A small business may only participate in the VA’s Veterans First Contracting Program if it demonstrates that it is unconditionally owned and controlled by a veteran or service-disabled veteran. It is the “unconditional” aspect of the ownership and control requirement that most often trips up applicants, typically for good reasons. The fact that there cannot be any limits on the veteran’s role in the company is often impractical in a start-up business which has other investors or members. For example, under relevant case law, a veteran must be able to convey or transfer his ownership interest in the business whenever and to whomever he or she chooses, which might not be agreeable to other, minority members or stockholders who depend on the company’s status as a VOSB or SDVOSB to get a return on their investment. While the veteran could include provisions in the applicable business agreements compelling the minority interest or interests to sell on the same terms as the veteran (“drag along rights”) or allowing the minority interest to sell on the same terms if the veteran determines to sell (“tag along rights”), the precise language in these provisions frequently determines the difference between staying within the rules and crossing the line.
Many businesses also are unaware that seemingly innocuous provisions in the company’s articles of incorporation, by laws or operating agreement conflict with the control requirement. In order to demonstrate “control,” a veteran must show that it controls both the “strategic policy” setting exercised by the board of directors of the company or the members of the LLC as well as day-to-day management and administration of the business operations of the company. In the case of a LLC, control means that the veteran must serve as the LLC’s managing member and control all decisions of the LLC, including those decisions typically requiring a majority vote such as mergers, dissolutions and amendments to a company’s operating agreement. Other provisions, such as quorum requirements in by laws, create the same problems by allowing minority owners to exercise “negative control” over the business.
Unfortunately for veteran owners of small businesses, many of these issues are not obvious and, generally, only can be spotted by an attorney well-versed in this area of the law. Indeed, there are nearly a hundred cases debating the issues of unconditional ownership and control. In addition to the steep learning curve in this area, recent regulations have increased substantially a veteran’s risk in submitting a defective verification application to VA. The instructions regarding verification on the VA’s website advise applicants that the penalties for misrepresentation of veteran-owned status include debarment. Under other recent legislation passed by Congress last year, the Small Business Jobs Act, the fact that a company or an individual did not know it had misrepresented its status or did not intend to make such a misrepresentation is irrelevant.
Tom Leney, VA’s Director for Small and Disadvantaged Business Utilization, assured veterans at the Veterans conference and at the American Legion convention that his office will not report for debarment applicants denied verification. He also stated that he does not inform Contracting Officers, including those from agencies other than the VA, whether or not the VA has denied verification to an applicant not listed in the VIP database. Mr. Leney, however, did indicate that there is a proposal for the VA to take its veteran verification process Government-wide. And while the OSDBU may not be a source of VA debarment candidates for the moment, competitors have always been able to protest the veteran status of a SDVOSB or VOSB. This blogger is personally aware of a case where a company’s SDVOSB status was protested by a competitor to SBA, SBA decided in favor of the protester, and the VA debarred the contractor for misrepresentation of status in connection with not only the procurement that was the subject of the protest, but all procurements for which the company had submitted a bid or proposal prior to that procurement. Any representation of status made to the Government, in any context, therefore, should be carefully considered.