Christine V. Williams
December 18, 2017
Advising clients that own a small business with another entity, and I apply this to joint ventures as well, it is important to keep affiliation rules in mind. I define the small business owner (or the SBA firm) as the one on whom the eligibility depends on to qualify for the U.S. Small Business set-aside contract. For instance, for 8(a) BD firms or 8(a) firms, the eligible firm is the participant who has applied and is qualified/accepted as a small firm that is economically and socially disadvantaged.
While others may contain an ownership interest in the business (with limitations), they cannot maintain “control” positive or negative in the SBA firm. That is, they cannot hold final say as to how a SBA firm can and cannot move or make business decisions. An important distinction is that the minority shareholders (the non-SBA eligible owner) may protect its interest with the power to veto “extraordinary actions.” This veto power does not constitute negative control. As one may be able to surmise, ordinary actions that the minority owner can block does constitute negative control. Such negative control can then constitute affiliation; resulting in the combination of revenue or employee count (depending on how the size standard is determined). This may result in the small SBA firm being found “other than small.”
In a recent Office of Hearings and Appeals (“OHA”) case, OHA listed from its previously established precedence, what constituted negative control as an ordinary event and what was simply the protection of the minority ownership interest by being able to veto “extraordinary events.”
In Size Appeal of Team Waste Gul Coast, LLC, SIZ-5864, OHA reiterated its position regarding extraordinary actions, which include the following:
- Issuance of additional stock;
- Amendment of the firm’s charter or bylaws; or
- Entry into a substantially different line of business.
Conversely, “negative control exists when a minority shareholder can block ‘ordinary actions essential to running a company.'” (internal citations omitted). OHA has determined that the creation of debt and payment of dividends are among ordinary actions fundamental to daily operations of a business. Id. Other fundamental operations that are considered ordinary course of business dealings by OHA have included incurring expenses over $5,000 not in the operating budget, submission of a bid over $250,000, and the power to hire and fire executives. Id.
While many factors may fall into either category, when a minority shareholder could block or veto debt or exploration into a strategic line of business, OHA found such powers were the ability to exercise negative control and the firms affiliated. This affiliation, OHA found, extended beyond the two companies, with other non-SBA companies also being considered into the size calculation. Here is a link to the decision: Negative Control OHA Decision