• SBA significantly revised ownership and control rules, adopting language from VA and SBA 8(a) BD program regulations.
  • SDVO SBCs should avoid super majority shareholder voting requirements.
  • New rule creates rebuttable presumptions for control regarding normal working hours and the reasonable commute to a firm’s headquarters.

On January 29, 2018, the U.S. Small Business Administration (SBA) proposed to significantly amend its regulations to standardize and clarify the ownership and control standards required for qualifying as either a Veteran-Owned (VO) or Service-Disabled Veteran-Owned (SDVO) Small Business Concern (SBC) under the programs offered by the SBA and the Department of Veterans Affairs (VA). (See Ownership and Control of Service-Disabled Veteran-Owned Small Business Concerns, 83 Fed. Reg. 4005, 4005-4011 (Jan. 29, 2018) (to be codified at 13 C.F.R. §§ 125.11-.13, .22-.23)). Section 1832 of the FY 2017 National Defense Authorization Act (NDAA) amended section 3(q) of the Small Business Act, 15 U.S.C. § 632, and section 8127 of title 38 of the United States Code, to place the responsibility for issuing regulations relating to ownership and control of VO and SDVO SBCs with the SBA, thus establishing a unified definition of ownership and control for these concerns. (Pillsbury’s analysis of the most recent NDAA for FY 2018 can be found at this link.) The SBA’s current proposed rule implements the requirements of the FY 2017 NDAA.

While the VA previously maintained its own set of rules for determining ownership and control, the FY 2017 NDAA now requires the VA to use the regulations promulgated by the SBA. The Secretary of the VA may continue to determine whether individuals qualify as “veterans” or “service-disabled veterans,” but challenges to the status of a VO or SDVO SBC based on issues of ownership and control now fall solely under the jurisdiction of the SBA’s Office of Hearings and Appeals (OHA).

Key Changes

The proposed rule provides much-needed clarity and guidance as to when firms may qualify as VO or SDVO SBCs. Whereas conflicting regulatory language previously subjected relevant concerns to disparate standards for ownership and control, the new rule establishes a unified approach that leads to significantly less uncertainty. Much of the proposed rule adopts ownership and control language from SBA’s 8(a) Business Development (BD) program (such as definitions of “daily business operations” and “negative control”) or standards from the VA regulations. Accordingly, the revised standards should be familiar to current participants.

The proposed rule provides that control cannot be undermined by the use of greater than 51 percent shareholder voting requirements. Such voting requirements are typically found in small companies to protect minority shareholders. Indeed, applicants must notify the VA of any super majority voting requirements that are provided for in the firm’s articles of incorporation, its by-laws, or by state law. Service-disabled veterans must hold enough stock and/or shares to overcome such super majority voting requirements in order to maintain status as a SDVO SBC.

The proposed rule also provides clarifying language regarding a number of ownership or control issues, including:

  • Control of board of directors
  • Control of partnerships
  • Treatment of ESOPs for control
  • Dividend and distribution requirements
  • Treatment of community property laws
  • Financial arrangements affecting control

Finally, the proposed rule creates two new rebuttable presumptions as to when a service-disabled veteran does not control a company:

  1. A service-disabled veteran does not control the firm when the service-disabled veteran is not able to work for the firm “during the normal working hours that businesses in that industry normally work.”
  2. A service-disabled veteran does not control the firm if that individual is not “located within a reasonable commute” to the firm’s headquarters and/or job-sites locations.

Importantly, these presumptions are rebuttable, and contractors may overcome them by providing contrary evidence.

Conclusion

SBA’s proposed rule generally remains consistent with prior guidance and conforms to the requirements of the FY 2017 NDAA. The new rule clarifies when firms may qualify as VO and SDVO SBCs and provides helpful examples that illustrate the rule’s intent. Because the new rule originates from a mandate in a federal statute, the SBA is likely to implement the rule in a form similar to the proposed language. We believe the new rule presents a substantial improvement to the existing regulations due to clarity, unity, and conformity, but if you have concerns, we encourage you to file comments with the SBA on or before the deadline of March 30, 2018.