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IN THE MATTER OF: PRECISE SYSTEMS, INC., APPELLANT

SBA No. VET-246, 20152015 WL 3451698April 30, 2015

SBA No. VET-246, 2015 (S.B.A.), 2015 WL 3451698
Small Business Administration (S.B.A.)
Office of Hearings and Appeals
[Service-Disabled Veteran Owned Small Business Concern Appeals]
*1 IN THE MATTER OF: PRECISE SYSTEMS, INC., APPELLANT
*1 SBA No. VET-246
*1 RFP No. SAQMMA13R0044
*1 April 30, 2015

Appearances

*1 Kevin P. Mullen, Esq.
*1 Damien C. Specht, Esq.
*1 Charles L. Capito, Esq.
*1 Jenner & Block, LLP
*1 Washington, D.C.
*1 For Appellant.
*1 Thomas K. David, Esq.
*1 David, Brody & Dondershine, LLP
*1 Reston, Virginia
*1 For all Points Logistics, LLC.
*1 Pamela J. Mazza, Esq.
*1 Peter B. Ford, Esq.
*1 PilieroMazza PLLC
*1 Washington, D.C.
*1 For B3 Solutions, LLC.
*1 Christopher R. Clarke, Esq.
*1 Office of General Counsel
*1 U.S. Small Business Administration
*1 Washington, D.C.
*1 For the Agency.
 
DECISION1
  
I. Introduction
 
*1 This dispute arises from a remand of the U.S. Small Business Administration (SBA) Office of Hearings and Appeals (OHA) decision in Matter of Precise Systems, Inc., SBA No. VET-243 (2014) (“Precise I”). In that decision, OHA affirmed the finding of the SBA Acting Director of Government Contracting (AD/GC) that Precise Systems, Inc. (Appellant) is not an eligible service-disabled veteran-owned small business concern (SDVO SBC) because Appellant does not meet the ownership requirements set forth at 13 C.F.R. § 125.9. Specifically, OHA affirmed the AD/GC's conclusion that Appellant's Series A Common Stock and Series B Convertible Preferred Stock are separate classes of voting stock under 13 C.F.R. § 125.9(d), and because the Series B shares are not majority-owned by service-disabled veterans, Appellant did not qualify as an eligible SDVO SBC. The specific ownership criterion in question requires that “at least 51% of each class of voting stock outstanding must be unconditionally owned by one or more service-disabled veterans.” 13 C.F.R. § 125.9(d).
*1 Appellant challenged Precise I at the U.S. Court of Federal Claims (Court), and on March 31, 2015, the Court issued an Opinion and Order remanding to OHA the issue of whether Appellant “satisfies the ownership criteria for SDVO SBC status.” Precise Systems, Inc. v. United States, No. 14-1174C (April 6, 2015) (hereafter, “Opinion”), at 24. The Court found that OHA was opaque in its reasoning that the Series A Common Stock and Series B Convertible Preferred Stock are separate classes of voting stock. On remand, the Court instructed OHA to “set forth its rationale for the decision with greater clarity regarding the standard for assessing eligibility and how it applies to [Appellant].” Id. This decision responds to the Court's remand order.
 
II. Background
  
A. Factual Background
 
*2 It is undisputed that Mr. John Thomas Curtis, a service-disabled veteran, owns [more than 51%] of Appellant's total outstanding shares. The remaining [[XX]% of the outstanding shares is held by Appellant's Employee Stock Ownership Plan (ESOP). The outstanding shares are divided into two categories. The shares owned by Mr. Curtis are Series A Common Stock, whereas the shares owned by the ESOP are Series B Convertible Preferred Stock. Series A Common Stock is limited to 1,200,000 shares, [XXXX] of which have been issued. Series B Convertible Preferred Stock is limited to 300,000 shares, [XXXX] of which have been issued. Appellant is a Maryland corporation.
*2 It is undisputed that Series A and Series B have equal voting rights. There are, however, other differences between the two groups of shares, specifically with regard to dividend rights, conversion rights, and redemption rights. These differences are summarized in Precise I and in the Court's Opinion. Precise I at 7; Opinion at 3-5.
*2 In Precise I, OHA reversed the AD/GC's determination that Mr. Curtis does not control Appellant within the meaning of 13 C.F.R. § 125.10. Precise I at 10. This portion of OHA's decision was not at issue before the Court. OHA hereby reaffirms its conclusion that Mr. Curtis does control Appellant.
 
