Ownership – 51% Unconditional Brief
Issue: Who does the Center for Verification and Evaluation (CVE) consider to own a Veteran-owned small business?
38 CFR § 74.3
An applicant or participant must be at least 51 percent unconditionally and directly owned by one or more Veterans or service-disabled Veterans.
What This Means
- The applicant must be 51 percent unconditionally owned by one or more Veterans or service-disabled Veterans. Ownership provisions must not have conditions or restrictions that will prevent the applicant from freely transferring their interests.
- The Government Accountability Office has flagged this issue, and it issued a report which found that a Veteran cannot be deemed to have unconditional ownership if the Veteran’s ownership interest can potentially go to another (other than after death or incapacity). See U.S. Gov’t Accountability Office, Service-Disabled Veteran-Owned Small Business Program: Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars in Contracts, GAO-10-108 (Oct. 2009). This example often results in a denial because the applicant is not at least 51 percent unconditionally owned.
- The determination as to whether an applicant meets the unconditional ownership requirement is decided by evaluating the particular facts and circumstances presented from the bylaws, operating agreements, and other documents relating to the formation and operation of the applicant.
- One common example that will prohibit an applicant from receiving verified status: if the applicant provides information relating to a right of first refusal, or language stating that the shares of the applicant shall be sold, assigned, pledged, etc. and follows with conditions that the shares must first be offered to then existing shareholders who desire to accept the offer.
Excerpts from Current Denial Letters
XXX company Section 5 states No Corporate Shares shall be sold, assigned, pledged, disposed of, or otherwise encumbered or transferred (whether by reason of death, sale, gift, assignment, order of the court, any judicial process or otherwise) unless said Shares are offered: first, to this Corporation for repurchase, by tender to its Board of Directors; and second, to the other then-existing Shareholders of the Corporation, in proportion to the number of Shares of stock then owned by such other Shareholders who desire to accept the offer. Therefore, CVE cannot reasonably conclude that the applicant meets the direct and unconditional ownership requirement set forth by 38 CFR Section 74.
*For Informational Purposes Only*
This information has been provided by CVE for general informational purposes and should not be construed as providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. In addition, CVE makes no representation as to the accuracy or whether the above information is currently up-to-date. All applicants must read the applicable regulations and determine how best to meet these requirements. The Verification Assistance Briefs do not constitute legal notice or replace the regulations.