Provisions in a company’s Shareholders Agreement, requiring the service-disabled veteran to sell his shares back to the company in the event of the veteran’s death or incapacity, were contrary to the SBA’s SDVOSB regulations.

According to a recent SBA Office of Hearings and Appeals decision, these provisions prevented the veteran from having unconditional ownership over the company, because he could not dispose of his shares as he chose.  In reaching its conclusion, SBA OHA wrote that Court of Federal Claims decisions allowing such provisions under the VA’s SDVOSB program didn’t apply to SBA–meaning that SDVOSBs verified by the VA might be ineligible for non-VA SDVOSB contracts.

What a mess.

OHA’s decision in Veterans Contracting Group, Inc., SBA No. VET-265 (2017) involved a Corps of Engineers IFB for the removal of hazardous materials and demolition of buildings at the St. Albans Community Living Center in New York.  The Corps set aside the procurement for SDVOSBs under NAICS code 238910 (Site Preparation Contractors).

After opening bids, the Corps announced that Veterans Contracting Group, Inc. was the lowest bidder.  An unsuccessful competitor subsequently filed a protest challenging VCG’s SDVOSB eligibility.

DoD procurements fall under the SBA’s SDVOSB regulations, not the VA’s separate rules. (As I’ve discussed various times on this blog, the government currently runs two separate SDVOSB programs: one by SBA; the other by VA).  The protest was referred to the SBA’s Director of Government Contracting for resolution.

The SBA determined that Ronald Montano, a service-disabled veteran, owned a 51% interest in VCG.  A non-SDV owned the remaining 49%.

The SBA then evaluated VCG’s Shareholder’s Agreement.  The Shareholders Agreement provided that upon Mr. Montano’s death, incapacity, or insolvency, all of his shares would be purchased by VCG at a predetermined price.  The SBA determined that these provisions “deprived [Mr. Montano] of his ability to dispose of his shares as he sees fit, and at the full value of his ownership interest.”  The SBA found that these “significant restrictions” on Mr. Montano’s ability to transfer his shares undermined the SBA’s requirement that an SDVOSB be at least 51% “unconditionally owned” by service-disabled veterans.  The SBA issued a decision finding VCG to be ineligible for the Corps contract.

VCG appealed the decision to SBA OHA.  VCG argued, among other things, that a 2013 Court of Federal Claims decision characterized a right of first refusal as “a standard provision used in normal commercial dealings,” which “does not burden the veteran’s ownership interest unless he or she chooses to sell some of his or her stake.”  That case, which arose under the VA’s SDVOSB regulations, caused the VA to reverse its previous guidance and allow right of first refusal provisions–something VA has now permitted for more than four years.

OHA wrote that the Shareholders Agreement “places conditions on Mr. Montano’s ownership interest.”  OHA explained that, “in [the] event of Mr. Montano’s death, he is not able to dispose of his stock as he pleases, but rather, his estate must sell it to the corporation at the corporation’s price.”  Similarly, if Mr. Montano were to be deemed incapacitated, his “shares are deemed to have been offered to the corporation at Certificate Value, and the corporation shall purchase the shares.”

OHA wrote that the Court of Federal Claims decision dealt with “DVA’s Service Disabled Veteran-Owned Small Business Program, the Vets First Contracting Program.”  The Court “considered the issue of ownership under DVA’s regulation, 38 C.F.R. 74.3” This “is a different program from SBA’s Service-Disabled Veteran-Owned Small Business Concern program.”  SBA’s program, OHA wrote, “requires that the SDV’s ownership be unconditional, without condition or limitation upon the individual’s right to exercise full ownership and control of the concern.”

OHA denied VCG’s appeal, and upheld the SBA’s determination finding VCG ineligible.

OHA’s opinion is consistent with its prior decisions, and not surprising in that respect.  OHA’s job in cases like these is to interpret the SBA’s rules–nothing more.  But for SDVOSBs, Veterans Contracting Group confirms that the government’s SDVOSB system is (to use official law school terminology), a hot mess.

In my experience, many SDVOSBs don’t even realize that the government runs two separate SDVOSB programs, much less that the two programs have separate eligibility rules.  When a company is verified by the VA as an SDVOSB, many veterans assume that the company is eligible for SDVOSB contracts government-wide.

But since 2013, the VA accepts right of first refusal provisions like those at issue in Veterans Contracting Group.  These provisions are commonplace in standard corporate documentation, and undoubtedly many companies with such provisions in their governing documents have been verified by the VA.  As Veterans Contracting Group confirms, these same provisions may make these verified SDVOSBs ineligible for non-VA SDVOSB contracts.

Yikes.

Fortunately, changes are on the way.  Thanks to the 2017 National Defense Authorization Act, the SBA and VA are working together on regulations to consolidate the SDVOSB eligibility requirements.  Once these new rules are finalized, SDVOSBs will finally be able to play under one set of rules instead of two.

Of course, the consolidated regulations have yet to be proposed, much less enacted.  For now, SDVOSBs should strongly consider taking a fresh look at their governing documents.  As Veterans Contracting Group demonstrates, just because those documents might be VA-approved doesn’t mean that they’ll pass muster for non-VA procurements.