The Court of Federal Claims rejects CVE’s denial based on Right of First Refusal language in contractor’s Operating Agreement. CVE often denies SDVOSB verification because a contractor’s Operating Agreement or Bylaws includes a provision that prevents a service-disabled Veteran from having unconditional ownership over his interest in the company. CVE has historically held that a provision providing others the right of first refusal to purchase a Veteran’s shares means the Veteran does not have unconditional ownership. We suspect this position has led CVE to hundreds of denials.
Recently, however, the Court of Federal Claims held that a right of first refusal is a normal business practice and does not strip the Veteran of his unconditional ownership unless he chooses to sell. In this regard, the Court held:
Like the encumbrance of veteran-owned stock as collateral, inclusion of a standard right of first refusal in an operating agreement is a normal commercial practice, 38 C.F.R. § 74.3(b), that does not hinder the veteran-owner’s interest unless the veteran receives a bona fide offer and chooses to sell. Moreover, upon a sale, the company would not automatically retain its eligibility for the VIP database, because it may no longer be owned by a veteran who could qualify for the database. 38 C.F.R. § 74.3(e)(4).
The above decision will have a major impact on CVE’s review process. CVE must revisit its view of what “unconditional ownership” really means for SDVOSB purposes. Just because a service disabled Veteran provides a right of first refusal to acquire his ownership interest to another person or entity, that does not mean he lacks unconditional ownership over his company today. The Court also correctly notes that when the Veteran does decide to sell, the company does not automatically retain its verified SDVOSB status and must still demonstrate that the new owners meet all of eligibility requirements under 38 C.F.R. § 74.3(e)(4).
In another recent case, KWV v. United States, the Court of Federal Claims rejected the VA OSDBU’s claim that the service disabled Veteran did not control his company because he lived six months during the year in Florida rather than near the company’s headquarters in Rhode Island. OSDBU held that the Veteran could not effectively control his company while in Florida. The contractor disagreed, noting that he controls the company from Florida by using the telephone, email and other electronic means:
While in Florida, Mr. Maron employs various electronic means to keep track of the day-to-day business of KWV. KWV typically only performs one job at a time, with most of the work being performed when Mr. Maron is in Rhode Island. Additionally, during periods he spends in Florida, Mr. Maron nonetheless travels to Rhode Island for “any meeting in which anything of importance is discussed.” He has ample management experience in construction, as his work history shows. Mr. Maron currently maintains no other jobs or positions, allowing him to focus solely on KWV.
The Court held that VA OSDBU’s wrongly held that the Veteran did not control his company. While the Veteran lived in Florida for six months during the year, this alone does not mean he cannot control his SDVOSB company. The Court held that OSDBU’s reasoning was cryptic and did not provide “a coherent and reasonable explanation of its exercise of discretion . . . nor articulated a ‘rational connection between the facts found and the choice made.'”
KWV, INC. v. UNITED STATES, No. 12-882C, 2013 U.S. Claims LEXIS 26 (January 18, 2013)
