Clarity is Key: An Example of Why Clear Language is Important for Showing SDVOSB Control

While SBA has taken over SDVOSB certification from the VA (along with some other rule changes), some things remain the same. One thing which we think will never change, is that making sure the language in your agreements is clear, is vital for the federal contractor (and indeed all businesses). While this is obvious for things like operating agreements and bylaws, documentation like meeting minutes should be clear as well. In a recent appeal of a denial of SDVOSB certification, a company had to go through what must have been a frustrating ordeal that might have been prevented with just a little extra language in the meeting minutes, only to have to deal with further frustration due to a couple of details.

Perrilliat Enterprises, Inc. (Perrilliat) is a construction contractor in Nevada formed in 2019. At the time it applied for SDVOSB certification, its bylaws provided that “[t]he corporation shall have 1 director and collectively they shall be known as the board of directors.” That director was the service-disabled veteran sole owner of Perrilliat. So far so good, as 13 C.F.R. 128.203 requires that for an SDVOSB corporation, the board must be controlled by one or more service-disabled veterans. It also provided that for a quorum to exist and a company meeting to be held, at least “1 member of the board of directors and 1 officer” had to be present. While the bylaws provided for one director, they established three officers: President, Secretary, and Treasurer.

As part of Perrilliat’s SDVOSB application, it provided meeting minutes for “Board Meetings” that occurred on February 28, 2019, and August 30, 2022. For both of these meetings, the minutes noted that three individuals were in attendance: The owner and two other people. Neither of these two other people were service-disabled veterans. At the 2019 meeting, the owner was named the President of Perrilliat and the other two individuals were named the Secretary and the Treasurer. The minutes provided that Perrilliat only has one board member, but did not specify who that individual was. The meeting minutes for the 2022 meeting described that earlier that year a “Board Retreat” was held, with the President/Owner, the Secretary, and the Treasurer in attendance.

On March 27, 2023, SBA denied Perrilliat’s SDVOSB application. The reviewer stated that Perrilliat had not shown that the company’s board was fully controlled by service-disabled veterans. The reviewer’s reasoning is that the meeting minutes indicated three people were present at the two meetings, and so these individuals must be the directors of the company. As the bylaws provided that one director and one officer was needed to establish a quorum, the reviewer concluded that “[b]ecause Appellant has ‘three directors and three officers’, only one of whom is a service-disabled veteran, non-qualifying individuals could potentially convene a meeting without” the service-disabled veteran. Additionally, because there were two non-service-disabled veteran directors versus the one service-disabled director/owner, the non-service-disabled veterans could outvote the owner, or at the very least block actions he wanted to take.

As you might have guessed by this point, SBA’s Office of Hearings and Appeals (OHA) did agree with Perrilliat that SBA had clearly erred in its evaluation. The meeting minutes did not state that all three individuals present were directors of the company. In fact, they said there was just one director! But even if the board did have three directors in 2019, the 2021 bylaws would have negated that:

“According to the Bylaws, Appellant is governed by a Board of Directors comprised of one individual. The Bylaws were signed solely by Stewart Perrilliat — Appellant’s President, owner, and a service-disabled veteran — who represented himself as ‘all the initial directors or incorporators of this corporation.’ The Bylaws further state that one Director and one officer are needed to establish a quorum, and that approval by ‘a majority’ of the Board members is necessary to make decisions. Accordingly, if Stewart Perrilliat is Appellant’s sole Director, it appears that he alone could establish a quorum and unilaterally control Appellant’s Board.”

Finally, OHA observed that even disregarding all the above, the service-disabled veteran owner was the sole owner of Perrilliat, and so he might control the board regardless.

So, this means Perrilliat got approved for SDVOSB certification then with the decision, right? Unfortunately, this was not the case:

“Although Appellant has identified errors in the D/GC’s decision, Appellant has not conclusively shown that it is an eligible SDVOSB. Additional review and clarification is thus appropriate. Notably, Appellant points to no specific evidence that Stewart Perrilliat is Appellant’s sole Director. While Appellant’s Bylaws do state that Appellant’s Board will be comprised of one Director, the identity of that one Director is unspecified. Furthermore, other information in the record appears to contradict Appellant’s claim that its Board consists of only one Director. The minutes of the August 30, 2022 Board meeting, for instance, refer to a ‘Board Retreat earlier this year’, during which the Board ‘[b]rainstormed’ on Appellant’s mission and strategic objectives. Appellant does not attempt to explain how these statements can be reconciled with its contention that its Board is comprised of only one Director.” 

As a result, the matter was merely sent back to SBA for further review, resulting in additional time spent in review with the SBA’s Veteran Small Business Certification (VetCert) program. Now, SBA clearly made a number of mistakes in its evaluation, and Perrilliat was absolutely right on that. But, even with that all said, just a couple missing details means that, instead of Perrilliat getting its SDVOSB certification there and then, it had to continue the review process. Little things like the meeting minutes not restating that the service-disabled veteran owner was the director and describing a 2022 meeting of the officers as a “Board Retreat” were enough to create a genuine question as to who controlled the company at the time of certification. It seems minor, but it is these little details that make the difference when applying for SDVOSB certification, and indeed any sort of certification with SBA.

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