Overview of Updates to the Control Requirements for DBE Certification

By: Danielle Dietrich

Preliminary Note: On Tuesday, April 9, 2024, the United States Department of Transportation issued a final rule that modernized the Disadvantaged Business Enterprise (DBE) program and the Airport Concessions DBE (ACDBE) program regulations. Review a copy of the final rule. The changes will go into effect on May 9, 2024. This blog is one in a series highlighting the changes and updates found in this final rule.

If you own a business that is or wants to be certified as a disadvantaged business enterprise (DBE) or an airport concession DBE (ACDBE), you should be aware of some significant changes to the U.S. Department of Transportation's (DOT) final rule on DBE and ACDBE programs, effective May 9, 2024. One of the sections that has been revised is section 26.71, which deals with the control of a DBE or ACDBE by one or more socially and economically disadvantaged individuals (SEDOs). In this blog post, we will highlight some of the key changes to this section and what they mean for your business.

The general rule is that one or more SEDOs must control the firm, and control determinations must consider all pertinent facts, viewed together and in context. This means that the certifier will look at the whole picture of your business, not just isolated factors, to see if you have the power and authority to run it. Some of the specific requirements for demonstrating control are:

• The SEDO must be the ultimate decision-maker in fact, regardless of operational, policy, or delegation arrangements. This means that you must have the final say in all matters affecting your business, even if you delegate some tasks or follow some guidelines from others. You must also hold the highest officer position in the company, such as CEO or president.
• The governance provisions of your business may not require non-SEDO concurrence or consent for you to transact business on behalf of the firm. This means that you must not need the approval of any non-SEDO partner, shareholder, board member, or other person to make decisions for your business. The only exception is for bylaws or other governing provisions that require non-SEDO consent for extraordinary actions, such as selling the business or dissolving the partnership, if you still have the ultimate responsibility for the business. Be aware that this includes restrictions placed on the company under financing agreements – such as requiring bank approval before taking some action.
• If your business is a partnership, at least one SEDO must serve as a general partner with control over all partnership decisions. This means that you must have the authority and liability to manage the partnership and bind it in contracts, and not be a limited partner who only contributes capital or has a passive role.
• The SEDO must have an overall understanding of the business and its essential operations to make sound managerial decisions. This means that you must know the ins and outs of your business, such as its products, services, markets, customers, competitors, finances, regulations, and risks, and be able to use that knowledge to make informed and independent decisions. You must also critically analyze information provided by non-SEDOs and use that analysis to make your own decisions, not just rely on their advice or recommendations.
• The SEDO may delegate administrative activities or operational oversight to a non-SEDO individual, but at least one SEDO must retain unilateral power to fire the delegate(s), and the chain of command must be evident to all participants in the company. This means that you can assign some tasks or responsibilities to a non-SEDO employee or manager, but you must still have the ultimate control and supervision over them and be able to remove them if necessary. You must also make sure that everyone in the company knows who is in charge and who reports to whom.
• No non-SEDO participant may have power equal to or greater than that of a SEDO, considering all circumstances. This means that no non-SEDO partner, shareholder, board member, employee, manager, or other person may have more influence, authority, or leverage than you in the business, whether formally or informally, directly, or indirectly. For example, non-SEDO participants may not make non-routine purchases or disbursements, enter into substantial contracts, or make decisions affecting company viability without your consent.

A business operating under a franchise or license agreement may be certified if it meets the standards and the franchiser or licenser is not affiliated with the franchisee or licensee. This means that you must still control your business and not be subject to undue restrictions or interference from the franchiser or licenser. The firm must also not regularly use another firm's business-critical resources to provide a product or service under contract to the same firm or one in a substantially similar business, unless it is providing services to a single customer or a small number of them, and not acting as a conduit, captive, or unnecessary third party. This means that you must not depend on another firm for essential equipment, facilities, personnel, or expertise to perform your contracts, unless you have a legitimate and limited reason to do so, and not just to pass through the benefits of the contract to the other firm.

If you have any questions about DBE certification, please contact Danielle Dietrich, Esq. at ddietrich@potomaclaw.com or 412-449-9141.

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