The Small Business Administration (SBA) Office of Hearings and Appeals (OHA) has issued a decision denying a small business size appeal because the business did not carefully consider size issues before it self-certified its size. In the appeal, the business (Technical Services Group, LLC) appealed a size determination arguing that it had corrected the affiliation issue after the protest and initial SBA size determination. It is well-settled, said the OHA judge, that "SBA determines size status as of the date of self-certification."
In the case, a 40% owner and co-chairman of the would be small business, also controlled several large businesses. The question was whether he also controlled the alleged small business. In determining whether he had such power, SBA applied 13 CFR 121.103(c)(2) which provides that if two or more persons own less than 50% of the voting stock but their holdings are "large" compared to other stock holdings, there is a presumption of control. Another person owned 35%, making the two owners control 75% together.
The OHA judge said that was enough to raise the presumption of control. The mere fact that a minority shareholder cannot individually control a concern is not sufficient to overcome the presumption of control. The OHA decided that although the possibility to control was remote, the potential was real. That possibility meant the would be small business was affiliated with a large business and therefore was not small. This is called the minority shareholder rule.
The lesson is clear: a minority shareholder can potentially control the would be small business and the resulting affiliation issue must be resolved prior to self-certification.
bill@spriggslawgroup.com http://www.spriggslawgroup.com/
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