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Ownership and Control of Service-Disabled Veteran-Owned Small Business Concerns

On Behalf of | Oct 24, 2018 | Firm News

Written by:  Jon M. DeVore

In 2006, Congress passed the Veterans Benefits, Health Care, and Information Technology Act of 2005 (38 U.S.C. 501,513), this in part created the Vets First Contracting Program within the Department of Veterans Affairs (VA). This program enabled approved firms to participate in Veteran-Owned Small Business (VOSB) and Service Disabled Veteran-Owned Small Business (SDVOSB) set asides issued by the VA.  On October 1, 2018, both the VA and the U.S. Small Business Administration (SBA)  made changes in their regulations that change the manner in which Veteran Owned Businesses will be certified and determined eligible to participate in Federal Procurement Programs.

In 2017, Congress passed the National Defense Authorization Act of 2017 (NDAA) which directed standardized definitions for VOSBs, and SDVOSBs between the VA and SBA. The NDAA further clarified how veteran-owned firms were certified and directed how the U.S. Small Business Administration (SBA) and VA would administer the veteran contracting program.  The NDAA instructed the VA to use SBA regulations to determine ownership and control of both VOSB and SDVOSBs. The VA would determine whether the individuals were veterans or service disabled veterans and would verify applicant firms. Any challenges as to control and size issues would be determined by the SBA and ultimately heard by SBA Office of Hearings and Appeals (OHA).

The VA removed references related to ownership and control to clarify the terms and references part of the verification process. This clarified that surviving spouse or employee stock ownership plan (ESOP) could also be qualified for the program under specific circumstances.

The SBA published final regulations that were effective October 1, 2018.  This rule amends the rules of practice of SBA’s OHA to implement protests of eligibility for inclusion in the VA center for Verification and Evaluation database eligibility, and it also includes procedures for appeals and denials of cancellations of inclusions in the database.  SBA amended its regulations and issued definitions of ownership and control for small business concerns (SBC) which applies to the VA in its verification and “Vets First Contracting Program” and all other government acquisitions requiring self-certification.

The Rule:

The rule defines a Service Disabled Veteran as one who possesses either a valid disability rating letter issued by the VA establishing a rating between 0-100% or a valid disability determination from the DOD, or is registered in the beneficiary identification and records locator subsystem maintained by the VA.  Reserve and National Guard disabled from disease or injury incurred or aggravated in line of duty also qualifies. These veterans with a permanent and severe disability are those with a service-connected disability that was determined by the VA to have permanent and total service connected disability for purposes of receiving disability compensation or pension.

The new rule and regulations define a VOSB concern as one where not less than 51 percent of which is owned by one or more veterans or, for publicly owned business, not less than 51% of the stock of which is owned by one or more veterans, and the management and daily business operations are controlled by one or more veterans or, if permanently and totally disabled, no less than 51% is owned by one or more veterans for both small business concerns and publicly owned businesses. Daily business operations are defined as the marketing, production, sales, and administrative functions of the firm, as well as supervision of the executive team.

An owner of an SDVO SBC and Conditions of Ownership are:

The SBA regulations essentially remain the same with some important changes for unique circumstances providing a concern must be at least 51% unconditionally and directly owned by one or more service-disabled veterans. For partnerships at least 51% of aggregate voting interest must be unconditionally owned by one or more service-disabled veterans. For publicly owned businesses, no less than 51% of stock must be unconditionally owned by one or more veterans.  One or more service-disabled veterans must be entitled to receive at least 51% of the annual distribution of profits paid to owners of corporation, partnership etc.  Ownership is determined regardless of whether the ownership and business concern is located in a community property state.

A SDVOSB upon the death of the service-disabled veteran will continue to qualify as a small business concern if the surviving spouse acquires the veterans ownership interest, veteran was rated 100% disabled under VA or the veteran owner with majority ownership died as a result of the service related disability.  The SBA limits the ability to continue to be a qualified business from the time of the death of the veteran and the ending of the earliest of the following three events:

  • The veteran’s spouse remarries;
  • The spouse divest ownership interest in the business; or
  • Ten (10 years) after the death of the veteran.

Control of a SDVOSB or VOSB:

The SBA has clarified the requirement for veteran control of the business concern under a variety of circumstances essentially providing eligibility integrity while providing that the veteran can still get the benefits in unique situations.  In the case of a permanent or severely disabled veteran the spouse or designated caregiver may act on behalf of that veteran.  A Permanent Caregiver for the veteran may control the affairs of the business on behalf of the veteran when it has been legally demonstrated that the person has the responsibility for managing the wellbeing of the veteran with a severe or permanent disability as determined by the VA.  There may be only one permanent caregiver.

Control over a corporation for one or more service-disabled veterans (or spouse or caregiver of a permanent and severe disabled veteran, will be deemed to be service disabled to control the board of directors when a single service-disabled veteran owns 100% of all voting stock of an applicant or concern, or owns at least 51% of all voting stock of an applicant or concern, is on the board of directors, and no super majority voting requirements exist for shareholders to approve actions.

If supermajority exists in the articles of incorporation the veteran must be able to overcome super majority voting requirements. If more than one seeks to qualify the concern each individual on the board together should own at least 51%. All voting stock, there is no requirement for supermajority, and the shareholders can demonstrate that they have made enforceable arrangements to permit one of them to vote the stock as a block without a shareholder meeting. If supermajority exists shareholders must provide for a sufficient percent of voting stock to overcome requirements. Weighted voting is required when an applicant does not meet these above requirements.

The SBA will NOT make a determination that the veteran lacks control in “extraordinary circumstances.”  The limited extraordinary circumstances are defined as:

  • Adding a new equity stakeholder
  • Dissolution of the company
  • Sale of the company
  • Merger of the company
  • Company declaring bankruptcy, and
  • Negative control.

There is a rebuttable presumption that service-disabled veterans do not control the firm when they are unable to work for the firm during normal working hours that businesses in the industry usually work (not limited to other full or part time employment, student, other activities etc.). There is also a presumption that these veterans do not control the firm if they are not within a reasonable commute to the firm’s HQ or job-site. Ability to respond to phone calls or emails is not by itself a presumption.

If the service-disabled veteran has been called to active duty, they may elect to designate in writing one or more individuals to control the concern on behalf of the service-disabled veteran during the period of active duty. This will not remove the eligibility based on absence during active duty. Written records must be kept.

This short report on the new regulations is not intended to be comprehensive and does not cover all of the details of the two sets of regulations.  This short report is not intended as legal advice.  We recommend people interested in this issue complete due diligence and independent research into the new regulations.