(Editor’s Note.  The following case illustrates the need to be careful in crafting ownership agreements to, for example, make sure the small business status remains in tack.)

After selecting EA for a small business set aside for an ID/IQ contract for architect/engineering services FPM protested the award to the Small Business Administration asserting EA was not a small business. The SBA field office noted the Louis Berger Group (LBG), a large business, owned 49.5% of EA’s stock and since it could block certain transactions outside the ordinary course of business it had “negative control” of EA in spite of the fact EA’s ESOP owned 50.5% of the stock. In addition to the negative control the field office ruled that EA depended financially on LBG and shared an “identify of interest” and therefore did not qualify as a small business.  In its appeal to the SBA’s Office of Hearings and Appeals (OHA) OHA disagreed with the field office ruling that the supermajority voting provisions in the stockholder agreements between EA, EA’s ESOP and LBG did not affect EA’s ordinary operations but rather  were crafted to protect LBG’s interests and not interfere with the ESOP’s operating control of the company.  Further OHA found that EA and LBG were not affiliates, did not share common investments and did not have an identity of interests which meant they were not even affiliated (Size Appeal of EA Engrg., (SBA No. SIZ 4973).

{TAG_FORM_TITLE}