In a recent decision, SBA’s Office of Hearings and Appeals (OHA) emphasized the importance of a careful reading and complete understanding of the control and ownership requirements for Service-Disabled Veteran Owned Small Businesses (SDVOSBs). This decision provides contractors with an excellent opportunity to brush up on SBA’s control rules regarding qualifying and non-qualifying owners. As the appellant found out in this case, while it may seem to some at first glance that simple majority ownership by the service-disabled veteran is enough to meet SDVOSB requirements, voting provisions matter as well. Failure to keep in mind all aspects of SDVOSB requirements could lead to a denial of SDVOSB status. Let’s take a look at the language of the regulation in question, and how this case illustrates the potential consequences of overlooking a critical item in an otherwise-compliant application for SDVOSB certification.
Before hopping into the case, a refresher on relevant SDVOSB requirements is in order (For even more refreshers on the SDVOSB program, check out our back to basics SDVOSB post here).
SDVOSB Basics
13 C.F.R. § 128.203 governs SBA’s consideration of who controls an SDVOSB. Generally, to be eligible for certification as an SDVOSB, the business “must be controlled by one or more service-disabled veterans” and control by one or more qualifying veterans means that “one or more qualifying veterans controls both the long-term decision-making and the day-to-day operations of the Applicant or Participant.” Additionally, a qualifying veteran must hold the highest officer position in the firm, and while they do not necessarily have to have the technical expertise or licensure that would automatically confer control of the company, they do have to demonstrate that they have “ultimate managerial and supervisory control over those who possess the required licenses or technical expertise.” Most importantly for our purposes here, when the business in question is a corporation, one qualifying veteran must own at least 51% of all voting stock, be on the Board of Directors, and there can be no supermajority voting requirements for shareholders to approve corporate actions. All votes must be simple, greater than 50%, majority votes. If a firm’s governing structure does for some reason include supermajority requirements, one or more qualifying veterans must meet all those supermajority voting requirements regarding the management and daily business operations of the firm.
Logically, there are also limitations on control by non-qualifying individuals. They may not have the power to exercise actual control over the firm, have business relationships that cause such economic dependance that the qualifying veteran cannot truly exercise independent business judgment, or receive compensation that exceeds that received by the qualifying veteran who holds the highest officer position (amongst a few other restrictions and limitations). This last limitation can be overcome by showing that the compensation received by the non-qualifying veteran is “commercially reasonable” or that the qualifying veteran has chosen to take the lower compensation to benefit the firm. Id.
With that in mind, let’s jump into this case.
The Case
In Borek’s Concrete Company, SBA No. VSBC-457-A (Jan. 6, 2026), the applicant firm was initially denied by the SBA due to perceived errors with effectively all of the above requirements. Borek’s was 51% owned by a qualifying service-disabled veteran, with the other 49% owned by the service-disabled veteran’s non-qualifying husband. While this appears at first glance to satisfy the requirements of SBA’s SDVSOB regulations, it was the details of the company’s corporate voting structure that ultimately doomed its SDVOSB application.
The initial denial was based on a determination that the qualifying veteran, who handled all of the administrative and office functions of the firm, did not have control of the management and business operations or control all decisions. The denial asserted the non-qualifying veteran, had impermissible control, because he was responsible for the firm’s construction projects and supervised the day-to-day onsite operations. The original rejection also asserted that the qualifying veteran was impermissibly dependent on the non-qualifying individual’s expertise in the construction industry, arguing that the service-disabled veteran could not contradict the non-qualifying individual’s decisions without great economic risk. Finally, the service-disabled veteran did not receive the highest salary, and initial review found the explanation of this unsatisfactory.
Upon appeal, OHA actually sided with the applicant firm on each of these issues, but another new issue was found which doomed the appeal.
OHA pointed out that the qualifying service-disabled veteran was the majority shareholder and president, and that, while she did not have the technical expertise to be found to control the company, she did have ultimate managerial and supervisory control over the person who did. OHA also noted that the qualifying service-disabled veteran had sufficiently explained the lower salary based on leaving more working capital in the company, and that they received a higher draw of new profits during distributions as majority shareholder, actually making them the highest compensated shareholder. OHA emphasized that SBA must consider all compensation and stated that, if they had been able to find that the service-disabled veteran controlled the company, they would have remanded the case to assess the actual compensation amount and whether it benefits the company.
However, OHA could not find that service-disabled veteran controlled the firm, and it was for reasons that were not mentioned in the initial denial. OHA noted the company’s own application and bylaws showed that 60% of shareholders were necessary for a quorum, and 75% of shareholders were necessary to amend the bylaws. These constitute supermajority requirements which the qualifying service-disabled veteran could not meet with their 51% ownership. As a result, impermissible negative control was held by a non-qualifying individual, as that person’s ability to refuse to vote alongside the service-disabled veteran gave them the ability to essentially veto a decision, that the service-disabled veteran must have the control to make. Therefore, OHA sustained the decision and denied the appeal.
Bottom Line
In the end, what doomed this applicant was the supermajority provision in their bylaws. Despite otherwise meeting the SDVOSB control requirements, and ownership of the majority of the firm, the non-qualifying individual had negative control through supermajority quorum and amendment requirements, which is not allowed by SBA regulations. This seemingly minor aspect of their bylaws was enough to derail their application, and it serves as an important reminder to take special care in structuring an applicant firm prior to applying to the SDVOSB program. Interestingly, even the ability to amend the bylaws has to be done by a majority vote without veto power by a minority owner. Had the firm’s owners restructured their bylaws prior to their application, they could have retained their ownership percentages and roles and successfully applied for SDVOSB certification.
It is important to remember that ownership percentage alone will not decide who controls a business. Supermajority provisions, while not uncommon in corporate documents, are a dangerous pitfall for potential SDVOSB applicants who may not realize that this one provision can be so problematic. When considering a potential application for SDVOSB status, it is crucial that the firm’s governing documents are reviewed to ensure that there are no negative control concerns. If there are, these must be revised so that SBA cannot possibly find that a non-qualifying veteran improperly controls the company.
As always, stay tuned here for continuing analysis of OHA decisions as they come. We’ll keep looking into what SBA is doing and what it means for those in the small business federal contracting space, and as always, if you have questions on federal government contracting law or the SDVOSB program, reach out to a federal government contracting lawyer, such as our firm.
Editor’s Note: Special thanks to our wonderful legal clerk Will Orlowski for putting together this blog post.
Questions about this post? Email us. Need legal assistance? Call us at 785-200-8919.
Looking for the latest government contracting legal news? Sign up for our free monthly newsletter, and follow us on LinkedIn, Twitter and Facebook.