We have previously blogged on SBA OHA decisions where an applicant was denied certification in one of SBA’s socioeconomic programs because the applicant failed to meet SBA’s control requirements. (You can check out some recent posts here and here). These decisions served as friendly reminders that before submitting an application, future applicants should take a closer look at its governing documents for potential concerns SBA may raise in its review.
A recent OHA decision, however, suggests that SBA’s strict interpretation of an applicant’s governing documents isn’t always the correct interpretation.
In Xebec Systems, Inc., SBA No. VSBC-411-A (Oct. 30, 2024), SBA OHA reviewed SBA’s denial of a Veteran-Owned Small Business (VOSB) certification for Xebec Systems, Inc. (Xebec).
Xebec’s application demonstrated that Xebec was directly and unconditionally owned by a qualifying veteran, and its Board of Directors consisted of the qualifying veteran and the company’s non-veteran minority shareholder. Included in Xebec’s application was the company’s amended bylaws, which contained the following provision:
Section 6. Informal Action. Any action required to be taken, or which may be taken, at a shareholders meeting, may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, is signed by the shareholders who own all of the shares entitled to vote with respect to the subject matter of the vote.
The bylaws did not include a provision related to formal actions of shareholders.
After reviewing Xebec’s application, SBA concluded that Xebec’s ownership structure could not demonstrate the control requirements for a VOSB under 13 C.F.R. § 128.203(a) & (e). To be considered an eligible VOSB, “the long-term decision-making and the day-to-day operations” must be controlled by one or more veterans. Further, the qualifying veteran must control the company’s Board of Directors. In its review of Xebec’s bylaws, SBA concluded that these requirements were not met based on two main concerns.
First, the bylaws contained no provision addressing formal actions of the shareholders. SBA’s interpretation was that, since the bylaws failed to address what vote is required for formal actions, Xebec could not establish that the veteran owner controls the formal actions of Xebec’s shareholders. Therefore, control could not be met.
OHA disagreed with this reasoning.
OHA noted that the veteran owner is the majority shareholder and sits on the Board of Directors. As a company incorporated in the State of Nevada, only a simple majority for shareholder actions is required. Further, the state law only requires a plurality vote to elect directors. As the majority shareholder of Xebec, the veteran owner has the ability to control formal shareholder action and elect directors. Therefore, the lack of a formal action provision in the bylaws did not reflect issues of control.
Second, the provision on informal actions required unanimous consent from the shareholders. SBA VetCert concluded that this provision gave the minority shareholder the ability to block informal actions, resulting in negative control for the non-qualifying veteran.
OHA disagreed, noting that this type of provision does not deprive a majority shareholder of control. Rather, the provision “merely permits, as a matter of convenience, that shareholder votes need not necessarily occur at a shareholder meeting, but also may take place informally at other times.” Here, OHA pointed out, this provision does not take away from the veteran owner’s control. If the minority shareholder does not consent to the informal action, then the veteran owner could call a formal meeting and exercise his majority control there.
OHA concluded that Xebec had established that it was majority owned and controlled by the qualifying veteran and was therefore an eligible VOSB.
When preparing to submit your application to SBA, it is still important to make sure your company’s governing documents don’t contain any language that SBA could interpret as a lack of control. But it is helpful to know that OHA may be on your side if your application faces strict review by SBA. So, while VetCert was overly strict, cleaning up these sorts of issues in a governing document could avoid the delay and hassle of filing an appeal.
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