As described in detail below by John Tolle, there have been some court decisions that impact how the SBA determines service-disabled veteran ownership control.
In a recent Court of Federal Claims decision, COFC 14-1174C, Precise Systems Inc. v. US, the court found that the SBA was free to ignore whether a stock plan diminishes a Veteran owner’s control. Specifically, the Court agreed with the the SBA that the employee stock ownership meant that the service-disabled veteran (“SDV”) who was the sole owner of Precise until 2011 no longer had both majority ownership and control of the company.
The stock was divided between two groups, one owned by the SDV, and one by the employees, with the SDV’s group accounting for the majority of shares and having the power to outvote the employee stockholders in any disagreement. But in a strict form-over-substance ruling the SBA ruled that the ownership structure did not comply with regulations that require that “at least 51% of the aggregate of all stock outstanding and at least 51% of each class of voting stock outstanding must be unconditionally owned by one or more service-disabled veterans.”
Thus because the SDV did not also own the majority of the employee stock shares, which SBA characterized as a separate “class” of voting stock, he did not qualify for SBA’s veteran-owned business program. By making this narrow interpretation of the law, OHA freed itself from the responsibility of analyzing whether distinctions in the stock “materially detracted from the service-disabled veteran’s ownership and control of the business,” as it may have been forced to under a broader reading of the case, according to the court.
Judge Campbell-Smith writes: “Although this very narrow interpretation seems handily to circumvent Precision Analytical’s [earlier precedent that the court addressed] broader principle, the court defers—as it must—to an agency’s interpretation of its own precedent when such an interpretation is rational. Here, the court cannot say that the OHA’s tightly cabined interpretation is irrational simply because it is narrow.”
She added: “[T]he OHA is within its discretion to adopt a hardline approach. In doing so, the OHA has signaled that it does not want to engage in a case-by-case analysis of whether differences inure to the benefit of the service-disabled veteran or someone else, or appear to inure to one but actually inure (or could be abused to inure) to the benefit of the other.”
John R. Tolle
Barton Baker Thomas& Tolle LLP