On July 5, 2023, Verndari, Inc. filed an appeal to the Small Business Administration after their certification as a Service-Disabled Veteran-Owned Small Business (SDVOSB) was denied. The SBA's decision was based on their finding that Verndari did not meet the certification criteria, as non-service-disabled veterans held negative control over their Board. In response to the denial, Verndari submitted an appeal to the Office of Hearings and Appeals with the request to reverse the decision.

Structure and Ownership of Verndari, Inc.

The appellant, Verndari, Inc., is a corporation incorporated in Delaware. On April 6, 2023, the appellant submitted an application for certification as a service-disabled veteran-owned small business (SDVOSB). The Chairman of the Board, Mr. Jan A. Van Prooyen, is a service-disabled veteran and owns 56.5% of the appellant. The other members of the Board include Mr. John H. Brown and Mr. Paul Sartori, neither of whom are veterans or service-disabled veterans.

The Chief Executive Officer of the appellant is Ms. Amy A. Van Prooyen, who is the daughter of Mr. Van Prooyen. Like Brown and Sartori, she is also not a veteran or service-disabled veteran. Mr. Brown holds the position of President, and Mr. Van Prooyen serves as the Chief Operating Officer. During the certification process, the appellant failed to provide information relating to licenses and details regarding ultimate authority and supervisory control over employees or contractors.

Vernardi's Bylaws

Vernardi submitted their revised Bylaws, dated June 23, 2023. These Bylaws include important provisions related to the company's operations and governance that are pertinent to the appeal:

1. Special Meetings: The Bylaws state that special meetings of stockholders can be called by various individuals, including the Board, Chairperson, CEO, President, or stockholders owning at least 10% of the votes.
2. Quorum Requirement: In order to have a valid meeting, a majority of stockholders' votes is required, unless otherwise specified.
3. Meeting Procedures: The Chairperson of the Board, or other designated individuals, will preside over meetings and determine the order of business and voting procedures.
4. Board Responsibilities: According to the Bylaws, the Board is responsible for managing the business and affairs of the company, with the CEO reporting to the Chairman.
5. Director Election: Directors are elected at annual stockholder meetings, and the Bylaws may specify certain qualifications for directors.
6. Quorum for Board Meetings: To conduct official business, a majority of directors must be present at Board meetings, and the presence of the Chairman is required.
7. Board Voting: Directors have the authority to vote on matters, and the vote of a majority of directors present at a meeting constitutes the act of the Board.
8. Action without a Meeting: The Bylaws allow directors to take action without holding a meeting if all members consent in writing or electronically.
9. Director Removal: Directors can be removed by a majority vote of stockholders, with or without cause. Importantly, the removal of a director does not reduce the number of directors or affect their term.

Denial of SDVOSB Certification

On June 28, 2023, the Small Business Administration, acting through the Director of the Office of Government Contracting, denied Verndari's application for certification as a Service-Disabled Veteran-Owned Small Business (SDVOSB). The denial was based on the finding that the Appellant had not demonstrated full control by one or more service-disabled veterans on the board. 

At that time, the Appellant had three directors, with only one of them being a service-disabled veteran. In order to convene a quorum for board meetings, the presence of a non-service-disabled veteran director was necessary. This situation allowed non-service-disabled veteran directors to exert negative control over the board's decisions. Despite the Appellant's Bylaws allowing for unanimous written agreement of all directors as an alternative to in-person meetings, there was a risk that non-service-disabled veteran directors could withhold their written consent, undermining this approach.

Appeal to the OHA

On July 5, 2023, Verndari filed an appeal with the Office of Hearings and Appeals challenging the decision made by the Director of the Office of Government Contracting. The Appellant contended that Mr. Van Prooyen's position as Chairman of the Board and majority owner granted him complete control and substantial influence in the organization.

In response to concerns raised about potential obstruction by non-service-disabled veteran directors, the Appellant contended that such apprehensions were baseless, citing sections of the Bylaws that granted Mr. Van Prooyen the authority to remove any director, with or without cause. Furthermore, the Chief Executive Officer reported directly to the Chairman of the Board.

The Chairman also held the power to convene special shareholder meetings at any time, presiding over them and determining the order of business. As such, the Appellant maintained that Mr. Van Prooyen could effectively address any attempts to hinder the formation of a quorum within the Board. It was on this basis that the Appellant claimed that Mr. Van Prooyen occupied the highest-ranking position within the company.

Final Decision and Analysis

The Director of the Office of Government Contracting's analysis of negative control in the Appellant's case was flawed, as it failed to consider the potential influence of a majority shareholder in overcoming such control. This is consistent with a previous case, Matter of Alpha Terra Engineering, Inc. (PDF), where OHA determined that the appearance of negative control was illusory due to the majority shareholder's authority to remove directors impeding their control. Similarly, in the present case, Mr. Van Prooyen, a service-disabled veteran and majority owner of the Appellant, possesses the power to remove and replace directors who obstruct a quorum of the Board, rendering the appearance of negative control illusory.

However, the Appellant did not convincingly demonstrate its fulfillment of all the requirements for SDVOSB certification. One area of uncertainty lies in whether a service-disabled veteran occupies the highest officer position in the Appellant, as mandated by 13 C.F.R. § 128.203(b). Additionally, the extent of the Appellant's reliance on non-service-disabled veterans for a critical license during the application process remains unaddressed.

As a result, the appeal was granted to the extent that the Director of the Office of Government Contracting erroneously concluded that non-service-disabled veterans possess the power to exert negative control over the Appellant's Board. Consequently, the Director's decision was vacated, and the matter was remanded for further review.

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