In late December, the Court of Federal Claims upheld an SBA decision revoking a Service Disabled Veteran Owned Small Business’ (“SDVOSB”) status on the basis the business failed in the unconditional ownership requirement set forth in the SBA’s SDVOSB regulations. In Veterans Contracting Group, Inc. v. United Sates, No. 17-1188C, the SDVOSB was determined not to be unconditionally owned by a service disabled veteran due to limitations in the company’s shareholder agreement that affected the ownership of the service disabled veteran’s shares upon his death or incapacitation.
The decision flowed primarily from the fact that, unlike the SBA’s regulations for 8(a) or WOSB companies, there is no definition of “unconditional ownership” in the SBA SDVOSB’s regulations.
The definitions contained in the 8(a) and WOSB regulations allow for exceptions related to death and incapacitation that follow normal commercial practices. However, the lack of definition in the SDVOSB regulations has led the SBA to apply the dictionary definition to “unconditional ownership”, which does not permit any exceptions as allowed in the other regulations. See The Wexford Group Int’l, Inc., SBA No. SDV-105, 2006 WL 4726737 (June 29, 2006) (“In sum, service-disabled veterans must immediately have an absolute right to do anything they want with their ownership interest or stock, whenever they want.”).
While recognizing the result as “draconian” and “perverse”, the Court held it did not have the authority to apply a different interpretation to the SBA’s own regulations, noting the SBA has had years since the Wexler decision to address the lack of regulatory definition but has failed to take action. The decision is particularly disturbing considering that Veterans Contracting Group did meet the ownership requirements under the VA’s own regulations; however, the company has been removed from even the VA’s list of SDVOSBs due to the SBA’s decision. The Court also recognized the decision could have a serious negative impact on SDVOSBs’ abilities to find business partners given the requirements for unconditional ownership under the SBA’s definition.
Until the SBA conforms the SDVOSB regulations to match the “unconditional ownership” requirements of the 8(a) and WOSB regulations, SDVOSB companies, and their shareholder agreements, must be cognizant of the requirements set forth in the Wexler decision and confirmed in this case. The Court’s ruling confirms that even agreements that follow standard commercial terms may violate the SBA’s standards for ownership, resulting in the total loss of SDVOSB status with both the SBA and the VA.