B. AD/GC's Determination
 
*2 On September 10, 2014, the AD/GC sustained protests filed against Appellant by several competitors for the subject procurement. The protesters, which included All Points Logistics, LLC (All Points) and B3 Solutions, LLC (B3), alleged that Appellant is not an eligible SDVO SBC as a result of its ESOP. The AD/GC concluded that Appellant has two classes of voting stock and that a service-disabled veteran does not control the majority of each class, as 13 C.F.R. § 125.9(d) requires. In determining that there were two classes of stock, the AD/GC reasoned that, “SBA regulations are focused on the treatment of the various classes/series/collections/sets/groups of shares themselves, and how those various classes/series/collections/sets/groups function. What is important is not the form of the structure, but the function of the structure.” Precise I, at 3 (quoting AD/GC's determination).
*2 In considering the functions of the groups of shares, the AD/GC found that Appellant's two groups of shares have “separate voting rights on at least one issue.” Id. According to Appellant's Articles of Incorporation, “[Appellant] may declare and pay a dividend on any class or series of stock without declaring and paying a dividend on any other class or series of stock if stockholders of a majority of the shares of each of the classes or series of stock not receiving a dividend consent....” Id. The AD/GC concluded from this language that Mr. Curtis's rights as a shareholder were restricted, because Mr. Curtis “is precluded from using his share of Series A Common Stock to vote on dividends related to Series B Convertible Preferred.” Id. The AD/GC also highlighted that Series B Convertible Preferred is “granted a preferred dividend right,” but Series A Common Stock is not. Id. Based on these factors, the AD/GC concluded that the two groups of shares are not functionally equivalent, so they must be treated as separate classes of stock for purposes of assessing SDVO SBC eligibility. The AD/GC specifically rejected Appellant's contention that, because all outstanding stock is entitled to one vote per share, Appellant has only one class of stock.
 
C. Precise I
 
*3 On November 6, 2014, OHA determined that the AD/GC's determination was not “based on clear error of fact or law.” See 13 C.F.R. § 134.508.
*3 OHA noted that SBA regulations are silent as to what constitutes a “class” of stock, and the regulations do not distinguish a “class” from a “series.” Precise I, at 9. In the absence of such a definition, OHA consulted Maryland corporate law and determined that criteria besides voting rights can distinguish classes of stock. Id. (citing Md. Code Corps. & Ass'ns § 2-104(a)(7) (“If the stock is divided into classes,” the corporation's articles of incorporation must include “a description of each class including any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption.”).) OHA took from this provision that, although voting rights are a relevant consideration, the boundaries of a “class” may also be defined by factors such as preferential dividends, redemption abilities, and conversion rights. As a result, OHA rejected Appellant's argument that voting rights are the sole factor that may define and distinguish “classes” of stock, and found that the AD/GC did not clearly err in considering factors other than voting rights in assessing whether Appellant has one or two classes of stock.
*3 OHA further determined that Series A and Series B were “sufficiently dissimilar” that the AD/GC did not clearly err in determining that Appellant's two groups of stock are separate classes of voting stock. Id. at 10. According to Appellant's Articles of Incorporation, Series B shareholders may receive cumulative preferential dividends before Series A shareholders do, and Series B shareholders have conversion rights unavailable to Series A holders. Series A and B shareholders also have different redemption rights. Because these groups of stock have different rights and restrictions, OHA found no clear error in the AD/GC's decision to treat the two groups of stock as separate classes for purposes of 13 C.F.R. § 125.9(d). Id.
*3 OHA was unpersuaded by Appellant's argument that the AD/GC's determination should be overturned because it is inconsistent with rules pertaining to the 8(a) Business Development (BD) program and with rules pertaining to the U.S. Department of Veterans Affairs (VA) program for SDVO SBCs. Id. OHA noted that the VA program is separate from that of SBA, and unlike SBA, VA specifically exempts ESOPs from certain requirements. There is no inconsistency with the 8(a) program because 8(a) regulations at 13 C.F.R. § 124.105(d) require at least 51% ownership of each class of voting stock. OHA rejected Appellant's reliance on Matter of Precision Analytical Laboratory, Inc., SBA No. 384 (1991) as “based on the flawed premise that voting rights are the only possible distinguishing characteristic of a class of stock.” Id.
*4 OHA declined to consider Appellant's public policy arguments for ESOPs on the grounds that OHA has no authority to determine the propriety of the regulations themselves.
 
