In my recent article about the impact of separate stock classes on veteran-owned firms, I discussed how having more than one class of voting stock can complicate an ownership analysis under both the Department of Veterans Affairs’ program for Veteran-Owned and Service-Disabled Veteran-Owned Small Businesses and the U. S. Small Business Administration’s (“SBA”) program (the “SBA Program”) for Service-Disabled Veteran-Owned Small Business Concerns (“SDVO SBCs”).
Citing an SDVO SBC status determination for illustration purposes, I explained how the analysis–which may appear straightforward and mechanical at first look–is not so cut and dry when the initial inquiry entails making a determination as to whether two separate stock classes even exist.
Earlier this month, the SDVO SBC status determination referenced in my blog post was affirmed in part by the SBA’s Office of Hearings and Appeals (“OHA”). Specifically, OHA found no error in the SBA’s determination that the service-disabled veteran did not own at least 51% of each class of the appellant firm’s voting stock and that, as a result, the firm did not qualify as an SDVO SBC. In its decision, OHA did not go so far as to define what constitutes a “class” of stock in the context of the SBA Program. Nevertheless, its analysis is instructive.
OHA began its recent analysis by looking at the ownership requirements for SDVO SBCs, formed as corporations, and noted that SBA’s regulations are silent as to what constitutes a “class” of stock. Next, OHA addressed the appellant’s argument that, because the regulation refers to “voting” stock, different groups of stock are different classes only if they have different voting rights.
The flaw in this argument, however, was that appellant’s interpretation of the regulation conflicted with that of the SBA decision-maker, and the appellant offered no clear support for why the SBA’s interpretation was wrong.
OHA then turned to Maryland state law, presumably because the appellant is a Maryland corporation, and noted that Maryland corporate law suggests that the boundaries of a class may be defined by criteria besides voting rights.
For this reason, OHA found that SBA did not err in considering factors other than voting rights in assessing whether appellant has more than just one class of voting stock. OHA also found no error in the SBA’s determination that appellant’s two groups of stock should be treated as two classes.
In this regard, OHA agreed with the SBA decision-maker that the two groups of stock had different rights and restrictions with respect to dividends, redemption and conversion and were thus sufficiently dissimilar.
In sum, OHA’s recent decision is helpful in that it shows that the SBA can look beyond just voting rights to determine whether an SDVO SBC has more than one class of stock. While OHA stopped short of defining what does (and does not) constitute a “class” of stock for purposes of the SBA Program, its decision suggests state law is controlling on the issue, and I believe that makes sense.
About the author: Peter Ford is an associate with PilieroMazza in the Government Contracts Group. He may be reached at email@example.com.