By: Edward T. DeLisle & Maria L. Panichelli

SDVOSB Appeal of Rush-Link One Joint Venture, SBA No. VET-228 (2012), a recent Small Business Administration Office of Hearings and Appeals (“OHA”) decision that we discussed previously, demonstrates how a company’s internal corporate structure can impact that company’s eligibility to participate in the Service-Disabled Veteran Owned (“SDVO”) small business program.

SDVOSB Appeal of Rush-Link One concerned a joint-venture, Rush-Link One, which was 51%-owned by Link Contracting, Inc. (Link), a purported SDVO small business concern. Mr. George Carpenter, a service-disabled veteran, owned 55% of Link. Following the award of a SDVOSB set-aside contract to Rush-Link One, a competitor challenged the joint-venture’s eligibility for the SDVO program.

Pursuant to 13 C.F.R. § 125.10(a), a small business concern may qualify as an eligible SDVO only if the management and daily business operations of that concern are “controlled” by one or more service-disabled veterans. The regulations define “control” differently, depending upon the type of corporate structure employed. In the case of a partnership, one or more service-disabled veterans must serve as general partners, with control over all partnership decisions. 13 C.F.R. § 125.10(c). A limited liability company (LLC) is “controlled” by a service-disabled veteran only if one or more service-disabled veterans serve as managing members, with control over all decisions of the LLC. 13 C.F.R. § 125.10(d). In the case of a corporation, such as Link, the service-disabled veteran must prove that he or she has “control” over the corporation’s Board of Directors, thereby allowing him or her to make all major decisions on the company’s behalf. 13 C.F.R. § 125.10(e). Service-disabled veterans control the Board of Directors when either: (1) one or more service-disabled veterans own at least 51% of all voting stock of the concern, are on the Board of Directors and have the percentage of voting stock necessary to overcome any super majority voting requirements; or (2) service-disabled veterans comprise the majority of voting directors through actual numbers or, where permitted by state law, through weighted voting. 13 C.F.R. § 125.10(e).

Applying the above in Rush-Link One, the OHA concluded that the supermajority requirements in Link’s shareholders’ agreement abrogated the service-disabled veteran owner’s “control” of the corporation under 13 C.F.R. § 125.10, and rendered the concern and, therefore, the joint-venture, ineligible for participation in the SDVOSB program. The OHA found that, although Link was 55% owned by a service-disabled veteran, its shareholders executed a formal shareholders’ agreement which stated that “[e]xcept as otherwise provided herein or in [Link’s] bylaws, all decisions of the Shareholders shall be made by a majority vote. “Majority vote” was defined as one in which “seventy percent (70%) of the issued shares of the Corporation vote to pass the issue or matter.” The same paragraph of the shareholders’ agreement indicated that “[t]his provision shall supersede any contrary provision of [Link’s] bylaws or Articles of Incorporation (as they stand now or may subsequently be amended).” Accordingly, the OHA found that Mr. Carpenter’s 55% ownership of Link was insufficient to overcome the supermajority requirement set forth in the shareholders’ agreement, and, consequently, that he did not “control” Link’s board of directors or Link as a whole. Therefore, OHA concluded that Link was not a SDVOSB, and that Rush-Link one was not an eligible SDVOSB joint-venture.

Let this case serve as a reminder that internal corporate governance is critically important to SDVOSB eligibility. In our practice, it represents the single, most frequently cited basis for the loss or denial of SDVOSB status.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.