D. Remand
 
*4 In its Opinion, the Court found that SBA regulations “do not define the term “class”' so “[i]n the absence of a specific definition, the plain and ordinary meaning of the term applies.” Opinion, at 19 (citations omitted). The Court quoted the definition of the term “class” from Black's Law Dictionary. Id.
*4 The Court determined that, in Precise I, “OHA rationally considered dissimilarities in dividend preferences, redemption abilities, and conversion rights among shareholders because these differences were apparent on the face of [Appellant's] organizational documents.” Id. However, “OHA then turned to Maryland corporate law to define the characteristics dispositive of a ‘class,’ but did not provide a discernibly thorough reasoned explanation for its analysis.” Id. The Court observed that “Maryland law does not prohibit an entity from establishing multiple ‘series' within a ‘class”’ nor does it “definitively define or distinguish a ‘class' from a ‘series.”’ Id. at 20. The Court concluded that “Maryland law would not seem dispositive, yet the OHA summarily concluded Maryland law established [Appellant] had separate classes of stock not two series within a single class.” Id.
*4 The Court observed that 13 C.F.R. § 125.9(d) refers to classes of voting stock and stated that “the Series B stock at issue here plainly appears to be “voting stock.”' Id. Further, the Court stated, the phrasing of the regulation “suggests it is ‘voting stock’ that qualifies what potential groups of stock (‘class[es]’) are relevant, and vice versa.” Id.
*4 In determining whether the Series A and Series B stocks are separate classes, OHA “identified variances among [Appellant's] voting stock, ... considered what weight to give the identified dissimilarities, [and] appl[ied] a ‘sufficiently dissimilar’ test.” Id. at 21. However, “OHA failed to give meaning to its “sufficiently dissimilar' test because it offered no guideposts for measuring “sufficiency.”' Id.
*5 The Court indicated that OHA could have attached greater significance to Precision Analytical, an OHA case involving the 8(a) program, as a guidepost for determining whether different classes of stock exist. The Court stated that the 8(a) program is analogous to the SDVO SBC program, and the fact that “[t]he programs employ materially identical ownership criteria” is “evidence that the SBA intended consistency between [the programs].” Id. at 22. Based on Precision Analytical, OHA could have rejected the AD/GC's reasoning and “independently concluded that only those dissimilarities that related to voting rights would be material.” Id. at 21.
*5 The Court stated that Precision Analytical “stands for a much broader principle—namely, that differences in stock that either do not adversely affect control or benefits, or are subordinate to greater control or benefits, in the individual upon whom status is based, are ‘meaningless' and therefore can be disregarded when assessing ownership.” Id. at 22. Further, in rejecting Precision Analytical, “OHA neither addressed the basis for disregarding a materiality standard tied to the purpose of the regulation, nor [discussed its] rationale for deviating from its own precedent in an analogous context.” Id.
*5 The Court adopted Appellant's view that the SBA rules governing ownership of SDVO SBCs are irreconcilable with the VA's rules. The Court found, however, that it has no authority to compel such reconciliation. Id. at 23 n.18.
*5 The Court noted the AD/GC's observation that the Series B stockholders have preferred dividend, conversion, and redemption rights that Series A stockholders do not also have. The Court stated, though, that OHA determined— but offered little explanation as to why—these variances were sufficient to conclude that Appellant has two separate classes of voting stock. Accordingly:
*5 It appears the OHA based its sufficiency conclusion on the mere fact that the variances existed and reflected rights enjoyed or obligations suffered by Series B shareholders that were not shared equally by [Mr. Curtis] in his capacity as the Series A shareholder. The mere existence of differences, though, says nothing of the relevance or materiality of any of the differences.
*5 Id. at 24 (internal citations omitted).
*5 On remand, the Court directed that OHA “set forth its rationale for the decision with greater clarity regarding the standard for assessing eligibility and how it applies to [Appellant].” Id.
 
III. Comments
 
*6 On April 3, 2015, OHA issued an order offering interested parties an opportunity to provide comments on the Court's remand order. Four interested parties submitted comments.
 
A. All P oints' Comments
 
*6 On April 11, 2015, All Points, one of the original protesters, submitted comments. All Points maintains that Precise I is “entirely consistent with authoritative sources and objective guideposts.” (All Points' Comments, at 3.)
*6 In discussing the Congressional and regulatory intent behind the SDVO SBC program, All Points observes that the ownership requirement at issue in this case first appeared in the 8(a) BD program. In creating the requirement that a disadvantaged individual must own at least 51% of all stock, in addition to owning at least 51% of all classes of voting stock, SBA stated that this “requirement resulted from a General Counsel's opinion which found that such ownership was necessary to meet the 51 percent ownership requirement of section 8(a) of the Small Business Act.” (Id. at 4, quoting 54 Fed. Reg. 34,692, 34,694 (Aug. 21, 1989).) All Points explains that OHA later stated in Precision Analytical that the Congressional and agency intent behind this new requirement was “to allow only disadvantaged individuals to share in the benefits” of the 8(a) program. (Id. at 5, quoting Precision Analytical, at 6 (emphasis added by All Points).)
*6 The SDVO SBC program is a newer creation than the 8(a) BD program. When SBA proposed the same requirement of 51% ownership of each class of voting stock to the later- created SDVO SBC program, All Points states, SBA received no comments or objections to this provision. From this silence, All Points posits that “[t]he applicants were likely aware that the specific requirement was identical [to] the 8a stock ownership test and that the SBA's General Counsel had already reasonably opined that the requirement was needed to comport with legislative authority.” (Id.)
*6 As a second guidepost, All Points encourages OHA to consider Internal Revenue Service (IRS) rules governing stock in ESOP trusts, because shares placed in an ESOP are subject to special IRS requirements that do not apply to shares held outside the ESOP. For instance, ESOP participants have the right to demand that their distributions be made in employer securities and to have the employer repurchase the shares at fair market value; and if an ESOP participant retires, the participant must receive the ESOP account balance within one year of the event. (Id. at 7.) Thus, All Points reasons, “[i]t is clear from the non-exhaustive examples listed above, that any shares placed in an ESOP Trust will be ‘sufficiently dissimilar’ from shares that remain apart from the Trust.” (Id.)
*7 The third guidepost All Points refers to is Appellant's Amended Articles of Incorporation and the differences in preferences, conversion rights, limitations of dividends, restrictions, and redemption rights between Series A and Series B identified by the AD/GC, OHA, and the Court. (Id. at 8-9.)
 
