The Department of Veterans Affairs (“VA”) recently signaled a policy change that will make it easier for service-disabled, veteran-owned small businesses (“SDVOSBs”) to qualify as such under the VA’s verification program (a prerequisite for eligibility to bid on certain government set-aside contracts). The VA has announced that the inclusion of “right of first refusal” provisions in the organizational documents of a SDVOSB, along with other “transfer restrictions that are part of normal commercial dealings,” will no longer serve as a bar to verification as a SDVOSB.

VA regulations require that a small business “be unconditionally owned and controlled by one or more eligible veterans, service-disabled veterans or surviving spouses” in order to qualify as an SDVOSB. 38 C.F.R. § 74.2(a). In the past, the VA relied on this “unconditionally owned” requirement to deny contractors SDVOSB verification when a veteran owner’s interest in his or her company was subject to transfer restrictions. Among the more important of such provisions is a standard “right of first refusal” clause, which would give other (non-veteran) shareholders the first right to purchase the veteran owner’s shares under certain limited circumstances. (In a recent case, Miles Construction, LLC v. United States, the U.S. Court of Federal Claims rejected the VA’s attempt to deny verification based on a “right of first refusal” provision.)

In recent written testimony submitted to the House Subcommittees on Contracting and the Workforce and Oversight and Investigations, however, a VA official stated that “right of first refusal” provisions and other such transfer restrictions “do not materially affect the ability of a Veteran to unconditionally own or control a business.” He further confirmed that as of March 6, 2013, the VA would no longer consider these restrictions a reason for denying SDVOSB eligibility.

The VA’s policy reversal is a victory for SDVOSBs, making it easier for those companies with traditional transfer restrictions to qualify for SDVOSB verification and the opportunity to bid on lucrative VA set-aside contracts.