DBE Dilemma – Change of Control
Construction contractors see certification as a Disadvantaged Business Enterprise (“DBE”) under the Federal Laws as a very valuable asset. Rightfully so! Federal mandates require DBE participation on virtually all federal projects. A well run DBE will have many great opportunities to capitalize. Naturally, non DBE’s often wish to gain all of those advantages.
BEWARE: Where a firm was formerly controlled by a non-disadvantaged individual and ownership is transferred to a socially and economically disadvantaged individual, and the prior individual remains involved in the business, the new owner must demonstrate by clear and convincing evidence that:
- The transfer was for reasons other than obtaining DBE status;
- The new owner, actually controls, management policy and operations of the firm.
Family businesses often run into this problem. For instance, Dad may have owned the business for years. Dad hopes to gain DBE status by selling the business to Mom. Mom knows nothing about the business. Mom has no say in management, Mom may not even realize she is the controlling owner. Dad stays on as a “manager” but for all intents and purposes controls the business.
A recipient of Federal Funds will not likely be clearly and convincingly persuaded that this is a DBE. There will be no certification. There will be no advantage to the transaction. Dad will have wasted a lot of money trying to dupe the government. The government may not like that and may pursue Dad because there may be material falsehoods in the application to become DBE. Dad what were you thinking? Mom shakes her head and can’t understand it. No certification will be accomplished unless Mom gets demonstrably involved in her new company.
Consider the situation when instead of selling to Mom, Dad sells to his three daughters in equal one third parts. This time however, the daughters are on the board of directors, engage in management day to day, and have skills and experience which are consistent with the business. The recipient of the Federal Funds will see the corporate minutes showing the daughters’ involvement, interview the daughters and gain awareness of their skills, view the daughters in the field and observe their leadership, and maybe they will even see the daughters tell Dad what to do! Certification achieved.
The statutes and regulations surrounding the federal DBE programs are vast and highly complicated. Change of Control is merely one small issue. BDB attorneys have extensive experience in advising contractors through the DBE mine fields and protecting their interests when trouble arises.
Contact the author of this article: John Swansinger