B. Appellant's Comments
 
*7 On April 12, 2015, Appellant submitted comments. Appellant states that “the question presented in this case is whether Mr. Curtis' majority ownership of [[Appellant's] voting stock - all of which votes together - satisfies the requirement that the SDV own at least 51 percent of each class of voting stock.” (Appellant's Comments, at 1.) According to Appellant, “[i]n construing [[13 C.F.R. § 125.9(d)] consistent with the Court's opinion, there are two paths SBA may take, each of which leads the SBA to find in [Appellant's] favor.” (Id. at 7.)
*7 First, Appellant argues, OHA could find that Appellant has “a single class of voting stock, under which [Appellant] established two series of stock with different dividend, conversion, and redemption rights.” (Id. at 2.) There is no dispute that Mr. Curtis owns a majority of Appellant's total issued stock; consequently, Appellant argues, Mr. Curtis owns a majority of Appellant's single class of voting stock. The conclusion that Appellant has only one class of voting stock is supported by the fact that Series A and Series B have equal voting rights, as well as by Maryland law, which does not forbid the creation of multiple series within a class of stock. (Id. at 7-8.)
*7 Second, OHA could determine that “dissimilarities between Series A and B are meaningless and cannot form the basis upon which to distinguish the stock as separate classes of voting stock.” (Id. at 8.) Appellant states that the Court rejected the notion that trivial differences between Series A and Series B will give rise to two separate classes of stock, commenting that “[t]he mere existence of differences, though, says nothing about the relevance or materiality of any of the differences.” (Id. at 5, quoting Opinion at 24.). Further, the Court interpreted Precision Analytical as having held that “differences in stock that either do not adversely affect control or benefits, or are subordinate to greater control or benefits, in the individual upon whom status is based, are ‘meaningless', and therefore can be disregarded when assessing ownership.” (Id. at 10, quoting Opinion at 22 (emphasis added by Appellant).)
*7 In the instant case, Appellant contends that the “Preferred Dividend” payable on Series B but not on Series A does not undermine Mr. Curtis's ownership of Appellant because it is “not the highest priority dividend.” (Id. at 5.) Rather, the Court recognized that the Series B “Preferred Dividend” is subordinate to the Series A “Repayment Dividend.” (Id. at 5-6.) “Thus, not only were the dividends immaterial to the SDV's ownership rights, the priority given to repayment dividends on Series A in fact enhanced the financial benefits accruing to Mr. Curtis.” (Id. at 6.)
*8 Similarly, Appellant continues, differences in conversion and redemption rights between Series A and Series B are meaningless with respect to Mr. Curtis's ownership and control of Appellant. The ability of Series B shareholders to convert their shares to Series A is immaterial because “[e]ven if every ESOP Series B shareholder exercised his or her right to convert all of the Series B stock to Series A stock, Mr. Curtis would still own more than 51% of the total issued stock.” (Id. at 6, quoting Opinion at 5.) The conversion right, therefore, cannot deprive Mr. Curtis of control of Appellant or of the benefits of ownership. The redemption right permits Appellant to unilaterally redeem Series B shares, and provides greater power and control to Mr. Curtis. (Id.) Appellant reiterates that “[n]ot only were the variances [between Series A and Series B] immaterial and irrelevant to [Mr. Curtis's] ownership and voting rights, the effect of these three dissimilarities was to enhance the rights and privileges afforded to Mr. Curtis.” (Id. at 7, emphasis in original.)
 
