If someone asked me to play a word association game with the phrase “quorum provision,” one of my first responses might be “boring.”  After all, who really cares about some arcane paragraph tucked away in a company’s governing documents, describing how many people must attend company meetings?

Well, SDVOSBs should care.  If your small business is pursuing service-disabled veteran-owned small business set-aside opportunities, you better make sure your governing documents are airtight.  As demonstrated in one recent SBA Office of Hearings and Appeals decision, even something as mundane and boring as a quorum provision can defeat SDVOSB status, if the provision does not allow service-disabled veterans to unconditionally control the company.

SBA OHA’s decision in SDVOSB Appeal of Artis Builders, Inc., SBA No. VET-214 (2011) involved a seemingly innocuous bylaws provision that many small business owners may not even think about.  In Artis Builders, a small business’s Board of Directors had two members: one service-disabled veteran, and one non-service disabled veteran.  The company’s bylaws provided that a majority of the Board must be present to constitute a quorum.  Without a quorum, the Board could not vote.

After the small business won a Department of the Interior contract set-aside for SDVOSBs, a competitor filed an eligibility protest with the SBA.  As is the norm in such protests, the SBA requested a copy of the small business’s bylaws.  After reviewing them, the SBA held that the small business was not an eligible SDVOSB, because the quorum provision prevented the service-disabled veteran from controlling the company.  The SBA reasoned that under the quorum provision, the non-service-disabled veteran could essentially veto any business decisions the veteran wished to make, simply by refraining from attending Board meetings.

The small business appealed to SBA OHA, arguing that because the service-disabled veteran owned a majority of the business, he could remove the non-service-disabled veteran from her position on the Board at any time, countering any veto power the non-veteran might possess.

SBA OHA was not swayed by this argument.  Based upon other provisions in the company’s bylaws, it found that the service-disabled veteran would have great difficulty removing the other director, or potentially be unable to do so at all.  It held that “Based on the actual language of Appellant’s bylaws as they are presently written, [the non-service-disabled veteran] could indeed prevent quorum or block action by the board of directors.”  SBA OHA upheld the SBA’s decision, and the small business lost its contract.

Artis Builders is a warning to service-disabled veteran-owned small businesses about just how important it is to make sure that their bylaws, operating agreements, partnership agreements, or other governing documents meet the SBA’s standards for demonstrating that a service-disabled veteran owns and controls the company.  If you haven’t done so yet, now would be a good time to pull out your company’s governing documents and go through them with a fine-tooth comb.  As SBA OHA has held, even boring provisions can defeat SDVOSB status if they do not permit the service-disabled veteran to unconditionally control the company.