Was Your SDVOSB Status Denial Due to Quorum Language in Your Bylaws?
According to the Center for Verification and Eligibility (CVE) website, the number one reason for SDVOSB status denial is quorum language in a company's bylaws that gives passive control to non-veteran board members. This is a function, in this author's opinion, of a misreading of the law. SDVOSB status denial letters will often cite 38 CFR 74.4(f)(2) for the proposition that quorum language in a company's bylaws cannot allow for passive control by not Veteran board members. However, the CVE's reasoning is legally flawed, because 38 CFR § 74.4(f)(1)(ii) states:
CVE will deem veterans or service-disabled veterans to control the board of directors where:
A single veteran owns at least 51 percent of all voting stock of an applicant or participant, the individual is on the board of directors and no super majority voting requirements exist for shareholders to approve corporation actions. Where supermajority voting requirements are provided for in the concern's articles of incorporation, its by-laws, or by State law, the veteran must own at least the percent of the voting stock needed to overcome any such supermajority voting requirements;
The section of the regulation often cited for VOSB or SDVOSB status denial comes from (f)(2) of the same paragraph, which states:
Where an applicant or participant does not meet the requirements set forth in paragraph (f)(1) of this section, the veteran(s) upon whom eligibility is based must control the board of directors through actual numbers of voting directors or, where permitted by state law, through weighted voting (e.g., in a concern having a two-person board of directors where one individual on the board is a veteran and one is not, the veteran vote must be weighted—worth more than one vote—in order for the concern to be eligible for VetBiz VIP Verification). Where a concern seeks to comply with this paragraph:
(i) Provisions for the establishment of a quorum cannot permit non-veteran directors to control the board of directors, directly or indirectly.
Also, 38 CFR 74.4(f)(4) requires that “Arrangements regarding the structure and voting rights of the board of directors must comply with applicable state law.” Using California as an example, the law there requires that:
“A majority of the authorized number of directors constitutes a quorum of the board for the transaction of business. The articles or bylaws may not provide that a quorum shall be less than one-third the authorized number of directors or less than two, whichever is larger, unless the authorized number of directors is one, in which case one director constitutes a quorum.” Cal. Corp. Code § 307(a)(7) (West)
So what does the CVE say to Veteran business owners in California? Are they guaranteed SDVOSB status denial unless they limit their board members to service disabled vets or go it alone? As of right now, the answers are unclear.