C. B3's Comments
 
*8 On April 13, 2015, B3, one of the original protesters, submitted comments. B3 argues that Precise I correctly affirmed the AD/GC's conclusion that Appellant is non-compliant with 13 C.F.R. § 125.9(d).
*8 B3 states that “[w]hen a company divides its sole class of voting stock into two separate groups of stock, each with its own distinctive rights and responsibilities, the resulting groups of stock can reasonably be viewed as “classes' of stock.” (B3's Comments, at 4.) In Appellant's case, although the Series A and Series B stock have identical voting rights, “they notably have distinct and separate rights to conversion, dividends, and redemption.” (Id.) B3 asserts that rights of this nature are established in Maryland law as “indicators of different ‘classes' of stock.” (Id., citing Md. Code Corps. & Ass'ns § 2-104(a)(7).)
*8 B3 points out that Appellant is a “C” Corporation rather than an “S” Corporation, and that the latter arrangement is prohibited from issuing multiple classes of stock. (Id. at 5, citing I.R.C. § 1361(b)(1)(D).) The distinctions between Appellant's Series A and Series B stock, argues B3, are “significant enough to constitute two separate classes of stock, which would not allow [Appellant] to elect ‘S' corporation filing status.” (Id. at 5-6.)
*9 B3 contends that if a group of stock has voting rights, then the service-disabled veteran must own at least 51% of it. “Whether the various qualities of each stock enhance or detract from the [service-disabled veteran's] control over the company is not a criterion for the establishment of a stock class.” (Id. at 6.)
 
D. SBA's Comments
 
*9 On April 13, 2015, SBA submitted comments. SBA argues that the “functional equivalence” test utilized by the AD/GC is a “proper and reasonable” interpretation of the regulation. (SBA's Comments, at 2.)
*9 SBA asserts that Appellant has not offered a “valid and objective standard” by which to differentiate a series from a class. (Id.) SBA then reasons that Appellant could hypothetically have used the term “Class A” instead of “Series A” and “Class B” instead of “Series B.” In such a case, although the rights and privileges associated with each group of stock would remain unchanged, the hypothetical firm would clearly be ineligible simply because of the labels attached to the groups of stock. To avoid such an absurd result, the AD/GC considered whether the functions associated with the Series A and Series B stock were the same. (Id. at 3.)
*9 SBA argues that the “functional equivalence” test is a clear rule that can be easily applied, resulting in timely resolution of protests on pending procurements. (Id. at 4.) In addition, SBA maintains, the test is utilized elsewhere in 13 C.F.R. § 125.9 and has also been adopted by the Supreme Court. (Id. at 3, citing Miranda v. Arizona, 384 U.S. 436 (1966); Rhode Island v. Innis, 446 U.S. 291 (1980); Arizona v. Mauro, 481 U.S. 520 (1987); Pennsylvania v. Muniz, 496 U.S. 582 (1990); Buckley v. Am. Fed'n of Television & Radio Artists, 419 U.S. 1093 (1974) (Douglas, J., dissenting); FEC v. Wis. Right to Life, Inc., 551 U.S. 449 (2007); and Citizens United v. FEC, 558 U.S. 310 (2010).)
*9 Next, SBA argues that OHA should not determine whether Appellant meets the ownership requirements of 13 C.F.R § 125.9 by considering whether there is any “meaningful” effect on control, as Appellant urged the Court to do based on its interpretation of Precision Analytical. SBA asserts that it would be inappropriate to analyze ownership by applying “a pseudo and ad hoc control test that is not contained or articulated anywhere in SBA regulations.” (Id. at 5.) Further, such an approach “would only serve to duplicate other regulations.” (Id.) SBA already has a separate regulation requiring that service-disabled veterans fully control the SDVO SBC. (Id.) SBA argues therefore that ownership and control should remain distinct issues to be evaluated.
 
IV. Analysis
 
*10 On remand, the Court directed OHA to “set forth its rationale for the decision with greater clarity regarding the standard for assessing eligibility and how it applies to [Appellant].” Opinion, at 24. The specific eligibility requirement at issue mandates that “at least 51% of each class of voting stock outstanding must be unconditionally owned by one or more service- disabled veterans.” 13 C.F.R. § 125.9(d).
*10 The Court observes that SBA's regulations “do not define the term ‘class.”’ Opinion, at 19. Therefore, the Court instructs, “[i]n the absence of a specific definition, the plain and ordinary meaning of the term applies.” Id. Following this guidance, OHA takes notice of the following relevant definitions from Black's Law D ictionary:
*10 Class of stock. A category of corporate shares used when more than one type of stock is issued. See preferred stock and common stock under STOCK.
 
...
 
*10 Common stock. A class of stock entitling the holder to vote on corporate matters, to receive dividends after other claims and dividends have been paid (esp. to preferred shareholders), and to share in assets upon liquidation. Common stock is often called capital stock if it is the corporation's only class of stock outstanding - Also termed ordinary shares. Cf. preferred stock.
 
...
 
*10 Preferred stock. A class of stock giving its holder a preferential claim to dividends and to corporate assets upon liquidation but also that usu. carries no voting rights. - Also termed preference shares. Cf. common stock.
 
