OHA: Provisions in Operating Agreements for SBA Set-Aside Program Participants can Sink Eligibility

The organizational documents for a business seeking certification under a SBA socio-economic program can play an important part in a company demonstrating its eligibility under the SBA’s requirement for control by the company’s owners, such as a service-disabled veteran or disadvantaged owner. Unlike some of the SBA’s requirements for eligibility, the manner in which a program applicant or participant might run afoul of this requirement are not always obvious. Typical provisions in the organizational documents that, under “non-SBA” circumstances may seem innocuous, may unintentionally undermine the disadvantaged owner’s requirement of showing of unconditional ownership and control. 

In a recent OHA decision regarding Service-Disabled Veteran-Owned Small Business (SDVOSB) eligibility, (CVE Protest of: Randy Kinder Excavating, Inc.  d/b/a RKE Contractors, Protester Re: E&L Construction Group, LLC), an unsuccessful bidder filed a protest of a set-aside contract award, alleging that the company was not unconditionally controlled by the disadvantaged owner. After considering a variety of arguments, OHA issued a decision based on a handful of provisions in the respondent’s operating agreement.

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SBA Affiliation Rules: 4.16% Minority Owner “Controlled” Company

An owner of a mere 4.16% minority interest nonetheless “controlled” a company within the meaning of the SBA’s affiliation rules because the company’s ownership was split among approximately 20 companies, each with an equal ownership interest.

In a recent size appeal decision, the SBA Office of Hearings and Appeals confirmed that, where a company has no 50% or greater owner, a minority owner may be presumed to control the company–even where that ownership is as little as 4.16%.

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SBA Affiliation Rules: Beware Supermajority Voting Requirements

Under the SBA’s affiliation rules, a minority owner may “control” a company where the company’s governing documents impose supermajority voting requirements that require the minority owner’s consent for the company to make ordinary business decisions.

In a recent size appeal decision, the SBA Office of Hearings and Appeals confirmed that supermajority voting requirements may establish control (and affiliation), even where the minority owner does not actually exercise its control.

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SDVOSB’s Operating Agreement Caused Affiliation

In a recent SBA Office of Hearings and Appeals size decision, a service-disabled veteran-owned small business’s operating agreement caused affiliation under the SBA’s affiliation rules, despite the fact that the majority owner was also labeled as the 51% manager.

SBA OHA’s decision in Size Appeal of Washington Patriot Construction, LLC, SBA No. SIZ-5447 (2013) shows the importance of carefully drafting a small business’s corporate operating agreements or bylaws to prevent affiliation with other companies controlled by the small business’s minority owners.

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SBA Affiliation Rules: Directors’ Control “Illusory,” Says SBA OHA

A director does not “control” a company under the SBA affiliation rules when that director can be removed at any time by the majority shareholder, according to a recent size appeal decision of the SBA Office of Hearings and Appeals.

In Size Appeal of Environmental Quality Management, Inc., SBA No. SIZ-5429 (2012), SBA OHA arrived at the commonsense conclusion that when a majority shareholder has unfettered discretion to fire a company’s directors, the majority shareholder–not the directors–control the company for purposes of the SBA affiliation rules.

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8(a) Joint Ventures and SBA Size Protests: SBA OHA Narrows The Scope of Review

When the SBA Area Office reviews a SBA size protest against a SBA-approved 8(a) joint venture, the SBA Area Office must confine itself strictly to size issues.  According to a recent decision of the SBA Office of Hearings and Appeals, in conducting its review of a SBA size protest, the SBA Area Office cannot examine whether the joint venture complies with the 8(a) program’s regulations.

Although the distinction between size and 8(a) issues may sound like a technicality, it can make the difference between a sustained SBA size protest and an unsuccessful one.  As a result, this SBA OHA decision provides an extra layer of protection to SBA-approved 8(a) joint ventures–any makes filing a successful SBA size protest against an approved 8(a) joint venture that much more difficult.

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The SBA Affiliation Rules, Trustees, and Negative Control: A Cautionary Tale

Small government contractors ask me, with some frequency, whether placing a company’s stock in a trust will protect the company from affiliation under the SBA affiliation rules.

I typically answer this question with one of my own: “who will control the trust?”  I tell them that if the same people who currently control the company will continue to control it once the stock is placed in trust, the mere act of placing the company’s stock in the trust is unlikely to shield the company from affiliation with other companies controlled by those same people.

A recent size appeal decision of the SBA Office of Hearings and Appeals confirms that the ordinary SBA affiliation rules typically still apply when a company’s ownership is placed in trust.  In fact, in this size appeal decision, the company in question lost out on a contract because one of the trustees had so-called “negative control” over the company–essentially, the ability to veto the decisions of the other trustee.

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