Following recent congressional testimony, as well as a newsletter published by the Department of Veterans Affairs’ (“VA”) Center for Veterans’ Enterprise (“CVE”) last month,  it would appear that the Miles decision (discussed in detail here and here) has forced an important change in VA policy regarding transfer restrictions.

Prior to the Miles opinion, the VA had taken the position that any restriction on a service-disabled veteran owner’s right to transfer his or her ownership interest rendered ownership conditional.  As the regulations require “unconditional ownership” by a service-disabled veteran to be considered a legitimate SDVOSB concern, the VA reasoned that the presence of transfer restrictions embedded within formation documents eliminated an entity from eligibility.  That was then.

In Miles, the Court of Federal Claims ruled that transfer restrictions did not necessarily render a service disabled vet’s ownership “conditional.”  The provision Miles required the company’s service-disabled veteran owner to offer minority shareholders the right to purchase the veteran’s shares prior to a sale to a third party.  The VA argued that this provision denied the service-disabled veteran “unconditional” ownership and prevented Miles from being SDVOSB-verified.   In overruling the VA’s decision, the Court of Federal Claims concluded that provisions such as the “right of first refusal” provision in Miles’ shareholders agreement fell within the ambit of “normal commercial practice;” it did “not affect the veteran’s unconditional ownership.”  In short, the Court found that transfer restrictions do not render control conditional, as long as those restrictions are commercially reasonable.

In apparent recognition of this holding, the VA has changed its official policy regarding transfer restrictions.  As referenced by the VA’s Executive Director of Small and Disadvantaged Business Utilization, Mr. Thomas Leney, in his congressional testimony (check around the 1:05-1:10 mark), the VA’s position now is that “transfer restrictions on ownership that are part of normal commercial dealings, such as the right of first refusal, do not materially affect the ability of the veteran to unconditionally own or control the business.”  He went on to state that “the VA will no longer interpret the current regulation to mean that such restrictions constitute a reason for denying eligibility.”  This policy shift is reflected in a Verification Assistance Brief entitled “Transfer Restrictions“, found on the VA’s website, and is highlighted in a newsletter published by CVE on May 3, 2013.

Unfortunately, the VA has determined that this change in policy will not be applied retroactively to companies who were denied SDVOSB eligibility prior to March 1, 2013.

However, these entities are not completely out of luck.  For applicants that received denial letters before March 1, 2013, where the sole basis for denying SDVOSB verification was the existence of transfer restrictions, those applicants can request reconsideration without waiting the six months typically required to reapply pursuant to 38 C.F.R. 74.14.  Moreover, the VA has promised that these previously-denied companies will receive “priority” processing, and should have a determination within thirty business days (as long as they have previously undergone a full review and no changes have occurred within the company).

If your company was previously denied SDVOSB verification based upon a problem with transfer restrictions, and you wish to take advantage of the priority reconsideration process, send an email to vacorecons@va.gov, with the following subject line: TRANSFER RESTRICTION PRIORITY, with your company name and DUNS number.  If you have any questions, you can also send me an email and I will try to assist you.

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.