...
 
*10 Voting stock. Stock that entitles the holder to vote in the corporation's election of directors and on other matters that are put to a vote. - Also termed voting security.
*10 Black's Law Dictionary at 285, 1552-53 (9th ed. 2009). Black's Law Dictionary does not define the term “series” or “series of stock.”
*10 Several conclusions follow from these definitions. First and most apparent, ““class of stock” is a term used when “more than one type” of stock is issued. Thus, groups of stock with different characteristics constitute separate ““classes” of stock.
*10 Second, “common stock” and “preferred stock” are discussed separately, and each is defined as “[a] class of stock.” “Common stock” is therefore a different type of stock - and hence a separate class of stock - than “preferred stock.” The definitions confirm this understanding by including both “common stock” and “preferred stock” under the definition of “class of stock.”
*11 Third, a holder of “common stock” has voting rights and a right to dividends subordinate to a holder of “preferred stock.” By contrast, “preferred stock” may or may not carry voting rights. Thus, the salient trait distinguishing “common stock” from “preferred stock” is not voting rights, but rather the difference in rights to dividends.
*11 Fourth and finally, unlike “common stock” and “preferred stock,” “voting stock” is not defined as “[a] class of stock,” and the definition of a “class of stock” likewise does not mention “voting stock.” Therefore, the fact that two groups of stock have identical voting rights does not establish that they are the same class of stock.
*11 Applying these definitions to the instant case, it is clear that Appellant's ““Series A Common Stock” and “Series B Convertible Preferred Stock” are both ““voting stock,” as they enjoy equal voting rights. The key issue, then, is whether Series A and Series B are separate classes of stock. If so, each must be considered a “class of voting stock” under 13 C.F.R. § 125.9(d). In this regard, there is no dispute that the Series A and Series B shares have different dividend rights, different conversion rights, and different redemption rights. See, e.g., Opinion at 3-5. Thus, Series A and Series B are plainly different “types of stock” and therefore separate classes of stock in accordance with the above definitions.
*11 Appellant's argument that Series A and Series B are one single class of stock because the two groups vote together and have equal voting rights is not supported by the definitions. As noted supra, “voting stock” is not a class of stock. Further, the definitions indicate that the boundaries of a “class of stock” are determined by the characteristics of the underlying shares, not by whether groups of shares vote together.
*11 Even if OHA were to assume, based on the definitions of “common stock” and ““preferred stock,” that not every difference between groups of shares is pertinent in deciding whether or not there are separate classes of stock, it is nevertheless still apparent that Appellant in this case would have two separate classes of stock. This is true because the definitions make clear that “common stock” and “preferred stock” are separate classes of stock, and that common stock and preferred stock are distinguishable from one another primarily on the basis of dividend rights. Here, Appellant identified its Series A and Series B shares as “Common” and “Convertible Preferred” respectively, and these two groups of stock differ, inter alia, in their associated dividend rights. Thus, Appellant has two separate classes of voting stock for purposes of 13 C.F.R. § 125.9(d).
*12 As SBA emphasizes in its comments, the AD/GC applied essentially this same reasoning in determining that Appellant's Series A and Series B shares are not “functionally equivalent.” In particular, the AD/GC disregarded the fact that Appellant labeled its groups of stock “series” rather than “classes” and instead focused on whether the two groups of shares carried identical rights. This approach was rational, as the AD/GC sought to ascertain the true nature and character of the two groups of outstanding stock so that he could fairly apply SBA regulations based on function, and not form.2 Having concluded that Appellant's two groups of stock were not functionally equivalent, the AD/GC reasoned that Appellant cannot avoid the requirements of 13 C.F.R. § 125.9(d) simply by naming the groups of stock “series” instead of “classes.”3
*12 On appeal in Precise I, OHA examined the AD/GC's decision to determine if it was “based on clear error of fact or law.” 13 C.F.R. § 134.508. Thus, when OHA remarked in Precise I that OHA could “find no clear error in the AD/GC's determination that Appellant's two groups of stock are sufficiently dissimilar such that they should be treated as two classes,” OHA did not intend to establish a new test for evaluating groups of stock. Precise I, at 10. Rather, OHA meant only to convey that, given the differences between Appellant's groups of stock, and mindful of the standard of review on appeal, it was not possible for OHA to find clear error in the AD/GC's decision.
*12 The AD/GC's application of the “functionally equivalent” test to this case is also consistent with Maryland corporate law, which applies to Appellant as a Maryland corporation. As OHA explained in Precise I, Maryland law confirms that the boundaries of a “class” of stock may be defined by any number of factors, including preferential dividends, redemption abilities, and conversion rights. Md. Code Corps. & Ass'ns § 2-104(a)(7). Moreover, while Appellant is correct that Maryland law does not prohibit the creation of a “series” within a ““class,” it is equally true that Maryland law does not provide that a “series” is a subset of a “class.” On the contrary, Maryland law uses the terms “class” and “series” together - apparently as synonyms - throughout the provisions referring to corporate stock. See generally Md. Code Corps. & Ass'ns §§ 2-105, 2-208.2, 2-210, 2-309, 2-310, 2-310.2, 2-404, 2-406, 2-407, 2-605, 3-105, 3-106, 3-106.1, 3-202, 3-603, and 3-803. The fact that Maryland law seemingly draws no distinction between a ““class” and a “series” supports the AD/GC's approach of looking beyond this terminology to the actual substance of the arrangement.4
