The SBA found that a joint venture was not an eligible SDVOSB because the minority partner was able to assert negative control over the veteran-owned majority partner. OHA affirmed. Negative control exists when a minority partner is able to block ordinary actions essential to day-to-day operations of the business. Here, unanimous consent was required before the joint venture could initiate contracts litigation against the government. OHA reasoned that government contract litigation is not an extraordinary event; rather, it is an all too common part of the day-to-day operations of a government contractor. Because the minority partner could block a litigation decision, it could exert negative control.
In the Matter of Strategic Alliance Solutions, LLC, SBA No. VET-277
Background
The Missile Defense Agency awarded a contract for advisory and assistance services to Strategic Alliance Solutions (SAS). The contract was set aside for service-disabled, veteran owned small businesses. An unsuccessful offeror, Defense Integrated Solutions (DIS), filed a protest challenging SAS’s status as an SDVOSB.  DIS alleged that SAS was a joint venture between an mentor and protégé, but that SAS’s joint venture agreement did not comply with the SBA’s regulations, so the company was not an eligible SDVOSB.
The SBA found that SAS was not an eligible SDVOSB. SBA concluded that the veteran owner of the protégé partner of the JV did not control all the decisions of the JV. Additionally, the SBA found that SAS’s joint venture agreement did not comply with the SBA’s JV requirements. In particular, the SBA noted the agreement gave the mentor partner negative control over some of the JV’s day-to-day operations.
SAS appealed the eligibility determination to SBA’s Office of Hearings and Appeals.
Analysis
OHA found that the SBA had erred in finding that SAS was not controlled by a service-disabled veteran. The company’s CEO was a service-disabled veteran. The CEO had delegated certain responsibilities—negotiation of contracts and subcontracts—to subordinate officers. But OHA reasoned that a service-disabled veteran may delegate responsibilities, but delegation does not mean the veteran has ceded control of the company.
Nevertheless, while the OHA found that the CEO had not ceded control, it did find that minority-mentor partner was able to assert negative control over the joint venture.  An SDVOSB may enter into a joint venture for purposes of performing an SDVOSB contract. But under 13 C.F.R. § 125.18(b)(2), an SDVOSB must be the managing venturer of any joint venture with control over the day-to-day operations of the business. A managing venturer lacks day-to-day control when a minority owner has negative control—that is, the ability to block ordinary actions. A minority owner will not have negative control if it has the ability to block extraordinary actions.
Here, the joint venture agreement stated that initiation of litigation for contracts requires unanimous approval of all the JV members. OHA reasoned that initiating government contracts litigation is unfortunately a common occurrence in government contracting. Thus, initiating litigation is essential to the day-to-day operations of a business—it is not an extraordinary circumstance. Because SAS’s minority partner could block a decision to initiate litigation, the minority partner had negative control over the joint venture. The SBA appropriately found the joint venture ineligible for an SDVOSB award.
Strategic Alliance is represented by Jonathan T. Williams, Peter B. Ford, and Meghan F. Leemon of PilieroMazza PLLC. Defense Integrated Solutions is represented by Emily J. Chancey, Joshua B. Duvall, and Nicholas P. Greer of Maynard Cooper & Gale, P.C.
–Case summary by Craig LaChance, Senior Editor
