3 Areas Of Legal Risk To Address Early And Often

Companies restarting their businesses post-pandemic shutdown will be seeking creative ways to both renew customers and find new pipelines of business.  Those whose majority owners qualify may do so by seeking certification as a minority, veteran, disadvantaged, disability-owned, or woman-owned business to secure a piece of federal, state, and local contracts being awarded in the years ahead.  This article overviews the various pathways and requirements to obtain such certifications.

First, the available certifications include companies who are controlled by persons owning at least 51%: (1) who qualify for minority business enterprise (MBE) certification based on their ethnicity (Blacks, American Indians, Hispanics, Asian Americans and other identified groups); (2) who are female to qualify for woman-owned business enterprise (WBE) certification; (3) who qualify as ADA-disabled persons for disability-owned business enterprise (DOBE) certification; (4) whose company is financially disadvantaged due to the qualifying member’s protected status such as minority/woman/disabled to obtain disadvantaged business enterprise (DBE) certification; or (5) who are an American veteran or a service-disabled American veteran to qualify for certification as such (VBE or SDVOSB).

Second, the certifying agencies include: (1) the Indiana Department of Transportation (INDOT) for federal and state highway and transportation-related contracts; (2) the Indiana Department of Administration (IDOA) for other state contracts; (3) the City of Indianapolis for its awarded contracts; (4) the Small Business Administration (SBA) for federal-level contracts; (5) a for-profit regional organization named The Women’s Business Enterprise National Council (WBENC) that many large companies rely on for diversity awards in their contracts; and (6) nearly every state and major city in the United States for companies that conduct business there.

Third, to find out the best avenue for certification of a business, including learning whether competitors have such certification (and in what areas they have qualified to obtain government contracts), nearly every certifying agency publishes its certified business list on its website as an aid to contractors who are awarded contracts and are seeking to fulfill their contract’s allocated quota of certified businesses for the contract.  Many governmental contracts now require that 3-10% (or more) of the awarded work be performed by minority/women/disabled/veteran or disadvantaged businesses who have been so certified.

Fourth, the general requirements to obtain certification include that the qualified person: (1) owns at least 51% of the company;(2) controls the company’s management and is active in the day-to-day aspects of the business with sufficient experience or license to do so; and (3) has invested capital and shares in the risks/profits of the business proportionate to his or her ownership interest.

 Fifth, the application process for certification should be reviewed because each certifying agency utilizes its own application form requiring the qualifying member to sign under oath the elements to prove the qualifications for certification. As well, the forms require that the applicant provide all material information which often includes personal and company tax returns, bank and corporate records, and contracts.  After receipt of the application, most certifying agencies conduct an on-site interview of the qualifying member that “tests” and confirms that the qualifications are met.  The agencies also reserve the right to inspect equipment or other assets on-site or in the field and interview the company’s vendors, subcontractors, bankers, and employees to vet the qualification standards.  While it is unclear the extent to which onsite interviews may be affected by the recent pandemic shutdown (i.e., if they will be offered telephonically or by videoconference), they are a crucial step in the process such that companies should pay due attention to preparing for them.

Sixth, the pitfalls are many, particularly if companies fail to seek experienced counsel to identify and help address them before submitting the application.  Some are simple and can readily be remedied, such as failure to include all supporting documentation.  Others take time, such as satisfying a requirement that the company has been in business at least two years or otherwise sufficiently prove it is worthy and reliable to be awarded governmental contracts.  Deeper problems include the existence of corporate governance documents that affect control requirements, unexplained disparity in compensation as to the qualifying member, and inadequate capital contribution or collateralization when qualifying members obtain their majority ownership through financing by the seller or family members who do not qualify for certification.

Finally, consideration must be given regarding what to do if certification is granted (or not).  Within 90-120 days of applying, a company should learn whether certification has been granted.  Certification is typically valid for three years so long as nothing changes to disqualify the company. The company usually must file an annual affidavit attesting that no such changes occurred.  If certification is denied, the qualifying member is best advised to withdraw the application so that deficiencies can be addressed and allow the company to promptly reapply.  If it instead suffers a denial, there is usually a one-year bar against reapplying.

Kathleen Hart

Kathleen Hart


Author Kathleen Hart

Kathleen Hart concentrates her practice in civil and commercial litigation, frequently pursuing or defending cases that involve injunctive relief, such as breach of non-competition agreements, trade secret misappropriation, and unfair competition claims; contract and property disputes; shareholder and corporate control battles; failed business transactions; and RICO, fraud, embezzlement and business tort claims. She helps clients evaluate the strengths and weaknesses of their claims and defenses in order to position themselves to resolve disputes.

In addition, Kathleen serves as outside general counsel for various privately-held businesses and strategist to high net-worth individuals, using her combined employment law and litigation experience to help them evaluate or negotiate employment, non-competition, confidentiality/non-disclosure, employment, change-in-control, and severance agreements. For most of her career, Kathleen has also assisted women and minority clients obtain MBE/WBE/DBE certification with governmental or other certifying agencies.

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Disclaimer: Article is made available for educational purposes only and is not intended as legal advice. If you have questions about any matters in this article, please contact the author directly.

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Posted on June, 1 2020, by Kathleen Hart