBA precedent, held that certain restrictions on ownership of an SDVOSB by a service-disabled veteran are acceptable under the SBA’s unconditional ownership regulations. In particular, the SDVOSB company can retain a right of first refusal that would allow it to purchase the shares of the veteran upon death, incompetency, or insolvency, and that right does not result in a violation of the unconditional ownership requirement.

With the Court and the SBA’s administrative judges staking out different positions, what should SDVOSBs do?

In Veterans Contracting Group, Inc. v. United States, No. 17-1015C, (Fed. Cl. Aug. 22, 2017), the Court examined the same facts that the SBA Office of Hearings and Appeals did in a recent decision addressed in our blog post of September 19, 2017. And, examining the very same facts, the Court reached the opposite conclusion.

Veterans Contracting Group had a shareholder agreement which included a clause that arguably restricted ownership by the veteran. This clause provided that “if a shareholder dies, is found to be incompetent, or becomes insolvent, that shareholder ‘shall be deemed to have offered all the [s]hares of the [c]orporation owned by such [s]hareholder at the time of occurrence of any of the events specified above to the[c]orporation and the [c]orporation shall purchase such [s]hares at the Certificate Value and upon the terms and conditions hereinafter set forth.'”

The Court described this clause as one “that provides the company with the first opportunity to purchase the shareholder’s shares when death, incompetency, or insolvency arises.” In other words, a right of first refusal in favor of the company should any shareholder (including the veteran) die, become incapacitated, or become insolvent.

VCG bid upon a Corps of Engineers IFB for the removal of hazardous materials and demolition of buildings at the St. Albans Community Living Center in New York. The IFB was set aside for SDVOSBs under NAICS code 238910 (Site Preparation Contractors).

After opening bids, the Corps announced that VCG was the lowest bidder. An unsuccessful competitor subsequently filed a protest challenging VCG’s SDVOSB eligibility.

Because this was a non-VA job, jurisdiction over the protest rested with the SBA. The SBA’s Director of Government Contracting held that the restrictions in VCG’s shareholders agreement deprived the veteran “of his ability to dispose of his shares as he sees fit, and at the full value of his ownership interest.” The SBA determined that the restrictions were contrary to the requirement that a veteran “unconditionally own” his or her interest. The SBA issued a decision finding VCG to be ineligible for the Corps set-aside contract.

As is its policy when it issues an adverse SDVOSB decision, the SBA forwarded its findings to the VA Center for Verification and Evaluation. Relying on the SBA’s adverse determination, the VA CVE decertified VCG from the VetBiz VIP database.

VCG then took two separate, but concurrent, legal actions. It filed an appeal with OHA, arguing that the SBA’s decision was improper. Again, because this was a non-VA job, the SBA had ultimate authority to determine whether VCG qualified as an SDVOSB. Around the same time, VCG filed a bid protest with the Court. VCG’s bid protest didn’t directly challenge the SBA’s determination. Instead, the protest challenged the VA’s decision to remove VCG from the VetBiz VIP database. Of course, resolving the question of whether the removal was appropriate required the Court to evaluate the propriety of the SBA’s underlying decision. Thus, both OHA and the Court were, in effect, examining the same question: that is, whether the restrictions in VCG’s shareholders agreement were contrary to the SBA’s SDVOSB regulations.

As we discussed in our September post, OHA upheld the underlying SBA decision. OHA found that the restrictions in the shareholders agreement were contrary to the SBA’s SDVOSB regulations, which OHA said require “that the SDV’s ownership be unconditional, without condition or limitation upon the individual’s right to exercise full ownership and control of the concern.”

The Court noted that the definition of “unconditional” used “by the SBA in its decision addressing [VCG’s] eligibility is based upon a dictionary definition of ‘unconditional,’” but use of a dictionary definition is “both unnecessary and inappropriate” when there is a perfectly good definition in the 8(a) regulations under 13 C.F.R. § 124.105. Although the 8(a) Program regulations don’t directly apply to the SDVOSB program, “[s]uch regulatory guidance relates to eligibility for a business development program, and it provides insight into the scope of unconditional ownership for SDVOSB–eligibility.”

Because the SBA ignored the definitions in the 8(a) program regulations, including 13 C.F.R. § 124.105(e) stating that “SBA will disregard any unexercised stock options or similar agreements held by disadvantaged individuals,” its ruling was unreasonable. The Court cited with approval both AmBuild Co., LLC v. United States, 119 Fed. Cl. 10 (2014) and Miles Construction, LLC v. United States, 108 Fed. Cl. 792 (2013), agreeing with these cases that a restriction on ownership that is not executory (meaning not taking effect until a future event occurs) does not result in unconditional ownership. The Court also pointed out that the restrictions at issue in those cases (and, by implication, in VCG’s case) were “customary business provision[s].”

The Court held that VCG was likely to succeed on the merits of its protest.  The Court issued a preliminary injunction ordering the VA to “restore [VCG] to the VIP database of approved SDVOSB entities.”

It’s important to note that the Court didn’t overrule OHA’s decision.  OHA was considering one aspect of the case (the set-aside award); the Court was considering another (the de-listing of VCG from the VA’s VetBiz VIP database). For now, OHA’s contrary decision is still, officially, good law. That said, there doesn’t seem to be a way to reconcile the two decisions. Should VCG, or another SDVOSB, take an OHA decision to the Court, it seems very likely that the Court would directly overrule OHA. One wonders, then, whether OHA might reconsider its position, on its own volition, the next time this issue arises. Time will tell.

In the meantime, SDVOSBs must be aware that this is still an area of the law very much in flux. Caution is warranted.