OHA: Multiple Service-Disabled Veterans Control Company, Despite Internal Dispute

Control over a Service-Disabled Veteran-Owned Small Business can be held by multiple service-disabled veterans. Having control reside in multiple individuals can make things a little more complicated, though. SBA Office of Hearings and Appeals recently examined a situation where multiple service-disabled veterans shared control of a company, but did not have a united front when responding to information requests concerning a company’s eligibility.

In Pro-Sphere Tek, Inc., CVE-162 (Aug. 31, 2020), SBA considered an appeal of a Department of Veterans Affairs (VA) Center for Verification and Evaluation (CVE) decision to cancel the verified status of Pro-Sphere Tek as an SDVOSB.

The company was owned by two service-disabled veterans: Mr. Blevins owned 40% and Mr. Rhoades owned 39% (although there was some dispute over the ownership amounts, OHA determined they were at least these percentages). A third service-disabled veteran, Mr. Sumrall, served as the company’s Chief Operating Officer (COO) and Vice Chairman, although he was not an owner.

CVE found it could not determine that service-disabled veterans controlled the company. This was due in large part to a lawsuit between the two veteran owners of the company, and the separate responses from each veteran owner sent to CVE, both of which caused confusion with CVE over who controlled the company.

CVE stated that “due to the conflicting representations provided by [Mr. Rhoades and Mr. Blevins], and the pending litigation regarding the exercise of control over [Appellant], CVE is unable to reasonably conclude that the day-to-day operations of the concern satisfy the verification requirements and the requirements set forth in [Appellant’s] Bylaws.” CVE was also concerned that

there could be “control by non-service-disabled veterans” because of the disputes between Mr. Blevins and Mr. Rhoades over who is managing the day-to-day operations of the concern, how many voting members are on the Board of Directors, and whether Mr. Rhoades is the majority owner with authority to amend the Bylaws and to establish a quorum for the transaction of business.

Pro-Sphere Tek appealed the CVE cancellation to OHA, arguing that “CVE did not identify any non-service-disabled veterans who conceivably could control Appellant.”

OHA agreed with Pro-Sphere Tek. Specifically, “CVE did not identify any non-service-disabled veteran persons or entities that control Appellant, nor articulate any theory as to how any such non-service-disabled veteran persons or entities could potentially control Appellant.”

While CVE focused on the “tumultuous” relation between the service-disabled veteran owners, this was not the deciding factor for OHA. OHA noted that “[w]hile it is true that such infighting among business partners is atypical, CVE nevertheless appears to have overlooked the fundamental fact that all of the individuals in question here – Mr. Rhoades, Mr. Blevins, and Mr. Sumrall – are service-disabled veterans.” Because these were the only parties involved, they must control Pro-Sphere Tek in some combination.

OHA concluded:

“[T]he concerns voiced by CVE . . . ultimately pertain to which service-disabled veteran(s) control Appellant, not to whether Appellant is controlled by service-disabled veterans as opposed to non-service-disabled veterans. Again, the NOVSC did not identify any non-service-disabled veteran persons or entities that have any involvement in Appellant’s operations, and did not describe any mechanism through which non-service-disabled veteran persons or entities could potentially control Appellant. CVE thus lacked a proper basis to find that Appellant may be controlled by non-service-disabled veteran persons or entities, or to find Appellant non-compliant with 13 C.F.R. § 125.13(i)(7), which applies when a concern has business relationships “with non-service-disabled veteran individuals or entities” that create extreme economic risk.

There are a couple takeaways from this decision. First, OHA confirmed that having multiple service-disabled veteran owners of an SDVOSB is allowed by SBA’s rules, as long as they, and no non-veteran, control the entity. But perhaps more importantly, having a less than united front when responding to questions from a certifying body such as CVE can sow uncertainty. In the face of uncertainty, these certifying bodies can make the wrong decisions in some cases. The appeals process can be an effective way to fix these errors caused by the confusion of a reviewing agency. But responding to questions from CVE or similar offices in a cohesive, easy-to-follow manner is also important.

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