A corporate client used a corporate redemption to acquire 83% of the stock of its founder, who was no longer qualified to own a Disadvantaged Business Enterprise (“DBE”) under the U.S. Department of Transportation regulations because he had a net worth of over $750,000.  51% of the remaining 17% of the stock was sold to one of the client’s employee, who qualified as a minority owner and also satisfied the net worth requirement.  MDOT refused to acknowledge the redemption and sale, saying that it was a sham transaction, and denied our client’s application for re-certification as a DBE.  We appealed.

The MDOT regulations neither endorse nor forbid use of a corporate redemption to transfer control of an MBE.  There are no published agency or court decisions on the issue.  Relying on expert testimony from a certified professional accountant, we argued that this form of transfer was legitimate, and should be recognized by MDOT.  The Court accepted our analysis of the impact of the redemption on the value of the company at the time of transfer of control, and ordered MDOT to certify the company as a DBE.

We were dealing with a complicated series of corporate transactions which MDOT contended were not genuine.  The challenge was to explain the transactions in a straightforward, simple manner, not easily done when the other side is saying it is a sham.  Trust your judgment, and press ahead with what you believe is logical and defensible.  Administrative appeals are not impossible to win.  We were prepared and used compelling exhibits and testimony.  By focusing on the validity of the corporate redemption, both during the hearing and in written closing argument, we succeeded in persuading the administrative law judge that MDOT had erred.

–Randy