Alog Corporation was awarded a contract with the Air Force. The solicitation was set aside for SDVOSBs. An SDVOSB status protest followed. Alog Corporation lost the protest and the contract because its stock transfer agreement violated the SDVOSB’s unconditional ownership requirement. Namely, the service disabled veteran must unconditionally own his interest in the company. The SBA Office of Hearings and Appeals described unconditional ownership as:

The service-disabled veteran’s ownership of the challenged concern must be unlimited, with no restrictions whatever on their ownership, or their ability to dispose of their shares in any way they choose. The exceptions are agreements dealing with the death or incapacity of a shareholder, and the pledge of stock as collateral if the terms follow normal commercial practices.

In this case, the Stock Transfer Agreement stripped the service disabled veteran of unconditional ownership because he could only sell his shares to employees of the company. And to make matters worse he had to sell his shares by a certain date (i.e. forced sale). These restrictions clearly violated the unconditional ownership requirement to be an eligible SDVOSB.

Lesson Learned: Retain a lawyer who understands SDVOSB rules when drafting a stock transfer agreement, bylaws or an operating agreement. While certain terms make commercial sense, they may not pass muster under the SBA regulations governing SDVOSBs.