When making size determinations and affiliation for negative control in small businesses, the SBA not only looks at finding actual control over the protested business but also whether a non-SBA Negative Control Definitiondisadvantaged person or entity has the ability to control the firm.

The negative control definition and positive control legal analysis can be confusing to small businesses. However, dealing with it in a small business size protest can be too late. Knowing what does affiliations mean under SBA rules is critical because a finding of affiliation due to negative control will cost you the awarded control.

Small business should be aware that when the company is approved for a specific program, the SBA will continuously monitor the company to make sure that it is still controlled by disadvantaged individuals. If there is a change in management or control of the company, the change must be submitted and approved by SBA before the firm can change control.  A firm can be terminated from an SBA program by not getting the SBA’s approval before any change in control. 

Terms such as the identity of interest become part of the analysis  when the SBA makes its decision.  13 CFR 121.103(a)(3) governs the SBA’s analysis.

When appealing an SBA size determination and adverse affiliation decision, many protestors base their arguments on the fact that the SBA Area Office did not address if one party could exert negative control over the other, and that the SBA did not consider the totality of the circumstancesThis approach can be a slippery slope because the SBA can look at various issues that relevant to affiliation decisions.

  • No one fact wins the case.
  • SBA decisions only have to be reasonable.

Under 13 CFR 121.103, control may be affirmative or negative. Negative control includes, but is not limited to, instances where a minority shareholder has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.

13 CFR 121.103 Operating Agreements Can Impact SBA Negative Control Definition

When applying the SBA negative control definition, the wording in your business operating agreements can still create legal problems. For example, when an operating agreement only has specific reasons why the business owner can terminate them, SBAOHA has also looked to see whether a company owner can remove employees for merely disagreeing with him.

To establish control and avoid potential affiliation in a small business size protest, business owners must have absolute decision making when by the express language of through the entity’s voting mechanisms. Size Appeal of Envtl. Quality Mgmt., Inc., SBA No. SIZ-5429 (2012) (appearance of negative control was illusory because majority owner could unilaterally remove directors without cause).

  • Having negative and positive control between two companies can lead to affiliation
  • 13 CFR 124.106(c) provides that, for a limited liability company (LLC) to be eligible for the 8(a) BD program, one or more disadvantaged individuals must control “all decisions” of the LLC.

Another problem when assessing control is when appeal courts see that your operating agreement states that “disagreements among the managers will be resolved by “vote of a majority of Managers.”  When applying the legal definition of negative control, this argument does not show that the business owner has total control over company business decisions.  

A minority shareholder can be seen as having control over the majority shareholder under 13 CFR 121.103 if he can somehow block actions that are critical to the daily operations of the business. See  Size Appeal of Carntribe Clement 8AJV #1, LLC, SBA No. SIZ-5357, at 13 (2012) (“Negative control exists if a minority owner can block ordinary actions essential to operating the company.”).

Negative Control Landmines Impact 8a Certification: A common problem exists when applicants seek to get 8a certified. The issue does not only arise in a small business size protest. When the SBA reviews 8a applications, they will also look at corporate documents to see if a third party violates the negative control definition. Simply put, you must fully understand the legal principles of positive control and definition of negative control when applying SBA affiliation rules.

Can the Area Office Make Determinations as to Whether Your Company is in Compliance with 8(a) BD Requirements?

SBA OHA has made the longstanding legal decision that when it comes to compliance with substantive 8(a) BD requirements, under 13 C.F.R. Part 124, such issues are beyond the scope of an area office’s subject matter jurisdiction.  If there are concerns, then the area office must seek resolution by referring the question to the Office of Business Development for further review and investigation.

Avoid Costly Mistakes in SBA Program Litigation. See What We Do to Help

For additional questions or help with affiliation and decisions about the SBA negative control definition and meaning under 13 CFR 121.103, call our small business size protest lawyers at 1-866-601-5518. FREE INITIAL CONSULTATION.

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