SDVOSB Joint Ventures: Supermajority Provision Defeats Eligibility, Says SBA OHA

A SDVOSB joint venture was not eligible for award of a SDVOB set-aside contract because its joint venture agreement called for certain decisions to be made by supermajority vote.

As explained by the SBA Office of Hearings and Appeals in its decision finding the SDVOSB joint venture ineligible, the supermajority provision undermined the regulatory requirement that a SDVOSB joint venture be managed by an eligible SDVOSB.

SBA OHA’s decision in SOF Associates-JV, SBA No. VET-234 (2013) involved an Air Force SDVOSB set-aside procurement.  After reviewing competitive proposals, the Air Force awarded the contract to SOF Associates-JV.

SOFJV was comprised of four members.  Absolute Disaster Services, LLC was the 51% owner, and three other companies shared the remaining 49% membership interest.  ADS was an eligible SDVOSB; the other three companies were not.

After the Air Force announced the award to SOFJV, an unsuccessful competitor filed a SDVOSB eligibility protest.  The competitor alleged, in part, that SOFJV did not satisfy the mandatory joint venture requirements established in 13 C.F.R. 125.15(b).

The SBA’s Director of Government Contracting, who decides SBA SDVOSB eligibility protests, reviewed SOFJV’s joint venture agreement.  The SBA D/GC noted that the joint venture agreement stated that SOFJV would have, at a minimum, quarterly Board meetings at which all four joint venture members would be present.  The SDVOSB joint venture agreement stated, “[o]n tactical and strategic business issues, Joint Venture members will be represented in accordance to their equity share in the Joint Venture.  Any motion will require a 66% approval by the Board members in order to be passed and implemented.”

The SBA D/GC determined that the supermajority voting provision undermined the regulatory requirement that a SDVOSB serve as the managing venturer of any SDVOSB joint venture.  Based in part on this finding, the SBA D/GC declared SOFJV to be ineligible for award of the Air Force SDVOSB set-aside contract.

SOFJV filed an appeal with SBA OHA.  SOFJV argued, in part, that the joint venture agreement appointed ADS as the managing venturer and gave ADS responsibility for overseeing and managing performance of the contract.

SBA OHA wrote that the provision in question “clearly requires a supermajority vote, which ADS by itself could not provide, to approve ‘tactical and strategic business issues,’ without defining just what those issues are.”  SBA OHA concluded that this provision “would give a wide latitude for the non-SDVO SBC firms to exercise negative control over any issue it deemed ‘tactical and strategic'” and thus “has the potential of hobbling ADS in its management of the joint venture.”  SBA OHA denied SOFJV’s appeal.

The SOF Associates-JV case helps answer a question SDVOSBs sometimes ask: “what does it mean to be a ‘managing’ venturer?”  In this case, at least, even though ADS was named the joint venture’s manager, the joint venture agreement did not allow ADS to make certain decisions without the consent of non-SDVOSBs.  In SBA OHA’s eyes, this meant that SOFJV was not truly “managed” by a SDVOSB.

One more potential issue from the SOF Associates-JV case: can a SDVOSB joint venture really consist of four companies?  Yes.  Although the typical SDVOSB joint venture is comprised of one SDVOSB and one non-SDVOSB, the regulations state that a SDVOSB joint venture may be comprised of “one or more” SDVOSBs and “one or more” other small businesses.  In this case, it was SOFJV’s supermajority provision (as well as other issues beyond the scope of this post) that defeated its SDVOSB eligibility, not the fact that it was comprised of four members.

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