*13 Appellant argues that differences between Series A and Series B are not meaningful, and should be disregarded, because these differences can never interfere with the ability of the service-disabled veteran to fully own and/or control Appellant. As SBA highlights in its comments, however, the problem with Appellant's argument is that the requirement to own at least 51% of each class of voting stock is imposed in addition to the other ownership and control criteria. Thus, without ignoring the plain language of 13 C.F.R. § 125.9(d), OHA cannot conclude that compliance with other ownership and control requirements is sufficient to qualify as an SDVO SBC.
*13 By statute, a service-disabled veteran must both own and control the company in order for it to be an SDVO SBC. 15 U.S.C. § 632(q)(2). To implement these requirements, SBA has promulgated separate regulations pertaining to ownership and control. 13 C.F.R. §§ 125.9 and 125.10. Likewise, OHA has repeatedly held that ownership and control are distinct requirements, and if a firm fails either, it is not an eligible SDVO SBC. Matter of Heritage of America, LLC, SBA No. VET-142, at 5 (2008) (specifying that a firm is not an eligible SDVO SBC if it fails to meet either the ownership requirements or the control requirements); Matter of IITS-Nabholz, LLC, SBA No. VET-114, at 7-8 (2007). Accordingly, although OHA has determined that Appellant is controlled by a service-disabled veteran, this is not enough for Appellant to qualify as an SDVO SBC. Appellant also must meet the ownership requirements as set forth at 13 C.F.R. § 125.9.
*13 Turning to ownership requirements, the regulation specifically states that, if the concern is a corporation, a service-disabled veteran must own at least 51% of the aggregate of all stock outstanding and at least 51% of each class of voting stock. 13 C.F.R. § 125.9(d). The regulation does not permit an exception provided that the concern meets the remaining ownership or control criteria. The corresponding regulations for SBA's 8(a) and women-owned small business programs similarly require at least 51% ownership of each class of a corporation's voting stock. 13 C.F.R. §§ 124.105(d) and 127.201(f). Likewise, VA's SDVO program, although not bound by SBA regulations, imposes this same requirement. See 38 C.F.R. § 74.3(b)(3). It therefore is clear that the drafters of these rules specifically intended to require ownership of at least 51% of each class of voting stock in addition to the other ownership criteria.5 While it can be argued that these restrictions are unnecessary or overly burdensome, such concerns should be directed to appropriate policy officials, not to OHA. It is well-settled that OHA has no authority to entertain a challenge to the underlying regulations. E.g., Size Appeal of ADVENT Envtl., Inc., SBA No. SIZ-5325, at 9 (2012); Size Appeal of Condor Reliability Servs., Inc., SBA No. SIZ-5116, at 6 (2010).
*14 Appellant also urges OHA to follow its previous decision in Matter of Precision Analytical Laboratory, Inc., SBA No. 384 (1991). Precision Analytical, though, involved unusual facts which are not present in this case. In Precision Analytical, the challenged firm had two classes of stock, one of which had minimal (bordering on non-existent) voting rights. The issue before OHA was not whether the challenged firm had two separate classes of stock, but rather whether each of the classes could be considered “voting stock.” Precision Analytical, SBA No. 384, at 6. OHA determined that the class with weak voting rights was not voting stock, and that the challenged firm consequently had just one class of voting stock. OHA further opined that, because the voting rights associated with one of the classes of stock were so meager, there could be no valid policy rationale for requiring that a disadvantaged individual own at least 51% of such a class of stock, if the company otherwise was eligible to participate in the program.
*14 OHA's reasoning in Precision Analytical does not apply to the facts of this case, because unlike the situation in Precision Analytical, Appellant's groups of stock have identical voting rights, and Appellant does not dispute this. Stated differently, Appellant's situation would be analogous to Precision Analytical only if one of Appellant's two Series of stock had no significant voting rights. Precision Analytical therefore has limited relevance to the facts presented here. Insofar as Appellant construes Precision Analytical as having held that a disadvantaged individual (or, by analogy, a service-disabled veteran) need not own at least 51% of each class of voting stock so long as the disadvantaged individual retains overall ownership and control of the company, such an interpretation is contravened by the plain language of the underlying regulations, including 13 C.F.R. § 125.9(d). Moreover, such an interpretation does not follow from a close reading of Precision Analytical, because OHA did not consider in that case whether a disadvantaged individual was required to own a majority of each class of voting stock, but instead merely found that one of the classes in question was not voting stock.
*14 Lastly, the Court expressed concern over disparity between SBA and VA in the treatment of ESOPs. See, e.g., Opinion, at 23 n.18. As noted above, though, the regulation in question here, 13 C.F.R. § 125.9(d), is substantively identical to VA's rules at 38 C.F.R. § 74.3(b)(3) (“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.”). Thus, at least with regard to the issue presented in this case, it is not evident that ESOPs would receive any different treatment under VA's version of the rule. While it is true that VA is somewhat more liberal than SBA in its treatment of ESOPs, this difference stems from the fact that VA has partially exempted ESOPs from the requirement to be directly owned by service-disabled veterans. See 38 C.F.R. § 74.3(a) and 75 Fed. Reg. 6,098, 6,100 (Feb. 8, 2010) (discussing rationale for exemption). SBA's rules, on the other hand, contain no such exception. As a result, SBA has generally found that concerns with ESOPs have difficulty qualifying as eligible SDVO SBCs, because an ESOP trust arrangement does not allow for direct ownership by service-disabled veterans. Matter of Wexford Group Int'l, Inc., SBA No. VET-105 (2006) (affirming a finding of ineligibility). The difference in the treatment of ESOPs, then, is unrelated to 13 C.F.R. § 125.9(d) and to the question presented in the instant case, but rather results from differences in the direct ownership requirements reflected elsewhere in the agencies' respective regulations.
 
