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Office of Small & Disadvantaged Business Utilization

Unconditional Ownership, Transfer Restrictions Brief

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Issue:  Can there be any restrictions on the Veteran owner’s ability to transfer ownership of the firm?

The Regulations

38 CFR § 74.3

  • (b) Ownership must be unconditional.  Ownership by one or more Veterans or service-disabled Veterans must be unconditional ownership.  Ownership must not be subject to conditions precedent, conditions subsequent, executory agreements, voting trusts, restrictions on assignments of voting rights, or other arrangements causing or potentially causing ownership benefits to go to another (other than after death or incapacity).  The pledge or encumbrance of stock or other ownership interest as collateral, including seller-financed transactions, does not affect the unconditional nature of ownership if the terms follow normal commercial practices and the owner retains control absent violations of the terms.  In particular,  The Center for Verification and Evaluation (CVE) will evaluate ownership according to the following criteria for specific types of business concerns.
    • (1) Ownership of a partnership.  In the case of a concern that is a partnership, at least 51 percent of every class of partnership interest must be unconditionally owned by one or more Veterans or service-disabled Veterans.

    • (2) Ownership of a limited liability company.  In the case of a concern that is a limited liability company, at least 51 percent of each class of member interest must be unconditionally owned by one or more Veterans or service-disabled Veterans.

    • (3) Ownership of a corporation.  In the case of a concern that is a corporation, at least 51 percent of each class of voting stock outstanding and 51 percent of the aggregate of all stock outstanding must be unconditionally owned by one or more Veterans or service-disabled Veterans.
  • (c) Stock options’ effect on ownership.  In determining unconditional ownership, CVE will disregard any unexercised stock options or similar agreements held by Veterans or service-disabled Veterans.  However, any unexercised stock options or similar agreements (including rights to convert non-voting stock or debentures into voting stock) held by non-Veterans will be treated as exercised, except for any ownership interests that are held by investment companies licensed under part 107 of title 13, Code of Federal Regulations.

What This Means

  • Unconditional ownership means that a Veteran’s stock or membership interest must not be subject to conditions precedent, conditions subsequent, executory agreements, voting trusts, restrictions on assignments of voting rights, or other arrangements causing or potentially causing ownership benefits to go to another (other than after death or incapacity).  As VA’s regulation has been interpreted by the courts, these are unique conditions subject to case-by-case review.

  • However, a right-of-first-refusal provision is a standard provision used in normal commercial dealings, and does not burden the Veteran’s ownership interest unless he/she chooses to sell some of his stake.  As a result, a right-of-first-refusal provision does not affect the Veteran’s unconditional ownership with regard to C.F.R. § 74.3(b).

  • Another normal commercial practice related to ownership is requiring approval of the other shareholders/members for the Veteran owner prior to transfer his shares/interest.  This type of provision is also used in normal commercial dealings; therefore, also does not affect the Veteran’s unconditional ownership with regard to C.F.R. § 74.3(b) unless he/she chooses to sell some of his/her stake.

  • Tag-along rights allow the other owners to participate in the selling owner’s transfer to third parties on the same terms and conditions.  If a Veteran includes tag-along rights in the applicant’s ownership documents (by-laws, operating agreements), this type of provision also does not affect the Veteran’s unconditional ownership with regard to C.F.R. § 74.3(b) unless he/she chooses to sell some of his/her stake.

  • Any participant that is performing contracts and desires to substitute one Veteran owner for another shall submit a proposed novation agreement and supporting documentation in accordance with FAR Subpart 42.12 to the contracting officer prior to the substitution or change of ownership for approval in accordance with 38 C.F.R. 74.3(e)(2).

  • If a transfer occurs based on incapacity or death, the concern must file a new application with the contracting officer and CVE within 60 days of the change in accordance with 38 .F.R. 74.3(e)(3).

*For Informational Purposes Only*

This information has been provided by CVE for general informational purposes and should not be construed as providing legal advice.  You should contact your attorney to obtain advice with respect to any particular issue or problem.  In addition, CVE makes no representation as to the accuracy or whether the above information is currently up-to-date.  All applicants must read the applicable regulations and determine how best to meet these requirements.  The Verification Assistance Briefs do not constitute legal notice or replace the regulations.

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