California Code of Regulations
Title 2 - Administration
Division 2 - Financial Operations
Chapter 3 - Department of General Services
Subchapter 10.5 - Disabled Veteran Business Enterprise Participation Goal Program for State Contracts
Article 3 - DVBE Certification
Section 1896.81 - Eligibility for DVBE Certification

Universal Citation: 2 CA Code of Regs 1896.81

Current through Register 2024 Notice Reg. No. 38, September 20, 2024

(a) The DVBE applicant shall, pursuant to Military and Veterans Code sections 999 and 999.2, meet all of the following qualifying criteria:

(1) DVs shall have at least a ten percent (10%) service-connected disability and be domiciled in California.

(2) The principal office of the firm shall be located in the United States, and cannot be a branch or subsidiary of a foreign corporation, foreign firm, or other foreign-based business.

(3) The business shall be at least fifty-one percent (51%) unconditionally owned by one or more DVs.

(4) The daily business operations shall be managed and controlled by one or more DVs. The DV(s) managing and controlling the business is/(are) not required to be the same individuals as the DV business owner(s).

(5) The DVBE shall have filed federal tax returns and submitted copies to OSDS in accordance with Military and Veterans Code section 999.2, subdivision (g).

(b) An entity meets the fifty-one percent (51%) unconditional ownership criteria under any of the following conditions:

(1) It is a sole proprietorship with at least fifty-one percent (51%) ownership by one or more DVs. The individual federal tax return submitted by the sole proprietorship shall demonstrate that the qualifying DV is the majority owner. There shall be no formal or informal restrictions that limit DV owner control.

(2) It is a partnership with at least fifty-one percent interest unconditionally owned by one or more DVs. The partnership agreement shall reflect each owner's interest. There shall be no formal or informal restrictions that limit DV owner control.

(3) It is a limited liability company (LLC) with a showing of one hundred percent (100%) unconditional ownership by one or more DVs pursuant to Public Contract Code section 10115.9. The operating agreement shall reflect each DV owner's interest as a member, manager and/or officer. There shall be no formal or informal restrictions that limit the DV owner control.

(4) It is a corporation with at least fifty-one percent (51%) unconditional ownership of all outstanding stock, including but not limited to voting stock owned by one or more DVs. DV owners shall control the board of directors. There shall be no formal or informal restrictions that limit voting power or control of DV owners.

(5) It is a subsidiary that is wholly owned by a parent corporation, but only if at least fifty-one percent (51%) of the voting stock of the parent corporation is unconditionally owned by one or more disabled veterans. If the subsidiary is an LLC that is wholly owned by a parent corporation, then one hundred percent (100%) of the voting stock of the parent corporation must be unconditionally owned by one or more DVs.

(6) Ownership by a living trust shall be equivalent to ownership by a DV, only if the trust reflects the DV owner(s) have at least fifty-one percent (51%) ownership and the DV owner(s) is/are the grantor(s) and/or trustee(s).

(7) DV ownership as documented in an employee stock ownership plan is allowable only if non-DV employee ownership under the plan does not exceed forty-nine percent (49%).

(8) Unconditional ownership by one or more DVs shall mean that ownership is not subject to conditions precedent, conditions subsequent, executory agreements, voting trusts, restrictions on or assignments of voting rights, or other arrangements of voting rights, or 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. Unexercised stock options or similar agreements (including rights to convert non-voting stock or debentures into voting stock) held by DVs are disregarded. However, any unexercised stock options or similar agreements, held by Non-DVs (including rights to convert non-voting stock or debentures into voting stock), will be treated as exercised.

(9) One or more DV owners must be entitled to receive:

(A) Allocation or distribution of at least fifty-one percent (51%) of the entity's losses or profit; and

(B) The entire value of ownership shares.

(c) OSDS shall determine certification eligibility on the basis of the following management and control factors and conditions. DV owners and/or DV managers shall document that they maintain control of the business. Control includes both the strategic policy setting exercised by boards of directors and the day-to-day management and administration of business operations; and is composed of two parts -- Managerial and Operational.

(1) DV owners shall have managerial control of the overall direction of the business, shaping its destiny. DV owners and/or DV managers shall demonstrate responsibility for the critical areas of the business's operations and be personally responsible for, including but not limited to, the following:

(A) Negotiations, execution and signature of contracts; and

(B) Execution of financial (credit, banking, bonding) transactions and agreements.

(2) To have operational control of the day-to-day operations, DV owners and/or DV managers shall demonstrate independent decisions for the day-to-day operations. Absentee or titular management by qualifying DVs is not considered operational control. DV owners and/or DV managers shall demonstrate an active role in controlling the business. Operational control is demonstrated by, including but not limited to, all of the following:

(A) DV owners and/or DV managers possess the requisite experience, education, knowledge and qualifications in the business's field of operations;

(B) No third party agreements restrict control by DV owners and/or DV managers; and

1.Supervision -- directly responsible for subordinates

2.Work force -- directly responsible for subordinates, contractors or subcontractors

3.Equipment

4.Materials

5.Facilities (office/yard)

(3) A DV or DVs controlling the business shall:

(A) Show sustained and significant time invested in the business. A DV engaged or employed with any other business(es) or governmental entity(ies), in any capacity, shall submit a detailed statement with the request for certification, explaining why such activities, duties or responsibilities do not impair the DV's ability to manage and control the certified business enterprise.

