Recent Change To Rights Of SDVOSB Minority Owners

10/15/2018 by Gretchen M. Ostroff

The Department of Veterans Affairs (VA) and the United States Small Business Administration (SBA) each administers its own service-disabled veteran-owned small business (SDVOSB) contracting program. Until very recently, each program was subject to its own set of rules. Disparities between the eligibility requirements of the VA’s “Vets First” program and the SBA’s Service-Disabled Veteran Owned Small Business Concern (SDVO SBC) program led to inconsistent results: a SDVOSB might qualify under the Vets First program, but not SBA’s program, or vice versa. Recent regulatory changes helped resolve some of the inconsistencies between the two programs and the corresponding confusion that has plagued service-disabled veteran-owned contractors.

Via a final rule effective October 1, 2018, the VA eliminated its own criteria for SDVOSB eligibility and instead adopted SBA’s eligibility guidelines found in 13 C.F.R. Part 125 for applicants to the Vets First program. Then, SBA adopted revised guidelines—also effective October 1, 2018—on service-disabled veteran-owned business eligibility.

One important conflict resolved by SBA’s new rules are the rights of non-service-disabled veteran owners of an otherwise qualified SDVOSB. Historically, the VA program acknowledged the business reality that a non-service-disabled veteran owner deserved to have input on certain fundamental changes to the business. Giving the non-service disabled veteran owner a say in “extraordinary” company actions was necessary for the non-service-disabled veteran owner to protect its investment in the business and benefitted the service-disabled veteran owner by making it easier to solicit potential investors. SBA, however, required the service-disabled veteran owner to exercise absolute control over the business, which SBA interpreted as prohibiting non-veteran owners from having rights over even extraordinary matters.

Effective October 1, 2018, SBA has changed its position on the rights of non-service-disabled veteran owners. 13 C.F.R. § 125.13(m) now specifies that in the following five “extraordinary circumstances,” a service-disabled veteran owner’s lack of unilateral and absolute authority does not make the business ineligible for SDVOSB status:

  1. Adding a new equity stakeholder;
  2. Dissolution of the company;
  3. Sale of the company;
  4.  The merger of the company; and
  5. Company declaring bankruptcy.

In other words, a non-service-disabled veteran owner now can have a say in any of these five decisions (but only these five decisions) without destroying the service-disabled veteran owner’s full “control” over the business required for SDVOSB eligibility. In addition to enhancing the opportunities for non-veteran investment in SDVOSBs, the regulatory change in 13 C.F.R. § 125.13(m), as well as the VA’s adoption of SBA’s eligibility requirements, provides some much-needed consistency between the VA and SBA SDVOSB programs. For more information, please contact the authoring attorney.

 

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