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.
The BR Construction SBA size appeal involved a Department of Veterans Affairs solicitation seeking a contractor to furnish and install telecommunications cable. After BR Construction was identified as the awardee, a competitor filed a SBA size protest, challenging BR’s size eligibility. The SBA Area Office determined that BR was not an eligible small business because its minority owner, David Christa, had the power to control BR under BR’s operating agreement, causing BR to be affiliated with other companies controlled by Mr. Christa.
SBA OHA denied BR’s size appeal. Examining the company’s operating agreement, SBA OHA noted that the agreement required the unanimous agreement of shareholders to consent to a number of “basic decisions” regarding BR’s day-to-day operations, such as incurring expenses over $5,000, submitting bids over $250,000, executing contracts over $250,000, borrowing money, and so on. SBA OHA held that “because [BR] cannot conduct ordinary business without the consent of Mr. Christa, the Area Office correctly determined that he exerts negative control” over BR, causing BR to be affiliated with other companies Mr. Christa controlled.
SBA OHA rejected BR’s assertion that Mr. Christa was a passive investor who played no active role in the company. Citing the SBA’s affiliation regulations, SBA OHA wrote that “since Mr. Christa has the power to exert negative control over [BR] it is immaterial whether or not he actually utilized that power.”
A final question—if this was a VA service-disabled veteran-owned small business procurement, why did this protest go to the SBA, not the VA? Under the VA’s service-disabled veteran-owned small business program, protests challenging a firm’s SDVOSB eligibility (for example, arguing that the firm is not unconditionally owned by a service-disabled veteran) are heard by the VA. However, protests challenging size are still heard by the SBA, even for VA SDVOSB set-asides.