(B) Hold the highest officer position exercising control over all other positions in the business.

(1) The highest position in the business must be listed as such on any California Contractors State License when the license is held under the name of the DV or DV's business.

(C) DV's unexercised right to cause a change in the management of the business does not in itself constitute DV control, regardless of how quickly or easily the right could be exercised. An exception is where DV(s) control of the board of directors, as demonstrated by the bylaws or articles of incorporation.

(4) In the case of a partnership, one or more DVs shall serve as general partners, with control over all partnership decisions. A partnership in which no DV is a general partner will be ineligible for certification.

(5) In the case of LLCs, one or more DVs shall serve as managing members, with control over all decisions of the LLC.

(6) In the case of a corporation, one or more DVs shall control the board of directors.

(A) DV(s) control the board of directors when, but not limited to:

1.DV(s) own(s) one hundred percent (100%) of all voting stock of the business; or

2.DV(s) own(s) at least fifty-one percent (51%) of all voting stock of a business, one or more DV(s) is/are on the board of directors, and no supermajority voting requirements exist for shareholders to approve corporate actions; or

3.One or more DVs own at least fifty-one percent (51%) of all voting stock, each DV owner is on the board of directors, and no supermajority voting requirements exist for shareholders to approve corporate actions. DV shareholders shall demonstrate that together or combined they possess the ability to control the business.

(B) Where a business does not meet the requirements set forth in subdivision (6)(A), the corporate by-laws shall specify that the DVs upon whom eligibility is based shall control the board of directors. In a two-person board of directors, with one individual a DV and the other a non-DV, certification eligibility requires the DV's vote to be decisive.

(C) Provisions for the establishment of a quorum cannot permit Non-DV directors to directly or indirectly control the board of directors.

(7) Non-DVs involved in the management of the DVBE or as minority stockholders, partners, officers, or directors, shall not exercise overall organizational control or dominance, or power to control the business.

(8) Non-DVs who transfer majority stock ownership of the business to DVs within two years, prior to the submission of a request for certification, and remain involved in the business, in any capacity, are presumed to control the business. This presumption may be rebutted by documenting that DV majority stockholders meet all management and control requirements and have the experience necessary to manage and control all activities of the business. The rebuttal shall be submitted by DV stockholder(s).

(9) Non-DVs or entities may be found to control or have the power to control in the following situations, including but not limited to:

(A) When the by-laws allow Non-DVs through a quorum to block DVs proposals.

(B) When a Non-DV provides the licenses, critical financial or bonding support upon which the business is operationally dependent.

(D) When dependency relationships with Non-DVs or entities are such that DVs cannot exercise independent business judgment due to the assumption of economic risk by others.

(E) When Non-DVs receive, as directors, officers or employees, compensation from the business that exceeds the compensation received by DVs holding the highest officer position, unless exceptions apply for legitimate employee retention purposes or income deferral reasons.

(d) For purposes of this subchapter, OSDS's determination of whether certified DVBEs with a small business or small business with microbusiness designation are manufacturers shall, consistent with the section 1896.12, subdivision (d)(3) of Title 2, California Code of Regulations (CCR) criteria for small business, include consideration of the following:

(1) Whether the business, with its own facilities performs the primary activities in transforming inorganic or organic substances into the end item being acquired, and is not a packager, or, in the case of kits, a final assembler. The end item must possess characteristics that did not exist before the original substances, parts, or components were assembled or transformed, as a result of mechanical, chemical, or human action. The end item may be finished and ready for utilization or consumption, or it may be semi-finished as a raw material to be used in further manufacturing, and

(2) Whether more than fifty percent (50%) of its annual gross receipts, as determined by the Department, result from the manufacture and sale of products manufactured by the business.

(e) DVBEs are required to comply with all applicable statutory and regulatory requirements of any state or local agency, or the federal government, in order to be certified.

(f) DVBE applicants must meet the applicant responsibilities as set forth in section 1896.82.

1. New section filed 2-14-2013; operative 4-1-2013 (Register 2013, No. 7). For prior history, see Register 94, No. 4.
2. Amendment of section heading, section and NOTE filed 11-29-2018; operative 1-1-2019 (Register 2018, No. 48).
3. Amendment filed 6-29-2023; operative 6-29-2023 pursuant to Government Code section 11343.4(b)(3) (Register 2023, No. 26).

Note: Authority cited: Sections 14600, 14615 and 14839, Government Code; and Section 999.5, Military and Veterans Code. Reference: Sections 999 and 999.2, Military and Veterans Code, Section 23101, Revenue and Taxation Code; Sections 10115.1 and 10115.9, Public Contract Code; Title 38, United States Code, §1114; and Title 13, Code of Federal Regulations (CFR), Chapter I, §121.406.

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