Reacting to a February federal court decision, the VA’s Center for Veterans Enterprise has reversed its position on provisions restricting the rights of service-disabled veterans to transfer their ownership interests in their service-disabled veteran-owned small businesses.
Previously, the VA CVE had taken the position that any restriction on a service-disabled veteran’s right to transfer his or her interest in the company was improper. Because such transfer restrictions are commonplace, many otherwise-eligible SDVOSBs had their verification applications denied.
No more. In a newsletter to SDVOSBs issued yesterday, the VA CVE stated that it would no longer deny verification based on certain ownership transfer restrictions–and offered an expedited reconsideration process to companies previously denied on this basis.
The VA CVE’s position is welcome news, but doesn’t mean that most SDVOSBs should rush to include transfer restrictions in their bylaws or operating agreements, because the SBA may not agree with the VA CVE’s change of heart.
In February, the U.S. Court of Federal Claims issued its ruling in Miles Construction, LLC v. United States, No. 12-597C (2013). The Court held that a standard “right of first refusal” provision should not prevent a SDVOSB from being verified, writing that the VA’s position to the contrary was “arbitrary and capricious and contrary to law.”
After the Court issued its ruling, I wrote:
The question then becomes, “now what?” Will the VA CVE revise its position on ownership restrictions in response to the decision? If so, what happens when an ownership transfer restriction is stricter than the one at issue in Miles Construction–such as a “tag along” or “drag along” provision, or a requirement that the veteran owner sell at a specified price? Much remains to be seen.
Now we have some answers. In yesterday’s newsletter, the CVE stated:
“In accordance with the 38 Code of Federal Regulation (CFR) § 74.3(b) (Transfer Restrictions), companies will no longer be denied for the Veterans’ First Contracting Program based upon “Right of First Refusal” or similar provisions in applicable business documents. This ruling is not retroactive to companies who received determination letters before March 1, 2013.”
Although the change in policy does not directly affect companies with denial letters before March 1, those companies are entitled to expedited reconsideration:
“However, companies that received denial letters with 38 § 74.3(b) (Transfer Restrictions) as a single point of failure before March 1, 2013, can submit for reverification. These companies will receive “priority” processing and should have a determination within 30 business days as long as they have previously under-gone a full document review and no other changes have occurred within the company. Please send an email with the following subject line: TRANSFER RESTRICTION PRIORTY with your company name and DUNS number to email@example.com.”
Kudos to the VA CVE not only for changing its misguided policy (albeit belatedly and in response to a federal judge), but for offering previously-denied companies a path to a quick verification.
As to my question regarding “tag along” provisions, and transfer restrictions other than those at issue in Miles Construction, the VA CVE has issued a new Verification Assistance Brief covering some of those issues. For instance, the new Verification Assistance Brief indicates that ordinary tag-along provisions may be acceptable.
The VA’s changed position is welcome news, but does not mean that SDVOSBs should comfortably insert transfer restrictions in their bylaws or operating agreements. The Verification Assistance Brief states that transfer restrictions “are unique conditions subject to a case-by-case review” meaning that a particular transfer restriction might not pass muster with the VA CVE.
In addition, the SBA’s Office of Hearings and Appeals has issued decisions suggesting that ownership transfer restrictions of any kind may be impermissible under the SBA’s SDVOSB program. In Miles Construction, the Court emphasized that its ruling applied only to the VA’s SDVOSB program, meaning that SBA OHA’s decisions still stand, and could come back to haunt verified SDVOSBs who bid on non-VA SDVOSB set-asides.
In other words, despite the VA CVE’s heartening reversal, much still remains to be seen.