SBA’s OHA Further Defines Extraordinary Action in SDVOSB Appeal

On September 4, 2025, the Small Business Administration’s (SBA) Office of Hearings and Appeals (OHA) granted an appeal challenging SBA’s determination that a service-disabled veteran did not control an entity applying for Service-Disabled Veteran-Owned Small Business (SDVOSB) status based on a minority owner’s ability to block certain actions in the matter of VSBC Appeal of: Blue Skye Foods, LLC, SBA No. VSBC-442-A.

SBA’s Director, Office of Government Contracting (D/GC), initially denied the appellant’s January 2025 application for certification as a SDVOSB, finding the appellant did not demonstrate that one or more service-disabled veterans fully controlled the appellant entity.  The appellant was a limited liability company formed in Ohio, 51% owned by a service-disabled veteran and 49% owned by another individual.  Pursuant to the appellant’s operating agreement, the majority owner was the managing member and was afforded discretion to make business decisions and take actions on behalf of the company unilaterally, unless otherwise provided for in the operating agreement.  Only certain “major decisions” required unanimous consent of both members, which included the following two decisions:

1. 1. 1. “Engaging in any business, or take any other action, which is in contradiction to any provision of this Agreement or which cause or may reasonably be expected to cause or result in a material adverse effect on the Company or any Company Subsidiary, or any property owned by the Company or any Subsidiary.”

      2. “Changing the Company’s or any Company Subsidiary’s accounting method or tax classification, either for financial or tax reporting purposes, or any other material tax decision, election or settlement (other than those expressly granted to the Tax Representative in accordance with Section 8 of this Agreement[)].”

D/GC denied the SDVOSB certification application, finding that these two provisions violated the requirement that the contractor meet all supermajority voting requirements of 13 C.F.R. § 128.203(f).

The appellant filed at OHA and argued that the two provisions in the operating agreement did not limit the daily operations of the business and that the service-disabled veteran had full control.  The appellant explained that the two provisions were included to protect the minority investor.  OHA agreed, granted the appeal, and ordered the D/GC to include the protester in the SBA certification database. 

In reaching this decision, OHA interpreted SBA’s recently revised regulation addressing negative control.  Effective January 16, 2025, SBA revised the negative control provision in its affiliation rule (13 C.F.R. § 121.103(a)(3)) and conformed the control provisions across the SDVOSB (13 C.F.R. § 128.203(j)), women-owned small business (WOSB) (13 C.F.R. § 127.202(h)), and 8(a) Business Development participation (13 C.F.R. § 124.106(h)) status regulations.  Following these changes, there is conformity across the size and status rules, and SBA will not find that a minority shareholder has impermissible control where the minority shareholder has the authority to block action by the board of directors or shareholders in the following extraordinary circumstances:

1. 1. 1. Adding a new equity stakeholder or increasing the investment amount of an equity stakeholder;

      2. Dissolution of the company;

      3.  Sale of the company or all assets of the company;

      4. The merger of the company;

      5. Company declaring bankruptcy;

      6. Amendment of the company’s corporate governance documents to remove the shareholder's authority to block any of the above actions.

Additionally, in response to commentary received during the rulemaking process, SBA added an important catch-all provision, which provides that a minority shareholder can block “[a]ny other extraordinary action that is crafted solely to protect the investment of the minority shareholders, and not to impede the majority’s ability to control the concern's operations or to conduct the concern's business as it chooses” without it giving rise to impermissible control.

OHA’s decision in Blue Skye tells us two things. 

First, we are likely to see more decisions interpreting these control provisions as these types of challenges arise in size, status, and certification matters. 

Second, while interpretation of this catch-all provision is likely to be decided in an iterative fashion, we very well could see SBA expand via caselaw what is considered “extraordinary”—similar to manner in which OHA’s decision in Size Appeal of Southern Contracting Solutions, III LLC, SBA No. SIZ-5956 and years of subsequent OHA decisions addressed the distinction between ordinary and extraordinary actions in the context of control.  For example, in both Southern Contracting and Blue Skye, the ability to block a majority party from engaging in any business or taking any other action in contradiction to any provision of the operating agreement did not give rise to impermissible control.  Such actions have long fallen squarely in the extraordinary bucket.  On the other hand, OHA previously concluded, in the 2011 decision of Size Appeal of: DHS Systems LLC, SBA No. SIZ-5211, that a minority investor’s veto power over “choice of accounting methods” was akin to veto power over setting a corporate budget as an ordinary action in that it is “not necessary for investor protection, but goes directly to the day-to-day operations of the company.”  So OHA’s Blue Sky decision in this respect updates and broadens the caselaw on what is an extraordinary action.

We will continue to report on developments in OHA’s interpretation of negative control.