SBA administers four socioeconomic programs: Service-Disabled Veteran-Owned Small Business (SDVOSB), 8(a) Business Development Program (8(a)) Women-Owned Small Business Program (WOSB) and HUBZone. The SDVOSB, 8(a), and WOSB programs all require that the key owner generally have control over the long-term decision-making and the day-to-day operations of a company. These same rules apply to the veteran-owned small businesses program (VOSB) as well. A recent decision from the Office of Hearings and Appeals at SBA reveals that the operating agreement or bylaws for these types of companies must be very clear about how they are operated.
In VSBC Appeal of: Tree Services, Inc., SBA No. VSBC-291 (2023), OHA looked at a VOSB company that was seeking certification. SBA denied certification due to what it considered defects in the bylaws. SBA rules state that “Non-qualifying-veterans may be found to control or have the power to control in circumstances where non-qualifying-veterans control the Board of Directors of the Applicant or Participant, either directly through majority voting membership, or indirectly, where the by-laws allow non-qualifying-veterans to prevent a quorum or block actions proposed by the qualifying veterans.” 13 C.F.R. § 128.203.
Specifically, the company had increased the size of its board from six to nine directors, but only one director was a veteran. However, the bylaws stated that:
- “The number of directors of the corporation shall be one (1).”
- “The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.”
SBA’s initial review of the bylaws indicated it would likely not meet the veteran control requirements “(1) there appears to be only one veteran among Appellant’s nine-member Board and (2) the quorum and voting provisions in the Bylaws would enable non-veteran directors to block corporate decisions.” More directly, SBA recommended that the company revise the bylaws to avoid any confusion about veteran control, and provided a deadline for an amendment.
When the company did not amend the SBA denied the certification application, writing that ““it appears that there are more Directors than authorized by the Bylaws and only one Veteran individual [i.e., Mr. Anna] holds a Director position, it cannot be determined that the Veteran is able to meet the Board of Director quorum and voting requirements set forth in the Bylaws.”
Here’s one interesting thing about the Veteran Small Business Certification (VetCert) program–it allows a company to revise its documents and resubmit for an updated review. This means that, in many cases, a veteran-owned company can update its documents and address concerns from the SBA. It’s something that most companies should take advantage of.
In this, the company did not take advantage of the opportunity to amend. After denial, though, Tree Services filed an appeal with OHA, arguing that, although SBA gave it until May 12, 2023 to amend its bylaws, SBA nevertheless denied the application on May 10, 2023.
Interestingly, OHA granted the appeal. OHA noted that, under SBA’s rules for the VeCert program, SBA can “request additional documentation at any time in the eligibility determination process.” 13 C.F.R. § 128.302(c). SBA must, however, “take into account any clarifications made by an Applicant in response to” an SBA request for information, and must ‘consider’”’ all information provided by the concern in deciding whether the concern qualifies as a VOSB or SDVOSB.”
In this case, SBA did not play by its own rules and denied the application prior to the deadline. The applicant, though, did not indicate it would amend its bylaws, or provide a response showing its bylaws met the requirements. In the end, OHA remanded this matter back to SBA for further consideration.
When a government reviewer such as SBA gives a company an opportunity to revise an application to meet any errors, it’s usually (although not always) the right move to take advantage of the opportunity. This is often the case when it comes to a certification program such as the VetCert program. However, SBA must also play by the rules as well. If it appears SBA did not abide by the deadline it set, it may be worth appealing such a decision.
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