Service-Disabled Veteran “Controlled” SDVOSB With 79% Ownership, Says SBA OHA

A service-disabled veteran, who owned 80% of this business and served as its highest officer, “controlled” the company within the meaning of the SBA’s SDVOSB regulations, according to a recent decision of the SBA Office of Hearings and Appeals.

SBA OHA’s commonsense decision overturned an earlier SBA determination that the veteran’s majority ownership and officer position did not amount to “control.”

SBA OHA’s decision in Alpha Terra Engineering, Inc., SBA No. VET-238 (2013) involved an Army SDVOSB set-aside solicitation for management and training support services.  After evaluating competitive proposals, the Army announced that Alpha Terra Engineering, Inc. was the apparent successful offeror.

A competitor filed a SDVOSB protest, challenging Alpha Terra’s SDVOSB eligibility.  The protester alleged, in part, that Alpha Terra was not controlled by one or more service-disabled veterans, as required under the SBA’s SDVOSB program.

The SBA’s Director of Government Contracting determined that Harold von Dran, a service-disabled veteran, unconditionally owned 79.279% of Alpha Terra.  Mr. von Dran also served as Alpha Terra’s president (the highest officer), as well as treasurer and chairman of the board.  Mr. von Dran had 37 years of relevant industry experience.

However, the Director noted that Alpha Terra had four directors: Mr. von Dran, and three non-SDVs.  Under Alpha Terra’s bylaws, three of the four directors were necessary to form a quorum for board meetings, and the votes of three of the four directors were necessary for the board to take action.  The Director determined that Mr. von Dran did not control the board because the presence and votes of non-SDVs were required at board meetings.  The Director issued a decision finding Alpha Terra to be ineligible for award of the Army SDVOSB set-aside contract.

Alpha Terra appealed to SBA OHA.  Alpha Terra argued, in part, that under its bylaws, Mr. von Dran could remove any director at any time.  Alpha Terra stated that the other directors could only exercise “illusory” control over the company, because Mr. von Dran could unilaterally remove a director if the director refused to establish a quorum or vote in accordance with Mr. von Dran’s wishes.

SBA OHA agreed with Alpha Terra.  Although apparently not raised by Alpha Terra in its appeal, SBA OHA first addressed a specific SBA SDVOSB regulation, 13 C.F.R. 125.10(e)(1).  Under that regulation, a service-disabled veteran is deemed to control a board of directors “when the service-disabled veteran owns at least 51% of the voting stock, is on the board, and holds sufficient stock to overcome any supermajority voting requirements.”  SBA OHA determined that these factors existed in the case of Mr. von Dran, meaning that he “controlled” the board within the meaning of the regulation.

SBA OHA also agreed with Alpha Terra’s argument regarding “illusory” control.  SBA OHA noted that according to the company’s bylaws, “Mr. von Dran has the power to remove every other director at a special shareholders meeting, if he so chose.”  SBA OHA stated that upon removing the directors, “he could then appoint directors of his choosing.”  In this way, “Mr. von Dran . . . has the ability to exercise full control” over Alpha Terra.  SBA OHA granted Alpha Terra’s appeal and reversed the Director’s decision.

SBA OHA arrived at the right result in Alpha Terra, and that is welcome news.  However, the case should also serve as a reminder to SDVOSBs about just how closely their corporate documents will be scrutinized in the event of a SDVOSB protest (or in the event that the company applies for SDVOSB verification with the VA).

Even here, where the service-disabled veteran owned nearly 80% of the company, served as the highest officer, and was highly experienced in the industry, the SBA initially ruled that the company was not a SDVOSB, based solely on its paperwork.  In that respect, Alpha Terra is an important reminder to SDVOSBs to carefully check (and double check) their corporate documents against the SDVOSB requirements before a SDVOSB protest occurs.

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