The Court of Federal Claims released an opinion today, Veterans Contracting Group, Inc. v. United States and Williams Building Company, Inc. No. 17-1188C (December 20, 2017), in which Judge Lettow held that the a right of first refusal provision in a shareholder agreement rendered an SDVOSB ineligible to receive a contract from the U.S. Army Corps of Engineers. Our office represented the Intervenor.
Unlike the VA’s SDVOSB regulations, the SBA SDVOSB regulations do not include a definition of “unconditional ownership.” Thus, for the last eleven years, the SBA Office of Hearings and Appeals (“OHA”) has looked to the dictionary definition of “unconditional” when determining whether a service disabled Veteran maintains unconditional ownership interest in his company. Often referred to as the “Wexford standard,” OHA has consistently ruled that “unconditional ownership” means that the service disabled Veteran must have “an absolute right to do anything they want with their ownership interest or stock, whenever they want.” Wexford Group International, Inc., SBA No. SDV-105 (2006) Thus, a provision requiring a service disabled Veteran to sell his shares back to the company upon his death or incompetency means that he does not have unconditional ownership under the Wexford Standard.
Veterans Contracting Group argued that the Wexford standard is no longer good law given the Court’s decisions in AmBuild and Miles. In these cases, the Court found that the right of first refusal is acceptable under the VA SDVOSB regulations because they are “not presently executory” and considered “a standard provision used in normal commercial dealings.” However, the Court noted that the Ambuild and Miles cases are irrelevant “to bid protests concerning solicitations from the U.S. Army Corps of Engineers or other non-VA agencies.”
Instead, the Court deferred to OHA’s ruling below, finding that the right of first refusal rendered the SDVOSB ineligible under the SBA’s SDVOSB regulations. The Court did so even though, in the judge’s opinion it “produces a draconian and perverse result.” Ultimately, the Court acknowledged that it “cannot remake the regulations” and must afford deference to the SBA’s interpretation of their own regulations.
Given this decision, SDVOSBs that want to bid on Non-VA SDVOSB set-aside procurements should revisit their corporate documents to ensure that a right of first refusal is removed to avoid being deemed ineligible. As an aside, the Court noted that Congress has recognized the difference between the VA and SBA SDVOSB regulations and “has sought to consolidate and reconcile them via amendments to their authorizing statutes,” citing Section 1832 of the 2017 National Defense Authorization Act. However, the VA and SBA have yet to do so. Given the Court’s decision in this case, the VA and SBA should get to it asap.
Update – SBA has since revised it regulations so that right of first refusal is permissible.
