Under the SBA’s affiliation rules, a minority owner may “control” a company where the company’s governing documents impose supermajority voting requirements that require the minority owner’s consent for the company to make ordinary business decisions.
In a recent size appeal decision, the SBA Office of Hearings and Appeals confirmed that supermajority voting requirements may establish control (and affiliation), even where the minority owner does not actually exercise its control.
Unanimity and supermajority voting requirements are one of the most common ways for a service-disabled veteran-owned small business to find itself on the wrong end of an eligibility protest (or, in the case of the VA, a CVE verification denial). Case in point: the decision of the SBA Office of Hearings and Appeals in SDVOSB Appeal of Rush-Link One Joint Venture, SBA No. VET-228 (2012).
Remember Weekend at Bernie’s, the 1980s comedy about a couple of young corporate employees who pretend their murdered boss is still alive? (Random note: did you know that they made a Weekend at Bernie’s 2 in 1993? Neither did I, until I was writing this post).
What does Bernie have to do with the SBA affiliation rules? In the movie, Bernie appears to control his company—even though he is not exactly in a position to make executive decisions. Like Bernie, in the SBA’s eyes, a person can be deemed to control a company, even if he or she does not actually exercise any power. The decision of the SBA Office of Hearings and Appeals in Size Appeal of BR Construction, LLC, SBA No. SIZ-5303 (2011) shows that SBA affiliation problems can arise when bylaws and operating agreements contain certain provisions that the SBA will find give legal control to a minority owner, even if that minority owner, in practice, acts as a passive investor.