SBA Bid Protest: Two Classes of Shares and SDVOSB Eligibility – JD Supra | Region & Cash

The Small Business Administration’s (SBA) bid protest in question arose out of a State Department request for proposals for an aviation program support service. The contract was a Service Disabled Veteran Owned Small Business (SDVOSB) and Precise Systems Inc. was the obvious winner. Four companies, All Points Logistics, LLC; AMPS, LLC; B3 Solutions, LLC; and Downrange Operations and Training, LLC filed an SBA bid protest alleging that Precise Systems was not unconditionally and directly owned by a disabled veteran as a result of its Employee Stock Ownership Plan (ESOP). The Acting Director of Public Procurement (AD/GC) supported the protest. Precise appealed the AD/GC decision to the Office of Hearings and Appeals (OHA). In supporting the SBA bid protest, the AD/GC stated that “in order for a company to qualify as an SDVO SBC, at least 51 percent of all outstanding shares and at least 51 percent of each class of outstanding voting shares must be unconditionally owned by one or more disabled veterans.” (internal quotation marks omitted) (Reciting 13 CFR §125.9(d))

FUNCTION OVER FORM?

Precise argued in its defense that it had only one class of shares outstanding because all shares outstanding carried one vote per share. The AD/GC countered that the function of the structure is more important than the form of the structure. It also found that in at least one offering, Precise had two sets of shares with separate voting rights and that the Series B Convertible Preferred Stock was entitled to a preferential dividend right. The AD/GC concluded that the disabled veteran, Mr. John Thomas Curtis, held all of the Series A common stock and a majority of the total outstanding shares, but none of the Series B convertible preferred stock and therefore did not hold at least 51 percent of each own class of voting stock as required by regulation.

With respect to control, the AD/GC found that Mr. Curtis satisfied all of the control requirements, including being the most senior official and having the managerial experience required to direct the Group; was a member of the Board of Directors; and had the required ownership share overcome any super-majority voting requirement. However, the AD/GC found that Mr. Curtis did not control Precise, although he complied with all requirements. The SBA OHA referred to this narrow reasoning and suggested that the AD/GC’s decision on this issue may have been a typographical error.

PRECISE’S ARGUMENTS ON APPEAL

In its complaint to the SBA OHA, Precise argued that the AD/GC’s finding that it had two classes of shares was clearly wrong and should be reversed. Specifically, the company argued that its articles of association provide that both series of shares should vote together as a voting class. In addition, the Articles of Association of Precise confirmed that each shareholder had one vote and that the quorum was satisfied with the majority of shares outstanding regardless of series. Precise argued that Mr. Curtis had the power to control the company because he owned a majority of the total outstanding shares, was a controlling director on the board of directors, and could establish a quorum based solely on his shares.

LAW OF MARYLAND

The SBA OHA, in confirming the AD/GC decision, referred to Maryland’s Corporations and Associations Code, which states in part: “Where the stock is divided into classes,” the documents governing the corporations must “have a description of each class, including all Preferences, Conversion and Other Rights, Voting Rights, Restrictions, Restrictions on Dividends, Qualifications and Redemption Conditions.” Md. Code Corps. & Ass’ns § 2-104(a)(7). The OHA concluded: “It follows from this provision that while voting rights are a relevant issue, the boundaries of a ‘class’ may also be defined by factors such as preferred dividends, redemption opportunities and conversion rights.” Administrative Judge Kenneth Hyde found that the AD/GC made no mistake in considering factors other than voting rights when assessing whether the Complainant owns one or two Classes of Shares.

VA LAW

Precise also pointed to the VA statute at 38 CFR §74.3(a) which specifically exempts ESOPs in an attempt to persuade the OHA to reverse the AD/GC’s decision. The ALJ countered that the SBA’s program does not contain such an exception and that there is no legal basis for the OHA to introduce such an exception. He also dismissed Precise’s political arguments that confirming the AD/GC decision would discourage companies from forming ESOPs. “It is clear that OHA has no authority to determine the adequacy of the regulations itself.” The ALJ directed that such concerns should be directed to the SBA’s political officials.

OHA CONCLUSION

The OHA denied Precise’s appeal, but agreed with its contention that the AD/GC erred in finding that Mr. Curtis, the disabled veteran, did not control his company and reversed that portion of the finding. This was a hollow victory, however, as the OHA determined that the AD/GC made no mistake in determining that Precise did not meet the eligibility criteria under 13 CFR §125.9(d). The OHA concluded that Precise had two classes of stock and one of those classes was not at least 51 percent owned by the disabled veteran. There is no indication that Precise has appealed this decision to the US Court of Federal Claims, which has jurisdiction over these matters.

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