Determination of Ownership
In determining whether the socially disadvantaged individual(s) in a firm owns the firm, the COBID must consider all the facts in record viewed as a whole.
One or more socially disadvantaged individuals must own at least 51% of the business. COBID will apply the standards a criteria for ownership as set out in 49 CFR § 26.69 (e-CFR 2015 Edition).
In the case of a corporation, such individual(s) must own at least 51 percent of each class of voting stock outstanding and 51 percent of the aggregate of all stock outstanding.
In the case of a partnership, the socially disadvantaged individual(s) must own 51 percent of each class of partnership interest. The ownership must also reflect in the firm’s partnership agreement.
In the case of a limited liability company, the socially disadvantaged individual(s) must own at least 51 percent of each class of member interest.
If a firm is owned equally (i.e., 50⁄50) by a combination of socially or economically disadvantaged individuals, the COBID will determine whether a firm is certified as a MBE, WBE, or SDV based on which individual possesses overall management and control of the firm. Evidence in support of management and control may include one or more of the following:
Professional licensing as generally required by the industry (e.g., engineer, architect, plumber, electrician, landscape architect, etc.)
Control of day-to-day operations of the firm
Position held in the firm
Ability to hire and fire staff
The business must be controlled by one or more socially disadvantaged individual(s). COBID will apply the standards and criteria set out in 49 CFR § 26.71 (e-CFR 2015 Edition).
One or more of the socially disadvantaged individual(s) must have made a substantial contribution of capital to the business, which is commensurate with his or her ownership interest.
The COBID may consider differences in compensation between the potentially certified owner(s) and other participants in the firm to determine whether to certify a firm. Such consideration shall encompass the duties of the persons involved, normal industry practices, the firm’s policy, and practice concerning reinvestment of income, and any other explanations for the differences proffered by the firm.
A contribution is not a promise to contribute capital, an unsecured note payable to the firm or to an owner who is not a socially disadvantaged individual or mere participation in a firm’s activities as an employee. Debt instruments from financial institutions or other organizations that lend funds in the normal course of their business do not render a firm ineligible, even if the debtor’s ownership interest is security for the loan.
The socially disadvantaged individual’s ownership in the firm must be real, substantial, and continuing, going beyond pro forma ownership and reflected as such in all business documents. The socially disadvantaged owner(s) must enjoy the customary incidents of ownership, and share the risks and profits commensurate with their ownership interest, as demonstrated by the substance, not merely the form, or arrangements.
The socially and economically disadvantaged individuals must directly hold all securities that constitute ownership of a firm.
Except as provided in this paragraph, the COBID does not consider securities or assets held in trust, or by any guardian for a minor, as owned or held by the socially disadvantaged persons in determining the ownership of a firm.
The COBID does recognize securities or assets held in trust by a socially disadvantaged individual for purposes of determining ownership of the firm, if:
The beneficial owner of securities or assets held in trust and the trustee are both socially disadvantaged individuals; or
The beneficial owner of a trust is a socially disadvantaged individual who, rather than the trustee, exercises effective control over the management, policymaking, and daily operational activities of the firm. The applicant may count assets held in a revocable living trust only in the situation where he or she is the sole grantor, beneficiary, and trustee.
If the applicant is relying on his or her expertise for certification, he or she must have a significant financial investment in the firm.
The COBID will consider the following requirements as they apply to situations in which the applicant relies on his or her expertise as a contribution to acquire ownership. The owner’s expertise must be:
In a specialized field;
Of outstanding quality;
In areas critical to the firm’s operations;
Indispensable to the firm’s potential success;
Specific to the type of work the firm performs; and
The records of the firm must reflect the applicant’s expertise. These records must clearly show the contribution of expertise and its value to the firm. The applicant may quantify his or her expertise in years of experience, education, and accomplishments related to the types of services the firm offers.
When an applicant receives majority stock ownership or control of a firm from a non-qualifying applicant within two years prior to submitting an application and the non-qualifying applicant remains involved in the firm as a stockholder, officer, director, or key employee the COBID will presume that the applicant does not control the firm. The applicant may rebut this presumption by showing that he or she has independent management experience necessary to control the operation of the firm and indeed is participating in the management of the firm.
Assets held by a socially disadvantaged individual(s) as result of a final property settlement; court order in a divorce or, legal separation from a non-socially disadvantaged individual; through inheritance; or following the death of the former owner, are assets of the socially disadvantaged individual. The terms and conditions of legal documentation governing that transaction (i.e. divorce settlement, legal will, etc.) support the transfer of ownership to them.
The COBID will not consider as evidence of ownership interest or assets in a firm obtained by a socially disadvantaged individual through gift or transfer from a non-socially disadvantaged individual unless there is evidence to support the transfer of interest and assets occurred for reasons other than obtaining certification.
To overcome this presumption and permit the COBID to count interests or assets, the socially disadvantaged individual must demonstrate by clear and convincing evidence that:
The gift or transfer to the socially disadvantaged individual was made for reasons other than obtaining certification as a MBE, WBE, and/or SDV; and
The socially disadvantaged individual actually controls the management, policy, and operations of the firm, notwithstanding the continuing participation of a non-socially disadvantaged individual who provided the gift or transfer.
The COBID will closely scrutinize such transfers when the socially disadvantage individual and non-socially disadvantaged individual are:
Directly affiliated and involved in the same firm for which the socially disadvantaged individual is seeking certification;
Involved in the same or a similar line of business; or
Engaged in an ongoing business relationship related to the types of services in which the socially disadvantaged individual is seeking certification.
In situations in which marital assets form a basis for ownership of a firm, the COBID considers the following:
When marital assets (other than the assets of the business in question), held jointly or as community property by both spouses, are used to acquire the ownership interest asserted by one spouse, the COBID must deem the ownership interest in the firm to have been acquired by that spouse with his or her own individual resources. In doing so, the other spouse must irrevocably renounce and transfer all rights in the ownership interest of the applicant in the manner sanctioned by the laws of the state in which either spouse or the firm is domiciled. The COBID does not count a greater portion of joint or community property assets toward ownership than state law would recognize as belonging to the socially disadvantaged owner of the applicant firm.
The COBID will require a fully executed Non-participation Statement renouncing the non-qualifying spouse or domestic partner’s rights in the jointly owned or community asset used to acquire an ownership interest in the firm.
The COBID must not regard a contribution of capital as failing to be real and substantial, or find a firm ineligible, solely because:
A socially disadvantaged individual acquired his or her ownership interest as the result of a gift or transfer without adequate consideration, other than the types set forth in paragraph (12) of this section;
There is a provision for the co-signature of a spouse who is not a socially disadvantaged individual on financing agreements, contracts for the purchase or sale of real or personal property, bank signature cards, or other documents; or
An applicant receives ownership of the firm in question or its assets for adequate consideration from a spouse who is not a socially disadvantaged individual to a spouse who is such an individual.