Tag Archives: negative control

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

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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

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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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SBA Affiliation Rules and Unanimity Provisions: Some SBA OHA Guidance

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A company’s minority owners often insist that certain  actions be approved unanimously or on a supermajority basis, giving the minority owner the ability to control (or at least veto) those actions.

But small government contractors must tread very carefully when it comes to unanimity or supermajority provisions in their bylaws, operating agreements, or other governing documents.  Although the SBA permits unanimity or supermajority provisions regarding certain “extraordinary” corporate actions, other unanimity or supermajority provisions may result in a finding that the minority owner exercises undue negative control over the company, leading to affiliation problems with other companies controlled by that minority owner.

The decision of the SBA’s Office of Hearings and Appeals in Size Appeal of DHS Systems, Inc., SBA No. SIZ-5211 (2011) offers some guidance as to which provisions pass muster under the SBA affiliation rules, and which do not.

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