The recent decision in CVE Appeal of Valor Construction, Inc, SBA No CVE-121-A (June 3, 2019) provides a useful reminder to contractors regarding the difference between unconditional ownership and unconditional control, and the importance of assessing both when analyzing service-disabled veteran owned small business (“SDVOSB”) eligibility.  Specifically, the decision in Valor – which was issued by the Small Business Administration’s (“SBA”) Office of Hearings and Appeals (“OHA”) – demonstrates that an individual’s majority ownership of a SDVOSB, alone, does not vest that individual with unconditional control over the SDVOSB.  The Valor decision further reflects how the revised control regulations may cause eligibility problems for contractors.  Avoiding these pitfalls requires some background knowledge regarding the dual SDVOSB programs and the revision of the applicable regulations, a thorough understanding of the revised regulations themselves, and an awareness of the most common eligibility problems that contractors can face under these regulations.  We walk you through these topics below.

As many SDVOSBs know, there are two separate small business programs that relate to veteran-owned businesses: one run by the SBA, and the other run by the United States Department of Veterans Affairs (“VA”).  The VA’s program governs eligibility for VOSB/SDVOSB set-aside procurements issued by the VA, while the SBA’s program governs eligibility for SDVOSB set-aside procurements issued by agencies other than that VA.  Both programs have eligibility requirements relating to the “unconditional ownership” and unconditional control” of one or more veterans/service-disabled veterans.  In December 2018, the regulations governing these programs were revised to promote consistency and uniformity regarding the way “unconditional ownership” and “unconditional control” are analyzed.  The regulations substantively governing unconditional ownership and control for both programs are now found in the SBA regulations, at 13 CFR 125.12 and 13 CFR 125.13, respectively.  These regulations differ from the previous eligibility regulations in several ways.  In particular, 13 CFR 125.13(i) now describes a number of factual scenarios involving non-veteran minority owners that can strip a company of its SDVOSB status.  CVE Appeal of Valor Construction, Inc, is a good example of some common eligibility pitfalls relating to control under the new regulation.

In Valor, a service-disabled veteran owned 51% of the company at issue, Valor Construction, Inc. (“Valor”).  The remaining 49% of the company was owned by two individuals, neither of whom were service-disabled veterans.  Though Valor was majority-owned by a service-disabled veteran, OHA found that the service-disabled veteran majority owner did not unconditionally control the company for several reasons.  First, OHA found that the service-disabled veteran majority owner, lacked the managerial experience of the extent and complexity needed to run Valor.  Valor is a construction company, but the veteran-owner’s resume reflected that he had no experience or training in the construction industry.  Second, the company’s by-laws required that, in order to effect certain corporate actions, unanimous consent (including the consent not only the service disabled veteran, but also the other minority owners) was required.  This meant that the service-disabled veteran owner could not, without approval of the other owners, take certain corporate actions; this meant he did not truly “control” the company. Finally, OHA found that the service-disabled veteran did not control the company because he had two jobs – one at Valor, and a second, outside, position – and that he worked at his second job during normal business hours.   Based on these three factors, OHA found that Valor was not a legitimate SDOVSB.

So, what lessons can SDVOSBs take from this decision?  Several!

• First, as a threshold matter, do not assume that just because a veteran/service-disabled veteran is the majority owner of a company, that the company meets all of the VOSB/SDVOSB eligibility criteria. Make sure you have evaluated whether or not you fulfill the requirements regarding control, as well.
• Make sure that the service-disabled veteran owner has the requisite knowledge and experience to run the company, and, further, that he/she can demonstrate it! Pursuant to 13 CFR 125.13(b), a service disabled veteran must hold the highest officer position in the company (i.e. President, CEO), and must also have “managerial experience of the extent and complexity needed” to run the company.  That means the service-disabled veteran must show that they have experience in the applicable industry, such that they would have the knowledge and understanding necessary to manage the company and its affairs.  In other words, if the veteran is claiming to run a complex IT firm, but has never worked anywhere but a restaurant, it is unlikely that he/she could demonstrate the managerial experience necessary to control the company.  Now, that does not necessarily mean that the service-disabled veteran has to have all of the requisite technical expertise, or personally hold required licenses – it will usually be enough to show that he/she has “ultimate managerial and supervisory control” over the employees that do.  But, he/she will likely have to provide evidence of this supervisory control to remain eligible.
• Beware of provisions in a company’s by-laws, operating agreement, shareholders agreement, etc., that divest a service-disabled veteran owner of the power to make decisions or effectuate changes! If there are any supermajority provisions, or unanimous consent provisions, that the service-disabled veteran, alone, cannot satisfy, there are eligibility problems.  Ensuring compliance with the SDVOSB eligibility regulations requires a careful reading of a company’s corporate governance documents!
• Be very careful about outside employment! If the veteran is not working for the company seeking SDVOSB status during normal working hours, there is a presumption that he/she does not control the company.

On a global level, the lesson is that you need to be familiar with the new regulations, and the specific provisions regarding control.   The above are just some of the considerations that can cause eligibility problems under the revised control regulations.  Others include the provision of critical financing by another business, a veteran owner working remotely, or business relationships with another company that foster “dependence” on that company.  In short, the revised regulations create a lot of hidden pitfalls that SDVOSB companies can fall into, some of which were not necessarily problematic under the old regulations.  If you have questions about your SDVOSB eligibility under the new regulations, contact a legal professional.

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