A history of close ties between companies does not mean that the companies are presently affiliated, according to a recent size appeal decision of the SBA Office of Hearings and Appeals.
In Size Appeal of A&H Contractors, Inc., SBA No. SIZ-5459 (2013), SBA OHA overturned a finding of affiliation because most of the ties relied upon by the SBA Area Office had been severed before the applicable date for determining size.
The A&H Contractors SBA OHA decision involved an Army Corps of Engineers solicitation for dredging. The solicitation was set-aside for small business under NAICS code 237990.
After the Corps reviewed competitive proposals, it announced that A&H Contractors, Inc. was the apparent successful awardee. An unsuccessful competitor subsequently protested A&H’s size.
The SBA Area Office found that A&H was affiliated with three businesses owned or controlled by Mr. Avinash Rachmale: Lakeshore Engineering, Inc., Lakeshore HealthCare Investment Group, Inc. and Sky Group Grand, LLC.
According to the SBA size determination, the following ties existed between the companies:
- Thomas Hardiman Sr. was the president and 100% owner of A&H. Mr. Hardiman had worked for Lakeshore for a number of years. In 2003, Mr. Hardiman purchased A&H from Mr. Rachmale and his wife, who had founded the company.
- In 2006, Mr. Hardiman left his employment at Lakeshore. However, he continued to serve as a consultant to Lakeshore until 2009.
- In 2009, A&H and Lakeshore formed a joint venture. The joint venture was awarded two contracts. Under the terms of the joint venture agreement, A&H received 51% of the profits and Lakeshore the remaining 49%. The companies did not team on any other contracts.
- In 2010, Lakeshore loaned $354,128 to A&H, which was repaid in 2012.
- Mr. Rachmale served as a member of A&H’s Board of Directors until September 3, 2012, when Mr. Hardiman removed him.
- A&H leased office space from Sky Group Grand under a written lease agreement. Lakeshore had separate space in the same building.
- In 2010, AH&H made a one time payment to Lakeshore for its share of expenses stemming from a building Christmas party.
- Mr. Hardiman owned 5% minority interests in LHIG and SGG.
Based on these ties between the companies, the SBA Area Office found A&H affiliated with Lakeshore, LHIG, and SGG, and deemed A&H ineligible for the Corps contract. A&H appealed to SBA OHA.
SBA OHA noted that “[t]he Area Office devoted much of the instant size determination to reviewing the historic ties between [A&H] and Lakeshore, and between their respective principals.” However, “none of these historic ties were still extant as of November 9, 2012,” when A&H submitted its proposal. Accordingly, “while the historic ties may be indicative of past affiliation, they do not establish that [A&H] and Lakeshore are affiliated as of November 9, 2012.”
After rejecting affiliation based on historic ties, SBA OHA concluded that none of the current ties between the companies resulted in affiliation. With respect to Mr. Hardiman’s minority interests in SGG and LHIG, “there is no reason to believe that such small interests could enable Mr. Hardiman to control SGG or LHIG, let alone Lakeshore.” Similarly, “a lease of office space does not demonstrate any power to control; otherwise a concern would always be affiliated with its landlord.” Finally, the joint venture did not violate the “three in two” rule, and “[t]he fact that two companies formed a single joint venture, compliant with SBA’s regulations, and without other significant business ties, is not sufficient to demonstrate that either company could control the other.” SBA OHA granted A&H’s appeal.
The A&H Contractors size appeal decision stands for the commonsense principle that companies should not be bound by their historic ties when it comes to the SBA’s affiliation rules. Otherwise, it might be difficult, if not impossible, to sever affiliation. Fortunately for A&H, and other companies in a similar position, though diamonds may be “forever,” affiliation is not.