United States: OHA Clarifies Negative Control Restrictions – But Do The New SDVOSB Regulations Limit Its Impact?

Mitchell Bashur and Amy L. Fuentes are attorneys in Holland & Knight's Tysons office

Between new regulations from the Small Business Administration (SBA) and decisions from the SBA's Office of Hearings and Appeals (OHA), the limits of acceptable actions by small business owners set on maintaining their small business size status continues to change. Most recently, OHA issued a noteworthy decision that clarifies restrictions on negative control of small businesses, including what actions it considers "extraordinary actions" and what actions are ordinary actions related to the daily control of a company. OHA's decision in Size Appeal of Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (2018) is helpful in understanding the parameters of permissible negative control since OHA provided its clearest list to date of "extraordinary actions" and "ordinary" actions essential to the daily operation of the company. However, it is important to note that the impact of the ruling, as far as service-disabled veteran-owned small businesses (SDVOSBs), will be limited in light of the new SBA and VA regulations.

Brief Summary of the Size Protest

In January 2018, the Navy issued a set-aside SDVOSB solicitation for a single Indefinite Delivery/Indefinite Quantity contract, with a corresponding $38.5 million annual receipts size standard. In April 2018, the Navy notified unsuccessful offerors that the apparent awardee was Southern Contracting Solutions III, LLC (SCS), a joint venture (JV) comprised of Electronic Metrology Laboratory, LLC (EML) and Emerald Resource, LLC (Emerald), an SDVOSB.

In response to the Navy's notification, Government Contracting Resources, Inc. (GCR), filed a size protest alleging that SCS is not a small business. In its protest, GCR made several allegations, including that (i) EML's average annual receipts for the period of measurement exceeded the $38.5 million annual receipts size standard for the procurement; (ii) EML is a member of at least five other JVs; (iii) EML and Emerald were affiliated due to a history of pervious JVs; and (iv) Emerald is dependent on EML because "a significant share" of Emerald's receipts are attributed to its JVs with EML. In sum, GCR alleged that EML and Emerald were affiliated and therefore ineligible for the instant award.

In June 2018, the SBA Area Office issued a size determination finding SCS to be an other than small business for the $38.5 million size standard. The Area Office found the exception to affiliation among JV partners did not apply because EML was found to be affiliated with two companies due to common ownership. In its decision, the Area Office analyzed EML's Operating Agreement, including Section 3.5 titled "Major Decisions." In reviewing the actions listed under Section 3.5 of the Operating Agreement, the Area Office determined that EML's President had impermissible negative control over EML because the actions relate to the daily operations of the business.

Negative control exists when a minority owner can block ordinary actions of a concern that are essential to the operating the company daily operations. However, prior case law has allowed minority owners to having the ability to block certain extraordinary actions of the concern have not been provided negative control if those provisions are crafted to protect the investment of the minority shareholders, and not to impede the majority's ability to control the operations or to conduct business as it chooses. Extraordinary actions are actions that are not essential to the daily operation of the concern, but are actions which could have a severe impact upon the company.

OHA Appeal and OHA's Analysis

SCS appealed the decision to OHA, arguing the Area Office erred as a matter of fact and law in determining that EML's President had impermissible negative control over EML's daily operations. SCS argued that the Area Office engaged in a flawed analysis of EML's Operating Agreement, incorrectly applied OHA precedent, and clearly erred in not providing SCS due process regarding issues of negative control.

OHA ultimately determined that based on the facts in Southern Contracting, the Area Office had erred in finding that the President of EML had negative control over EML and vacated the size determination. What is particularly noteworthy about this decision is the discussion of extraordinary and ordinary actions.

OHA began its analysis by determining that the issue on appeal concerned whether joint venture partner EML was a small business, and that this determination rested on whether the minority member of EML had negative control over EML. If the minority member of EML had control over EML, OHA reasoned that EML was affiliated with other firms the minority member has the power to control through common ownership. If EML was found affiliated, it would no longer be small and would, in turn, make the joint venture ineligible.

While OHA has analyzed issues of negative control in several decisions, the Southern Contracting decision provides the clearest list yet of what constitutes "ordinary actions" and what constitutes "extraordinary actions."
OHA listed the following as extraordinary actions, which a minority member may be given the power to block, or which may require a minority member's input, without resulting in a finding of negative control:

  • Amending the Bylaws/Operating Agreement/Articles of Incorporation;
  • Issuing additional capital stock;
  • Entering into any substantially different business;
  • Approving the addition of any new members or the withdrawal of any old members;
  • The sale of all or substantially all of the assets of the company;
  • Approving an increase or decrease the size of the Board;
  • Disposal of the company's goodwill;
  • Approving an increase or decrease the number of authorized interests;
  • Correcting a false statement in the Articles of Incorporation.
  • The submission of a claim to arbitration
  • Confessing of a judgment
  • Selling all or substantially all of a firm's assets;
  • Mortgaging or encumber all or substantially all of a concern's assets;
  • Committing any act that could result in a change in the amount or character of the concern's contribution to capital;
  • Causing a change in the character or business of the concern;
  • Committing any act that would make it impossible to carry on ordinary business;
  • Approving the reclassification of interests designed to protect a minority owner's investment;
  • Amending the operating agreement in any manner that materially alters the rights of existing members;
  • Filing for bankruptcy; or
  • Taking an action in contravention of the Operating Agreement.

Additionally, OHA listed the following as ordinary actions, which demonstrate a minority member having control over the daily operations of a concern, and thus do constitute negative control:

  • Control over the budget;
  • Power to hire and fire officers;
  • Control over employee compensation;
  • Ability to borrow money;
  • Purchasing equipment;
  • Making changes to a budget;
  • Bringing or defending a lawsuit;
  • Creation of debt;
  • Payment of dividends;
  • Amending or terminating leases;
  • Encumbering assets; or
  • Requiring that all actions taken to manage the company require a vote of 75 percent of the members.

The above clarifications, however, will have a limited impact on SDVOSBs This is because for offers submitted after Oct. 1, 2018, SDVOSBs will be subject to the new SDVOSB regulations, which list only the following five exclusively recognized extraordinary actions:

  • Adding a new equity stakeholder;
  • Dissolution of the company;
  • Sale of the company;
  • The merger of the company; and
  • The company declaring bankruptcy.

This list is notable as lacking the ability to have a negative control on amending the operating agreement itself, which in turn could be used to remove the five protections permitted.

The Southern Contracting decision helps to clarify what actions OHA will treat as extraordinary actions and which it will treat as ordinary actions that part of daily operational control. Even though the SDVOSB regulations on negative control changed for proposals submitted as of Oct. 1, 2018, the guidance is still helpful in interpreting requirements for other socioeconomic programs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions