SBA Affiliation Rules: President Controlled Company Despite Removal Provision

A company’s President was deemed to control the company for purposes of the SBA affiliation rules, even though the company’s majority shareholder had the unilateral right to remove the President from office at any time.

In a recent size appeal decision, the SBA Office of Hearings and Appeals held that a company’s President exercised “critical influence” over the company, and that the President’s influence was not rendered illusory simply because the 100% owner could remove the President from office.

OHA’s decision in Size Appeal of Radant MEMS, Inc., SBA No. SIZ-5600 (2014) involved a DoD solicitation for various research topics under the Small Business Innovation Research program.  Radant MEMS, Inc. submitted a proposal under the solicitation.  Radant self-certified as a small business, stating that it had ten employees and no affiliates.

The Contracting Officer filed a size protest questioning Radant’s eligibility for the SBIR program.  The Contracting Officer alleged that Radant was affiliated with CPI Radant Technologies Division (RTD through common management.  The Contracting Officer contended that affiliation existed, in part, through the common control of Dr. Jean-Claude Sureau, who was a high-ranking officer of both Radant and RTD.

The SBA Area Office determined that Dr. Sureau owned a majority of Radant’s stock and served as Radant’s President.  The Area Office determined that Dr. Sureau controlled Radant.  The Area Office then determined that RTD was owned by Communications & Power Industries, LLC (CPI), a large business.  Dr. Sureau was the President of RTD.

The SBA Area Office found that Dr. Sureau’s position as RTD’s President afforded Dr. Sureau critical influence over RTD’s operations.  The Area Office determined that Dr. Sureau controlled RTD for purposes of the SBA affiliation rules, and issued a size determination finding Radant to be affiliated with RTD due to Dr. Sureau’s common management.

Radant filed a size appeal with OHA.  Radant argued, in part, that Dr. Sureau’s control of RTD was “illusory” because CPI could unilaterally remove Dr. Sureau from office at any time.

OHA disagreed.  OHA noted that under the SBA’s affiliation rules, an individual is deemed to control a company when the individual exercises critical influence over the company’s operations.  In Radant’s case, OHA wrote, it is not “plausible to believe that the President of a concern does not, at a minimum, wield ‘critical influence’ or ‘substantive control’ over the concern’s operations.”

OHA rejected the argument that Dr. Sureau’s control was merely “illusory.”  OHA noted that in previous cases, OHA has held that a company’s director may not control the company when the majority shareholder has the power to remove the director with or without cause.  However, Radant “offers no legal authority to extend the concept of illusory control to cases of common management generally.”  OHA continued, “[i]ndeed, to find common management ‘illusory’ merely because the office could be removed from his or her position would potentially eviscerate common management as a basis for affiliation, because many officers and managers can be removed by some person or entity.”  OHA denied the size appeal.

As the Radant MEMS size appeal demonstrates, a high-ranking officer may control a company within the meaning of the SBA’s affiliation regulations even when that officer is not an owner of the company.  Moreover, as was the case in Radant MEMS, the majority owner’s mere right to remove the officer from his or her position does not render the officer’s control illusory.

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