V. Conclusion
 
*15 For the reasons discussed supra, the AD/GC properly found that Appellant's Series A Common Stock and Series B Convertible Preferred Stock are separate classes of voting stock. Service-disabled veterans do not own a majority of the Series B Convertible Preferred Stock. Therefore, Appellant is not an eligible SDVO SBC under 13 C.F.R. § 125.9(d). This is the final decision of the Small Business Administration. 13 C.F.R. § 134.515(a).
*15 Kenneth M. Hyde
*15 Administrative Judge

Footnotes

This decision was initially issued under a protective order. Pursuant to 13 C.F.R. § 134.205, OHA afforded counsel an opportunity to file a request for redactions if desired. OHA received one or more timely requests for redactions and considered any requests in redacting the decision. OHA now publishes a redacted version of the decision for public release.
OHA itself has endorsed a “functionally equivalent” test in situations that require the agency to look beyond differences of form in applying its regulations. In Size Appeal of North Slope Technical Limited, SBA No. SIZ-2217 (1985), the challenged firm altered its business structure from a partnership to a corporation and changed its name. North Slope, SBA No. SIZ-2217, at 5. On appeal, the challenged firm argued that its two forms should be treated as two separate companies. In determining that the two iterations were actually a single company for purposes of SBA's regulations, OHA stated that “where ... a firm undergoes a mere change in corporate form, or the functional equivalent thereof, and constitutes but a successor to an alleged affiliate, in terms of the services provided, the resources for providing those services, and the ownership interests involved, such firms may be considered a single concern for purposes of applying [SBA's regulations].” Id. at 14. OHA explained that this analysis “derives ... from an attempt accurately to assess the true character and nature of the specific corporation evaluated regardless of the formalities of its organization.” Id.
In its comments, SBA observes that, had Appellant chosen to label its groups of stock “Class A” and “Class B” instead of “Series A” and “Series B,” there is little doubt that Appellant would be ineligible under 13 C.F.R. § 125.9(d), even though the rights and privileges associated with two groups of stock would remain the same.
As noted in the Court's Opinion, Appellant's own corporate documents also appear to use the terms “series” and “class” interchangeably in at least one instance. Specifically, in the discussion of shareholder redemption rights, Appellant's Amended Articles of Incorporation refer to “the election of a majority of the holders of Series A Common voting as a single class.” Opinion, at 5.
As discussed by All Points in its comments, the requirement to own at least 51% of each class of voting stock was first introduced more than 25 years ago in the context of the 8(a) program. In proposing the new requirement, SBA stated that the purpose of the rule was “to ensure that the statutorily required ownership interests are not diluted by issuances of other classes of stock.” 54 Fed. Reg. 12,054, 12,056 (Mar. 23, 1989). Thus, the regulatory history of this predecessor rule confirms that the drafters of the regulation intended to impose an additional ownership restriction which could not be satisfied by meeting other ownership and/or control requirements.
SBA No. VET-246, 2015 (S.B.A.), 2015 WL 3451698
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