GMAT Sentence Correction (SC) | The Supreme Court has ruled that universities must allow the armed for

I guess you have misunderstood the question. Its the armed forces that want to recruit. The Supreme Court has passed a judgement that the universities will have to allow the Armed forces to recruit on campus else they (Universities) will lose central funding.

I understand that the option 1 may have a flaw due to the reference point of 'They', but i believe that 'unless' has been used properly.